The housing plan by Labour’s new leader, Jeremy Corbyn, aims to eliminate private landlords and cap rents. Higher taxes, more government spending and threats of property repossession will affect the business class upon which Labour depends to create jobs. Nevertheless, his landslide election (59.5%) won him top spot in the Labour party and where Tony Blair declared “war on terrorism”, Mr Corbyn might well declare war on the free market. While he correctly identifies some of Britain’s major housing issues, his solutions are unrealistic and outdated.
Goodbye private landlords
Mr Corbyn wants to lower private rents and limit rent growth increases. 86% of tenants in urban areas have private landlords and rents rose by 2.5% in the year until June 2015 according to Knight Frank. In response to this, he proposes to base rent on average income and not on market rates. This discounts the reality of what rental yields are: the ratio between property value and rental income. Rents may be rising but property value is rising faster as Britain half-heartedly battles a housing deficit. Ironically, it is market pressure pushing up prices, eating into tenant earnings and landlord yields. Research by HSBC in May 2015 shows 12 out of 20 best buy-to-let destinations by yield in the UK actually had declining gross yields with maximum rates of 7.98% (Manchester) while the top yield growth hotspots earned only 7.26% gross. London’s galloping rental rates, a favourite topic of Corbyn’s, actually have much lower average yields than the rest of the country.
No mercy for bad debt
The buy-to-let sector is fuelled by cheap mortgages left over from the post-crisis stimulation policies. Currently it is not uncommon to find local landlords with rental property mortgaged to 75% of the property value. However, if the Bank of England makes good on their promise to increase interest rates as revenues and GDP rise, it will sabotage every landlord who’s reaching the end of their fixed rate term. Indeed, an increase in interest would make the mortgage equivalent or higher than rental income in many regions. Circling in on indebted landlords in a market that is commonly described as “frothy” and deemed the UK’s biggest threat to economic recovery by Mark Carney, Governor of the Bank of England, could prove a dangerous move.
Cancel the tax relief
Another solution to deter from buy-to-let is to redirect £14 billion of tax relief from private landlords. There is no doubt this would relieve tenants and the government, but not for long. The whiplash of this decision would only cut into already low yields. The short-term results of this policy would look good on the monthly Exchequer profit and losses statement but how Labour would handle the potential financial crisis of high-debt landlords who can’t honour their monthly repayments is yet to be resolved.
Landlordship for the “fit and proper”
Another solution to Britain’s housing crisis as proposed by Mr Corbyn’s policy document is to create a landlord licensing and registration system alongside a “fit and proper test” which refers seemingly both to the property and the individual’s ability to deal with people. According to housing charity Shelter, over 17,000 people called their hotline last year about problems with their landlords, poor housing quality. Thousands reported abuse, harassment and threats. No one should have to live in subpar housing and on this point, the new Labour leader is right, the government should be responsible for making sure basic living standards are met, codified and monitored. However, if Mr Corbyn were to push through the licensing, registration and health and safety checks of each individual property, who would pay for it?
Someone’s gotta pay
The go-to solution of the new Labour leader is to tax someone, probably the landlords, who will have already lost their tax relief. Alternatively, they could charge landlords directly to register and have them pay individual experts to review their property. Undeclared lettings, vulnerable segments of British society forced into illegality, lack of legal structure to protect them would only put more pressure on non-profit organisations like Shelter. Let’s face it, abusive landlords already have little respect for the law, it’s doubtful they’ll pay extra to get caught out. As for the law-abiding owners, how would this service be managed, would the charges be capped or would they simply increase proportionately to demand and lack of trained professionals? It seems doubtful that Mr Corbyn’s uncapped benefits platform would diversify down the cost of this policy and leaving landlords, wealthy individuals and companies to foot the bill.
High taxes stimulate development projects
For Labour, housing is the responsibility of local councils and the government – and not the private investor as the Conservatives would have it. However, to build houses all politicians need developers and Mr Corbyn wants to encourage them with low interest rates, but the carrot comes with strict restrictions on new housing affordability. How developers will respond to higher taxes and low profit margins is another question.
Developers can use-it-or-lose-it
No more land-banking or speculation says Mr Corbyn. A Land Value Tax would be levied on unused property with planning permission and a use-it-or-lose-it strategy on the rest (that has planning permission) if the owners do not make use of it. Undoubtedly, this will be another source of income to fund his ambitious housing project. At the same time, implementing this type of strategy is a clear signal to businesses that a Labour government would take the right to repossess assets in the name of the State. Mr Corbyn seems determined to make the entrepreneurs of the UK pay for the mistakes of governments past, which will inevitably hurt the great British future he portrays in his speeches.
Business will be booming
Rumblings of extreme policies in British political ranks have not gone unnoticed by investors, British and foreign. These gung-ho policies certainly have the right appeal but lack the substance to make them constructive plans. As one British property owner and business director in Russia put it: “Wonderfully simplistic, let’s sort Palestine by tea time!” Higher taxes, caps on revenue and forcibly dropping prices have never much appealed to companies or wealth. By exposing the small local landlords, Mr Corbyn’s dream of full employment and affordable housing might just emigrate with businesses and economic growth if this policy ever came to fruition.
Leigh Stewart, Tranio