Transforming Private Landlords E-Book

Tony Crook

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 469

Veröffentlichungsjahr: 2013

Beschreibung

This book explores the origins, extent and implications of this revival in the fortunes of private landlordism. It presents an in-depth, scholarly analysis of private landlords, the rationales for and ways in which governments have sought to revitalise investment in residential lettings, and their success in doing so. It also assesses the extent to which landlordism has been transformed in recent years and the lessons for policy that can be learned from this experience. The book draws on the extensive research into private landlords conducted by the authors over the past two decades. This includes projects funded by the Joseph Rowntree Foundation, the predecessor departments to the Department for Communities and Local Government, Scottish Homes, and the Economic and Social Research Council. It fills a major gap in the literature about an important actor in housing provision and the built environment. Most of the recent work on private landlords has been published as research reports and there is a lack of book length scholarly study aimed at an academic rather than a policy audience.

Leseprobe

Contents

Preface

Introduction

1 Private Landlords in Historical Perspective

The Victorian landlord

The First World War and beyond

Post-war decline

From control to regulation

Private landlordism in the 1960s and 1970s

Conclusions

2 Government Policy Since 1979

Introduction

Changing roles for private renting

Policy objectives and barriers

Reviving private renting: creating new model landlords

1980: first steps towards deregulation

1989: ‘full’ deregulation: the overall approach

Deregulation of rents and more limited security

Supporting and informing landlords

Standards, management and deposits

‘New model landlords’

Other key policies

Conclusions

3 Private Renting Since 1979

Reversal of fortunes

Improving the stock

Deregulating lettings

Changing tenants

Images of renting

Rents and housing benefit

Conclusions

4 Private Landlords in Contemporary Britain

Introduction

The evidence

Typologies of landlords

Landlords in the 1980s

Landlords after 1989

Managing properties after 1989

Investment returns and plans

Conclusions

5 The Business Expansion Scheme

Introduction

BES: its origins and the rules for assured tenancy companies

Launching the companies

Numbers and types of companies formed

Funds raised

Property acquisition and management

Returns

Evaluation

The longer term

Conclusions

6 Financial Institutions and Rented Housing

Introduction

Barriers to institutional investment in residential lettings

Housing Investment Trusts: initial proposals and legislation

Housing Investment Trusts: the experience

Real Estate Investment Trusts: the background and rules

Real Estate Investment Trusts: the experience

Real Estate Investment Trusts: lobbying for reforms

The next step: pump-priming institutional investment

Niche market players

Conclusions

7 The Buy-to-let Boom

The buy-to-let mortgage market

The growth of buy-to-let

Are buy-to-let landlords different?

Buy-to-let and the credit crunch

After the crash

Conclusion

8 Conclusions

The transformation of private landlords

Lessons

A broader consensus on private renting?

Future prospects

References

Index

Transforming Private Landlords

This edition first published 2011© 2011 Tony Crook and Peter A. Kemp

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Library of Congress Cataloging-in-Publication Data

Crook, Tony, 1944–

Transforming private landlords: housing, markets and public policy / Tony Crook and Peter A. Kemp.

p. cm. – (Real estate issues)

Includes bibliographical references and index.

ISBN 978-1-4051-8415-1 (hardback : alk. paper) 1. Rental housing–England. 2. Landlords–England. 3. Landlord and tenant–England. I. Kemp, Peter, 1955– II. Title.

HD7288.85.G7C76 2011

333.33′8–dc22

2010020466

A catalogue record for this book is available from the British Library.

Acknowledgements

Many research and other colleagues helped us with this work, including Isobel Anderson, Mark Bevan, Peter Bibby, Stuart Bowman, Ceri Bryant, Max Craglia, Ed Ferrari, Ken Gibb, John Henneberry, John Hughes, Nile Istephan, Graham Martin, David Rhodes, Julie Rugg and Cathy Sharp. We also benefited from important collaborations with colleagues then at Coopers & Lybrand (now PriceWaterhouseCoopers) especially John Hawksworth, Jim Robertson and Rosalind Rowe. The analysis and interpretation we offer in this book is of course ours alone, but the book would not have been possible without their major contributions to a large series of projects. We offer them our very grateful thanks. We also thank Jenny Crook, who compiled the list of references for this book.

We are very grateful to Mark Long of BDRC for letting us cite their private landlord survey data, to the Council of Mortgage Lenders for allowing us to reproduce their buy-to-let data, and to the Office of National Statistics for granting public access to government data on housing. Responsibility for the analysis of these data in this book rests solely with ourselves.

We were also fortunate to receive substantial funding for our work and we gratefully acknowledge the support received from the British Property Federation, the Department of the Environment, the Department of Environment Transport & the Regions, the Economic and Social Research Council, the Joseph Rowntree Foundation, The Rent Service, The Scottish Executive, Scottish Homes and the Scottish Government. The views we express in the book do not of course necessarily reflect the views of the government departments and other organisations that supported our work.

The findings from our research reported in the book come from interviews conducted with thousands of landlords in Britain. Without their willingness to participate in our research this book would not have been possible. We offer them our thanks.

