3 July 2018

Three-year tenancies will be a disaster for the UK rental market


One day several years ago Tony Blair sat on his sofa and decided that the office of Lord Chancellor was an anachronism that needed to be abolished. Immediately people started pointing out it wasn’t quite that simple.

The office is so embedded into UK law, statute, legislation and practice that the absence of a named individual threatens the very fabric of British government. They don’t have to be a Lord, they don’t have to sit on the Woolsack nor be Speaker of the Lords, but a Lord Chancellor there must be.

I mention this not merely to make fun of Tony Blair and his omniscience, but to point out that society is a complicated thing. No one has ever sat down and designed one, nor an economy.

Those examples where people have tried have all gone the way of scientific socialism, as it becomes apparent that such planning cannot deal with the messy reality of the real world, with all its people and their competing interests.

Yet this is just the mistake being made by Housing Secretary James Brokenshire with his proposals to give tenants a minimum contract of three years.

His plans entirely misunderstand the complexity of the British housing market and economy.  They also fail what is known as Chesterton’s Fence. When walking in the countryside and happening upon a fence, it is not sufficient to just decide that it is no longer necessary. Only if we discover the fence’s original purpose can we adequately judge whether or not it’s still needed.

It is entirely true that the British private rental market exists on the basis of six and 12-month shorthold assured tenancies. Why is this so? Because for most of the 20th century governments piled rights onto tenants who had standard rental contracts, as in much of the rest of Europe.

This resulted in the creation of what were called “sitting tenants.” It was a great boon for those who already had such a rental contract, but a disaster for those who wanted to gain one, as private landlords pretty much disappeared from the scene.

Those shorthold assured contracts were introduced to make it possible to actually rent out somewhere without it becoming a lifelong obligation at significantly less than market rents. The supply of rental housing, unsurprisingly, increased.

Now there is concern that these six and 12 month contracts – even if rolled over – don’t provide the security tenants desire, hence the minister’s plans to introduce a three-year one.

Well, great, why not? As ever, the devil is in the detail. If we said that we can now have three-year tenancies with all the attributes of existing shorthold assured contracts, then that’s just fine. Those who wish to let their property on such terms could do so, those who wish to rent might equally do so.

Many on both sides would, assuming the continued absence of the creation of those value-destroying sitting tenancies. So too would those who prefer 6 and 12 month contracts be able to gain their desire.

That isn’t what is being proposed though. Instead we’ve an insistence that three years should be the minimum term for all new tenancies.

Congratulations Mr. Brokenshire, you’ve just killed every buy-to-let mortgage. of which there were 1.8 million even back in 2015.  It’s a standard clause in every single one of those mortgages that they be rented out on a six or 12-month shorthold assured tenancy. The reason being that in the event of default the bank or building society understandably wants to be able to sell the place without having to deal with an immovable sitting tenant.

No one has any problem with increasing the choices available in terms of types and terms of tenancies. But imposing new terms on all landlords and tenants either means that 1.8 million rental dwellings are off the market, or we’ve got to persuade every bank and building society in the country to alter their existing contracts. For a price, of course.

We might, then, politely suggest that this hasn’t been properly thought through. Although of course we’d never compare James Brokenshire to Tony Blair, I’m not too clear who that would be unfair to.

Tim Worstall works at the Adam Smith Institute and Continental Telegraph.