Tony Crook & Peter A. KempSheffield and OxfordMarch 2010

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Preface

This book draws together much of the research on which we have collaborated for over two decades. We were both independently examining the operation of the private rented sector of the housing market well before we started working together in the mid 1980s. Before then, the sector’s long-term decline was regarded as terminal, with no prospects of revival, and it was a part of the housing market that attracted little research. As a result, policy debates were substantially less well informed than other areas of policy. It was, in effect, an unfashionable area in which to be doing research, but despite this we were both fascinated with the ownership of the sector, the factors that shaped investment and disinvestment and how public policy influenced this. We completed PhDs in the field and continued to research and publish work on the subject.

As a consequence, when private renting became a more central part of policy debates on housing, we found ourselves in the fortunate position of being jointly commissioned to undertake a wide range of studies on the structure of the sector’s ownership and how landlords responded to government initiatives after deregulation. We collaborated on a series of studies that examined how the structure of ownership changed after deregulation, as well as studies of the impact of specific policy initiatives. We also found ourselves regularly taking part in briefings and consultations with the relevant policy and practice communities in government, professional institutes and the sector’s trade bodies.

We were thus in the privileged position of being able to closely observe the changing nature of contemporary landlordism during the remarkable renaissance in private renting’s fortunes that occurred in the three decades after the deregulation of the sector in 1980. In this book we have drawn on our own work and that of others to provide a detailed account and interpretation of the transformation of private landlords over that period. We completed the book in early 2010 and it is from that point in time that we have looked back at the changes that have occurred.

Introduction

This book examines what has been a remarkable transformation in the fortunes of private landlordism over the last three decades in Britain. The private lettings market has turned around from being a sector in long-term decline to one which has experienced strong growth, particularly over the past decade. Since the turn of the century, billions of pounds’ worth of residential housing-to-let has been acquired by private investors. Whereas in the past private landlords were relatively under-geared (Crook & Kemp, 1996a; Ball, 2006a), much of this new investment in the private rented sector has been facilitated by the provision of mortgage finance from banks and building societies. New loan products targeted at private landlords have emerged and account for a sizable share of the mortgage market. What is often now referred to as ‘buy to let’ regularly features in the property and personal finance pages of the newspapers (Kemp, 2004). From being almost a pariah in the 1970s, the private landlord has become, if not respected, then at least respectable once again.

Private landlords have always been important actors in housing provision, not just in Britain, but also in most other market economies. However, their contribution to housing supply declined considerably during the seven decades from the end of the First World War and especially after 1945. By the late 1970s, the private rented sector in Britain had declined to such an extent that some observers wondered whether the landlord might disappear altogether. Even if most commentators believed that the landlord’s condition was not terminal, few of them thought the decline was retrievable (see Eversley, 1975; Stafford, 1976; Finnis, 1977). It was not just that letting accommodation was less profitable and more time-consuming than alternative investments; it was also that few people now wanted or needed to rent their home from a private landlord. By the late 1970s, the majority of households could afford to buy their home with a mortgage and most of the remainder wanted to rent their home from the local council, not from a private landlord. For new households, private renting had become, in effect, a ‘waiting room’ where they saved up for a deposit to buy their own home or accumulated sufficient ‘points’ to gain access to council housing (Kemp, 1988a).

Moreover, public perceptions of private landlords had deteriorated to such an extent that the leader of the Labour Party and future Prime Minister, Harold Wilson, could declare that ‘rented housing is not a proper field for private profit’ (cited in Cullingworth, 1979, p. 61). This view reflected the fact that private renting was an area of sharp disagreement between the two main political parties. Debates about the private rented sector had become highly polarised in the 1950s and 1960s (Kemp, 2004). Although, by the late 1970s, political debates on private renting had become more muted, that was in large measure because the sector was then such a small part of the housing market that relatively few votes were to be won or lost over it.

Nevertheless, politicians remained wary about introducing legislation that might affect the fortunes of the landlords and tenants who remained in the sector. Legislation on private renting focused on ameliorating poor physical conditions and abuses of tenancy legislation, while housing policy in the 1970s was instead focused on the two main tenures of owner-occupation and council housing. Moreover, public perceptions of the private landlord remained ‘firmly associated with the image of “Rachmanism” or at best the rather seedy resident landlord Rigsby of the TV sitcom ‘Rising Damp’ (Kemp & Rhodes, 1997; Kemp, 2004, p. 1). The poor conditions that were prevalent in much of the privately rented stock appeared to confirm the poor image that the private landlord had acquired. There was little, let alone up-to-date, research on private landlords and, perhaps as a result, negative media stories tended to dominate discourse about private landlordism. And although there were criticisms of the paternalist way that council housing was managed, in the 1970s good practice was seen to lie in the public sector rather than among private landlords.

Reviving the market

It is now a matter for the history books that the late 1970s and early 1980s witnessed the emergence of what the US academic Frances Fox Piven (1986) has aptly described as a ‘revivalist romance’ with markets: a belief that markets were efficient, responsive to market signals and gave consumers what they wanted, when they wanted it; while public providers were increasingly viewed as remote, bureaucratic, inefficient and paternalistic. In Britain the Conservative Party, under the leadership of Mrs Thatcher, returned to power in 1979, determined to ‘roll back the state’, release market forces and ‘set the people free’. Although its programme evolved over time, it ultimately included cuts in social security benefits, legislation designed to undermine the power of the trades unions, privatisation of state assets, removal of exchange controls and deregulation of finance markets, including mortgage lending.

In housing policy, the first Thatcher government promoted new low-cost home ownership schemes, gave council tenants the right to buy their home at very substantial discounts from its market value, and curbed local authority capital spending, with the result that council house-building was drastically reduced. In addition, tentative steps were taken to reduce the regulation of private lettings in order to encourage new investment by private landlords (Crook, 1986b; Forrest & Murie, 1988; Malpass & Murie, 1999).

However, in practice, expanding home ownership and shrinking the supply of council housing were more important objectives for the first Thatcher government than reviving the private rented sector. This was perhaps not just a reflection of priorities but also of realities: after such a prolonged and substantial decline in private renting, it was perhaps unrealistic to expect a significant resurgence of investment by private landlords. In any case, the measures introduced in the 1980 Housing Act to help revive the private landlord sector were too limited to have a substantial impact on supply. Moreover, the shadow of the 1960s Rachman scandal (see Chapter 1) still hung over debates about the private rented sector, a fact which may account for the relatively modest steps towards deregulation taken by the Housing Act 1980 (Kemp, 1987a). It also helps explain why the 1980 Act introduced the ‘approved landlord’ scheme for organisations that wished to take advantage of the deregulation of rents on newly constructed or refurbished dwellings. In 1982 the government introduced capital allowances for these approved landlords in order to entice corporate investors back into the private rental market. The response to this incentive was weak and, in any case, the capital allowances were abolished after only two years (Kemp, 1988a).

It was not until 1988 – almost a decade after the Conservatives came to power – that Mrs Thatcher’s (third) government felt able to introduce more complete deregulation in the private lettings market. By this time, a political consensus had emerged about the important role that the private rented sector could play in meeting certain housing needs, such as easy access accommodation for young and mobile households (Best et al., 1992). This was in stark contrast to the partisan manner in which debates were conducted in the period from the 1950s to the 1970s. It largely reflected a shift by the Labour Party, but was one made possible by a more gradual and less doctrinaire approach to the private rented sector by the Conservatives than had been the case in the 1950s and 1960s.

Deregulation in the 1980s was intended to set the market free in order to secure an increase in the size of the sector and to modernise it. Until then, residential lettings had been dominated by small-scale and part-time landlords, a structure of housing provision that we characterised as a ‘cottage industry’ (Crook & Kemp, 2002). Conservative and New Labour governments during the period covered by this book believed that a more ‘modern’ form of landlordism based on larger corporate landlords would both create a more professionally run sector and have a better reputation than was then the case. These were thought to be essential preconditions for attracting tenants and potential funders into private renting. Deregulation was also part of a wider strategy by the Conservatives to reduce the role of local councils in the provision of rented housing and encourage the growth of alternative providers, including private landlords and housing associations.

Under the 1988 Housing Act, new private lettings were freed from rent regulation and security of tenure was substantially reduced (see Chapter 2). Not confident that these measures would generate a revival of investment by private landlords, in the 1988 Budget the Conservatives extended the Business Expansion Scheme (BES) to include, for a five-year period, new property companies providing housing to let on assured tenancies. The BES provided substantial tax breaks to individuals investing in companies set up under the scheme. As we explain in Chapter 5, the BES led to a significant, but ultimately short-lived, burst of investment in rented property.

Shortly after the passage of the 1988 Act and the introduction of the BES, the secular decline of the private rented sector came to an end. In fact, the number of rented homes began to increase, much to the surprise of government statisticians, who had assumed that the decline would continue (Down et al., 1994). However, as we explain in Chapter 3, this modest revival was as much a response to the owner-occupied housing market slump and the economic recession of the early 1990s as it was to the policy innovations introduced in 1988/89 (Kemp, 2009). The nominal decline in house prices resulted in about a million homeowners having negative equity, whereby the outstanding value of their home was less than the amount of mortgage they owed to their lender (Forrest & Murie, 1994). This prompted some of the homeowners who needed to move to let their homes for the duration and rent somewhere else instead while they waited for house prices and property transactions to recover (Crook & Kemp, 1996b). Meanwhile, some of the households that might have entered the owner-occupied market as first-time buyers delayed doing so until house prices had ceased to fall. Hence, the housing slump increased both the supply of and the demand for private rented housing. This growth in the rental market provided a surge of new customers for the residential lettings and management industry.

Once the owner-occupied housing market recovery began, however, the growth of private renting faltered as ‘property slump landlords’ sold their former homes and bought somewhere else to live (Kemp, 2004). Faced with the prospect of a much reduced volume of business, the Association of Residential Letting Agents (ARLA) – the trade association representing much of the letting and management industry – teamed up with a panel of mortgage lenders to offer new loan products aimed at private landlords (Ball, 2006b). This initiative, which they cleverly labelled ‘buy-to-let’, offered mortgages at interest rates that were significantly lower than those that had previously been available to private landlords (Kemp, 2004), but required the properties bought with these loans to be managed by members of ARLA.

The buy-to-let (BTL) market rapidly expanded and soon other lenders began marketing mortgages under this label. The boom in BTL lending, which took off after the turn of the century, was facilitated by the deregulation of, and subsequent innovation in, mortgage finance, as well as by the worldwide glut of savings and lower interest rates resulting from global imbalances between creditor and debtor nations (Schwartz, 2009). It was further fuelled by the sharp rise in house prices, which continued in Britain until the autumn of 2007.

Meanwhile, following lobbying from the property industry, in 1996 the Conservative government under Prime Minister John Major introduced legislation aimed at encouraging financial institutions to invest in private lettings via a new tax vehicle known as Housing Investment Trusts (HITs). Again, this was part of a continuing attempt by policymakers to bring new, more professional and larger-scale investors into the sector. It was not just about expanding the sector, but also about transforming its ownership and management (Crook & Kemp, 2002). As we explain in Chapter 6, this initiative failed to deliver on its object, as not a single HIT was established.

A similar attempt by the Labour government to entice financial institutions into the rental market also seems to have failed. Following the example of the USA and elsewhere, Labour legislated for the introduction of Real Estate Investment Trusts (REITs). These were vehicles that were intended to make direct ownership of commercial and residential property tax-efficient for pension funds and other ‘gross funds’ that are not liable for tax on the income from their assets (Jones, 2007). Although many existing commercial property companies converted themselves into REITs, to date no residential property companies have done so and nor have any de novo residential REITs been established. We examine the reasons why not in Chapter 6.

By contrast, there has been a resurgence of small-scale investment in the sector by private individuals and couples, much of it funded by BTL mortgages and all of it undertaken without tax incentives or other subsidies. As we explain in Chapter 7, although BTL was initially fashioned by ARLA, its rapid growth was in fact part of a wider credit and property boom that occurred in many advanced economies. It was not simply a response by investors to the deregulation of the private rental market. Deregulation was introduced in 1989, but the BTL investment boom did not take off until a decade later, when the credit and property bubbles got into full swing in Britain (Kemp, 2009).

Although the BTL lending boom was brought to an abrupt end by the onset of the credit crunch in 2007/08 and the subsequent Great Recession, the market for these loans is slowly coming back to life. And although some BTL landlords had their fingers burned as a result of falling house prices and rising rent arrears, many more benefited from increasing rental yields, falling interest rates and rising demand for rental housing. With both new construction by social housing landlords and the availability of mortgage finance for sub-prime borrowers likely to be highly constrained in the post-credit-crunch era, much greater reliance will need to be placed on the private landlord to meet housing needs than has been the case for many years.

Organisation of the book

Based mainly on our own studies of private landlords, this book explores the transformation in the fortunes of private landlords in Britain since the late 1970s. In doing so, it examines the extent to which the structure of landlordism changed over that period. It also considers the impact of public policy initiatives that sought to revive the private landlord and to bring a new ‘structure of housing provision’ (Ball, 1986) into the private rented sector, involving property companies and financial institutions. Finally, it examines the origins and development of the BTL boom after the turn of the century.

The starting point for our narrative is government attempts both to revive the market in private renting and to create a new corporate structure of rental housing provision. We show how difficult it has been for Conservative and Labour governments alike to achieve these twin goals by public policy alone. Among other things, both the finance market and the small-scale structure of provision that dominated the existing sector were central to shaping the eventual outcomes. Deregulation was a necessary condition for reviving the private landlord because it created a legal framework that helped to give landlords and their funders confidence to invest. But it was not, by itself, a sufficient condition for achieving the desired policy outcomes. The fact that governments introduced an array of tax-based schemes – capital allowances for approved landlords, the BES, HITs and REITs – indicates that something more was certainly needed to bring property companies and financial institutions back into the residential lettings market. Nevertheless, despite the tax incentives that these schemes offered, all suffered from poor design. The fact that they all did so revealed a paucity of policy learning on the part of government.

In addition, we show that many of the actual and implied assumptions on which policy was based – for example, that landlords were fully informed, rational market actors – were unfounded, with important consequences for outcomes. What emerged was different from many of the policy intentions, not least the limited investment by financial institutions and residential property companies and the rapid growth in private individual landlords with small-scale letting portfolios. While there was modest growth in investment by private individuals following deregulation, it reflected in part the slump in the homeownership market and the recession of the early 1990s. Moreover, substantial growth did not occur until a decade after deregulation; that is, from the turn of the century, when market conditions were much more conducive to investment by private landlords. The boom continued, however, even after house prices had risen to historically high levels and rental yields had been eroded to uncompetitive levels.

Chapter 1 sets the scene for the book by looking at private landlordism in historical perspective. It begins by considering the provision of rental housing by private landlords in late nineteenth-century Britain and then charts the origins of the long decline in private renting during the twentieth century. It also examines the nature of private landlordism in the 1960s and 1970s, during which period the private rented sector reached its nadir, and sketches out the legacy inherited by the Thatcher government that came to power in 1979.

Chapter 2 explores in some detail the development of public policy on private renting since 1979. The Conservatives introduced a number of policy initiatives during their three terms of office. Rent and security of tenure deregulation proceeded in three steps, with modest changes in 1980 and rather more radical reform in 1988, followed by a relatively minor but significant amendment in 1996. The Labour government left the tenancy legislation unchanged, but introduced a number of measures aimed at tackling poor quality houses in multiple occupation and ‘rogue’ landlords. In addition to discussing these developments, the chapter also outlines the measures aimed at encouraging property companies and financial institutions back into the residential lettings business.

Chapter 3 presents an overview of the changing nature of the private rented sector over the three decades from 1979. It focuses particularly on the growth of the stock as well as the changes in property conditions over that period. In addition, it looks at the changing composition of the households that rented privately and the tenancies on which they rented their accommodation. It also considers rents, affordability and the role of means-tested rent allowances.

Chapter 4 presents an in-depth examination of the changing nature of private landlords over the period since 1979. It shows that, contrary to the aims of public policy, the ownership of rental housing became increasingly the province of private individuals, most of whom held very small letting portfolios. However, it also shows that private landlords became more investment oriented over this period, with fewer landlords letting accommodation for non-financial reasons.

Chapter 5 reviews the impact of the BES on the provision of rented housing. It looks at the types of residential property company set up under the BES and shows that the scheme was unexpectedly used by universities and housing associations seeking ways to provide new accommodation for their growing number of students and low-income tenants, respectively. It also shows that the scheme was used by building societies seeking to offload the housing stocks that they had repossessed during the housing slump and economic recession of the early 1990s. In addition, the chapter looks at the management costs and rates of return that BES rental housing companies achieved and considers whether these were competitive with alternative investments. Finally, the chapter examines the amount of money raised and the cost of the scheme in relation to the tax relief provided to people investing in the BES.

Chapter 6 reviews the two main initiatives introduced to encourage financial institutions to invest debt and equity into private rental housing: HITs and REITs. The first of these schemes was introduced by the Conservatives and the second by Labour. Both have (so far) failed to entice financial institutions to re-enter the private lettings business from which they withdrew in the 1950s and 1960s (Hamnett & Randolph, 1988). The chapter examines the background to the introduction of these two schemes and considers why they were not successful.

Chapter 7 examines the buy-to-let boom that began in the late 1990s and accelerated after the turn of the century. It looks at the scale of BTL lending before considering why the BTL investment boom occurred. One of the recurrent themes in press commentary on this boom was that some of the people investing in BTL were naive or amateur investors. The chapter therefore examines whether BTL landlords were any different from their predecessors. Finally, the chapter assesses the impact of the credit crunch and the Great Recession on BTL.

Chapter 8 concludes the book. It first summarises the main findings of the research and analysis presented in the previous chapters. Next, it sets out the key lessons for policy that can be derived from our analysis. It also emphasises the importance of a bipartisan approach to the sector. Finally, it considers the future prospects for private renting in the light of our findings. What is clear from our analysis is that the outlook for private landlords is now far more positive than it seemed to be in the late 1970s.

1Private Landlords in Historical Perspective

Although this book is focused on the transformation of private landlordism over the last three decades, it is important to place that process in its historical perspective. The privately rented sector that existed in 1979 was a product of its history. The nature of private landlordism at that time was profoundly affected by the historical development of the sector over the previous century and especially since the First World War, when rent control and security of tenure legislation were first introduced. The aim of this chapter is therefore to provide an overview of that history and thereby to set the scene for the chapters that follow. Much of the material presented here draws on the historical research on the private rented sector conducted by Kemp (1982, 1984, 1987b, 2004).

The Victorian landlord

The nineteenth century was arguably a ‘golden age’ for private landlords (if not for their tenants). In that century, private landlords were in the ascendant and by far the dominant provider of housing. Although national data are not available, local studies suggest that about nine out of ten households in Britain rented their home from a private landlord, with almost all the remainder being owner-occupiers. Indeed, most landlords seem to have been tenants of other private landlords (Kemp, 1984).

The importance of private renting appears to have increased with industrialisation and rapid urban growth in the late eighteenth and the nineteenth centuries (Harloe, 1985). As people moved from the countryside to the towns in search of work and opportunity, they generally moved into accommodation rented from private landlords. In the nineteenth century, the great majority of newly built villas and rows of terraced housing were bought by investors seeking an income from letting property, rather than by people wanting somewhere for their own occupation. Thus, the house-builders’ prime market – whether they were constructing middle-class suburbs or working-class slums (Dyos & Reeder, 1973) – was the investor in housing to let (Kemp, 1982).

Even in rural Britain, where the prevalence of owner occupation appears to have been greater than in the towns and cities, the majority of households rented their home. Very often, the rural tenant’s landlord was also their employer, especially if they worked on a farm or for one of great landed estates. Indeed, tied accommodation, often let rent-free or for a low rent, was a pervasive feature of the countryside. Likewise, many of the servants that were such a ubiquitous feature in the life of middle- and upper-income households in urban and rural Britain lived in their employer’s house. Hence households with live-in servants were not just employers but also landlords (Kemp, 2004).

Thus, in the nineteenth century private renting was by far the most common form of housing tenure and the private landlord was a ubiquitous feature of the housing market (Kemp, 1982). Although most people could not afford to buy their own home, many wealthy people and other households that had the financial means to buy chose to rent their accommodation instead. Owner occupation did not have the financial attractions that it subsequently acquired, such as rising real house prices. And although mortgage interest payments could be offset against taxable liabilities, relatively few people paid income tax before the First World War. Where owner occupation did exist on a significant scale it was mainly confined to the more expensive parts of the housing market. There were also pockets of owner occupation among the labour aristocracy (skilled workers in well-paid employment), especially in small towns that were dominated by one firm or industry and where there was a large amount of company housing (Kemp, 1982). Nevertheless, some of these working-class owner-occupiers were also landlords (Kemp, 1987b).

Private rental housing was a popular investment prior to the First World War for households with savings to invest. Estate duty returns indicate that, at the turn of the century, one sixth of all personal wealth was held in the form of dwelling houses. It was second only to stocks and shares as a form of personal wealth. The ownership of rented houses was spread across all levels of wealth ownership, but was particularly important for those owning relatively small amounts of capital. House letting was popular in part because the available range of investment outlets was quite limited. But it was also attractive because the returns were competitive with the alternatives that did exist (Kemp, 1982). The income from rental housing, while not spectacular, was steady and dependable (Damer, 1976), important attributes in an era when few people has access to an old-age pension or insurance against the death of the family breadwinner.

Historical research suggests that private landlordism was a mainly small-scale business (Kemp, 1982), as it still is today. For example, in Liverpool in 1849, the average portfolio ranged from 3.0 to 9.6 dwelling houses across the 16 wards of the city (Treble, 1971). Daunton (1977) found that between 70 and 90% of the landlords in the various suburbs of Cardiff in 1884 owned fewer than six houses to let and the average holding per landlord was only 4.2 dwellings. In some localities, however, large landlords could play a major role. Thus, in the Newcastle-upon-Tyne suburb of Benwell in 1880, landlords with more than 50 dwellings accounted for only 3% of owners but 27% of the stock of dwellings (Benwell CDP, 1978). Landlord portfolios may have been larger in the Scottish cities, where much of the population lived in tenements. In Glasgow in 1900, for example, the average holding was 3.6 tenement properties, which represented about 22 flats (Morgan & Daunton, 1983).

Most Victorian private landlords borrowed money when investing in housing to let (Cairncross, 1953; Kemp, 1982). The main sources of mortgages in the housing market prior to 1914 were not building societies or banks, but private individuals and trust funds such as marriage settlements and bequests (Offer, 1981). Private mortgages offered the lender a regular flow of income without any of the costs or management hassles associated with property ownership. Estate duty statistics show that private mortgages on house property and business premises accounted for 6.8% of all personal wealth held in the UK (Kemp, 1982).

Borrowing enabled landlords to gear up their investment and obtain a higher return on the equity they had invested than would otherwise have been possible. Building societies and even insurance companies also provided loan finance to private landlords in the nineteenth century (Kemp, 1982). Private and building society mortgages were invariably made on a fixed-rate basis. But whereas building society mortgages involved annual payments of both principal and interest, private mortgages involved interest-only payments, the principal being repaid either at the end of the term or if the loan was recalled. Hence, landlords could obtain a higher rate of return by borrowing money privately than by getting a loan from a building society (Nevitt, 1966).

In the half century up to 1914, investment in new housing went in long waves of around 25 years, with a boom in house-building being followed by a slump. Hence, late nineteenth-century housing markets were subject to cyclical fluctuations, with periodic gluts and shortages (Saul, 1962). These cyclical fluctuations affected the amount of rent that could be charged by the owners of houses to let, particularly on new dwellings (Weber, 1960). The last house-building boom in the nineteenth century peaked in the late 1890s and early 1900s. Like its predecessors, it was then followed by a slump, but this time on an unprecedented scale. Between 1903 and 1914 house-building fell by as much as 70%. By the outbreak of the First World War, the output of new houses had fallen to a level that had not been seen for 60 years. From 1914 until the end of the twentieth century, house building for the private rental sector – apart from a short-lived resurgence in the 1930s – was negligible (Kemp, 2004).

The First World War and beyond

In December 1915, in response to rent strikes on Clydeside and elsewhere, rent controls were introduced for the first time in Britain. The tenant unrest was a response to rent increases imposed by landlords taking advantage of the acute local shortages of accommodation as manpower shifted to areas of munitions production. The government was forced to respond when the rent strikes threatened to extend into industrial action, thereby potentially endangering the war effort (Dickens, 1978; Byrne & Damer, 1980; Melling, 1980). Most other countries involved in the hostilities introduced rent controls during the war (Kemp, 1984; Harloe, 1985).

As its title suggests, the Rent and Mortgage Interest (War Restrictions) Act 1915 controlled not just rents, but also mortgage interest rates. Because repayment mortgages with loan terms of ten years or more were excluded from control, it was private lenders rather than building societies that were affected by the restriction on mortgage interest rates. The rateable value limits in the legislation restricted rent control to dwellings that, broadly speaking, were occupied by working class tenants (Kemp, 1984).

The 1915 Act was originally conceived as a temporary measure made necessary by the war and was due to expire six months after the cessation of hostilities. But by the end of the war, the housing shortage was far worse than it had been in 1915 (Bowley, 1945), which made it politically difficult to let the Act expire. Moreover, concerns had been raised during and immediately after the war about ‘landlord profiteering’ on middle-class properties, newspaper accounts of which damaged the image of private landlords (Kemp, 1984). Hence, rent control on existing dwellings was not only extended in duration, but also widened in scope in 1919 and again in 1920. However, newly constructed properties were exempt from all rent controls from 1919 to 1939 (Kemp, 2004).

In 1919 the Government also introduced Exchequer subsidies for local authority housing (Wilding, 1973; Merrett, 1979; Swenarton, 1981). It was realised that not only would there be very considerable excess demand for accommodation at the end of the war, but building costs would also be abnormally high, yet could be expected to fall after a few years. This seemed to imply that, irrespective of the long-term prospects for a return of investment into rented housing, in the short term investors would hold off from purchasing new house property until after building costs and house prices had fallen, for otherwise they would have suffered a capital loss. Hence, in turn, builders would be very unlikely to construct houses, since their traditional customer, the private landlord, would probably not buy them (Kemp, 1984). In these circumstances and in view of the likely social unrest that the housing shortage would generate, the Government accepted the need to provide some kind of subsidy to house building until ‘normality’ had returned (Wilding, 1973; Merrett, 1979; Swenarton, 1981).

During the 1920s, the building industry recovered from the slump into which it had entered during the late 1900s, a recession much exacerbated by the war. A prime cause of the initial slump was the downturn in the attractiveness of house-letting as an investment. The recovery of house-building during the 1920s, however, was based not on private rental but on owner occupation and local authority housing, two tenures that had been of considerably less importance before 1914. This recovery was greatly stimulated by the provision of Exchequer subsidies to new local authority housing and to private builders, as provided by the Housing Acts of 1923 and 1924 (Bowley, 1945; Merrett, 1979, 1982).

Following the publication of a report by the Onslow Committee into the Rent Acts, the Conservative Government took steps towards decontrolling the existing supply of rental housing. The 1923 Rent Act provided for decontrol on vacant possession, thereby transferring the basis of rent control from the dwelling to the tenant. The Act also made provision for decontrol by class of house as from 1925 when the position was to be reassessed in the light of house-building progress (itself to be aided by Government subsidies).

But even after the return to some kind of ‘normality’ in 1923, when the immediate effects of the post-war boom and slump had been felt and building costs had stopped falling from their 1920 peak, the prospects for investment in new private rental housing were poor (Kemp, 1984, 2004). Interest rates and building costs were still at higher levels than they had been before the war. Meanwhile, the wages of people in full-time work wages had not kept up with the rise in the cost of living. Moreover, during the depressed 1920s, short-time working was common and unemployment at a very high level (Bowley, 1947). Hence, the average working-class tenant would have had difficulty affording the economic rent of a new dwelling. Those who could afford the cost of new private housing tended to become owner occupiers rather than remain in the rented sector. In any case, the builders’ traditional market – the private investor – was no longer prepared to buy new rental housing (Kemp, 1984).

Existing private landlords not only had rent controls to contend with, but also faced competition from the new, subsidised local authority rental sector. Indeed, 98% of all new ‘working class’ dwellings produced in England and Wales between 1919 and 1931 were built for local authorities and only 2% for private owners. Moreover, the new local authority housing – built to higher standards and let at subsidised rents – tended to be let to clerks, teachers and better off working-class households in steady employment (Bowley, 1945). The rents of the new council houses, even with the subsidy, were simply too high for low paid or unemployed households to afford. Hence, the poorest households continued to rent their homes from private landlords.

After the First World War, people with money to invest were presented an increasing array of outlets for their savings, many of which were more attractive than housing to let. Moreover, compared with rental housing these new investments were more liquid, less ‘lumpy’, involved far fewer management problems and promised higher rates of return (Kemp, 1984). Thus, there was a marked growth in the number of joint-stock companies listed on the stock exchange after the war (Thomas, 1978), which made it easier for small-scale savers to invest in shares. Interest rates were much higher in the 1920s than they had been prior to the war. This not only reduced the profitability of geared investment in rental housing, but also increased the returns from money-lending investments such as Government bonds and building society share and deposit accounts (Kemp, 1984).

Thus, after the First World War a combination of rent controls, the investment environment and the tarnished image of investment in housing to let, helped ensure that a revival of new building for private rental did not occur in the 1920s (Kemp, 2004). When the building industry did eventually get back on its feet, from 1923 onwards, the recovery was not based on private renting, but on local authority housing and owner occupation. This recovery of house building was greatly stimulated by the reintroduction of Exchequer subsidies for local authority and private housing in the Housing Acts of 1923 and 1924 (the subsidies introduced in 1919 had been axed in 1921 as part of cuts in public spending). Whereas the 1923 Act passed by Chamberlain favoured the private sector, the 1924 Act passed by Wheatley favoured local authority house building (Merrett, 1979; Holmans, 1987).

The recovery of the private housing sector in the 1920s was based on owner occupation (Merrett, 1982; Ball, 1983). Much of the growth of owner occupation in the new housing market was the result of necessity. But home ownership also had important advantages in the 1920s. Whilst private renting was a reasonably attractive proposition for middle class households prior to 1914, the uncertainties and shortages of the war and early post-war years quickly highlighted its disadvantages. Buying one’s home was thus a means of ensuring stability and security (Kemp, 1984). Moreover, the building societies had plenty of money after the First World War (Cleary, 1965). Of course, this increase in owner occupation would not have been possible had not there been an important increase in people’s ability to buy (Cleary, 1965; Merrett, 1982; Ball, 1983). This was a product of increasing job security, the growth of ‘white collar’ employment and rising real incomes for those in work between the wars (Pollard, 1969).

Thus in the inter-war years there was a major shift in social attitudes towards owner occupation (Cleary, 1965; Jackson, 1973). This shift was reinforced during the 1930s, when there was a massive private house-building boom, based largely on owner occupation (Richardson & Aldcroft, 1968). Low house prices and generous lending terms meant that an increasing number of households could, for the first time, afford to buy rather than rent their own home (Ball, 1983). Hence growing numbers of better-off households left the private rental market and became homeowners. The fact that the vast majority of those purchasing in the 1930s were first-time buyers therefore meant that they did not have to sell their existing home in order to buy a new one (Merrett, 1982); they merely had to give their landlord notice to quit.

However, the conditions that made it possible for so many people to become owner-occupiers also helped make investment in private rental housing more attractive (Kemp, 2004). As well as low interest rates and building costs, working class rents increased during the 1930s, making rental yields relatively attractive. As a result, there was a notable revival of new private rental house building in the 1930s. In total, over 350 000 new dwellings were built for private letting in the five and a half years from September 1933 to March 1939, together with a substantial but unknown number of more expensive ones (Kemp, 1984).

Many of the investors in this new rental housing were private individuals. However, an important and to some extent novel feature of this return of investment in private rental housing was that much of it was by newly-formed property companies. These new property companies were different from the typical Victorian private landlords, who tended to be individuals. Moreover, this new form of landlord tended to involve a larger scale of operations, had access to a different form of capital financing and could be expected to be more economically rational in outlook (Kemp, 1984). The big insurance companies and pension funds were also keen investors in blocks of flats, especially in London and the south-east (Kemp, 1984; Hamnett & Randolph, 1988).

Post-war decline

The Second World War marked an important turning point for the privately rented sector in Britain. It brought to an abrupt halt the ‘Indian summer’ in building for private rental that had commenced in the early 1930s (Kemp, 2004). Just a few days after war was declared, rent controls were extended to virtually all rented housing, with rents frozen at their September 1939 level. After the war, the sector declined rapidly, both in relative and in absolute size. In 1938 the privately rented sector accounted for 6.6 million dwellings or 58% of the housing stock in England and Wales, but by 1975 it contained only 2.9 million dwellings and represented only 16% of the stock (Holmans, 1987). A similar decline occurred in Scotland. During this period, therefore, private renting in Britain was transformed from being the most common tenure to being a relatively small and residual part of the housing market.

The housing shortage after the war and the election of a Labour government in 1945 were important reasons for the lack of new construction for private renting. One consequence of the post-war housing scarcity was that blanket rent controls remained in place on existing and new dwellings after hostilities had ended. The failure to exempt new dwellings from rent controls made it almost inevitable that little construction for private rental would be undertaken in the post-war years (Kemp, 2004). Moreover, under the immediate post-war system of building licences, local authorities were expected to provide 80% of new construction (Merrett, 1979). Given the existence of rent controls on new private homes, the lack of subsidies for new rental housing and the limited permission to build, it was hardly surprising that the private sector focused its output on the market for owner occupation rather than housing to let (Kemp, 2004).

When the Conservatives returned to office in 1951, the housing shortage was still very substantial and hence so was the political imperative both to maintain rent controls on the existing stock of privately rented dwellings and to increase the output of new houses. The Conservatives at this time were more concerned with reaching the target of 300 000 new homes per annum that they had promised in the 1951 election campaign than by whom the houses were built (Holmans, 1987). With private housing construction gradually recovering as building controls were removed, it was difficult to argue a case for the extension of subsidies to the private landlord (Kemp, 2004).

Meanwhile, private sector rents were frozen at their September 1939 level, which in many cases was the August 1914 level plus 40%. The result was that private rents fell in real terms as house prices, earnings and retail prices all increased following the war. The consumer price index increased by 105% between 1939 and 1951 and the price of building maintenance trebled (Holmans, 1987). Frozen rents and rising property values meant that rental yields fell substantially. With a significant gap opening up between tenanted and vacant-possession house prices, many landlords took whatever opportunities arose to sell up and invest elsewhere. The continuing housing shortage, combined with an increasing appetite for owner occupation and growing numbers of households able to afford to buy, meant that landlords had a ready market for their properties (Hamnett & Randolph, 1988). Between 1939 and 1953, an estimated half a million dwellings were sold by private landlords to owner-occupiers in England and Wales. A further 1.2 million were sold in the period from 1953 to 1961 (Holmans, 1987).

While the new Conservative government sought and succeeded in raising housing output to 300 000 a year by 1953, it also began to focus attention on the condition of the existing stock of (mostly privately rented) houses, much of which was seriously substandard. The Conservatives’ 1953 White Paper ‘Housing – the Next Steps’ viewed the problem of substandard housing as one of the privately rented sector (Merrett, 1982). Apart from the age of the stock – 30% of which was at least a century old – the white paper identified post-war restrictions on building works and materials, and especially rent controls, as the two causes of the physical deterioration in the condition of private dwellings since the war (Kemp, 2004).

The structure of rents in the privately rented sector was described in the White Paper as ‘hopelessly illogical’, with, for example, different rents being charged for identical houses in the same street. In addition, many rents were insufficient to enable landlords to maintain their houses in adequate repair. Since the housing shortage was still sufficiently severe to prevent rents from being completely decontrolled, ‘The main question resolves itself, therefore, into the most equitable way of allowing such increases in the rents of privately-owned houses as will enable the landlord to keep the house in good repair’ (MHLG, 1953, p. 7).