Joseph Harnby is a PhD researcher in economics at the University of Bristol and a property investor
Ethics are often the elephant in the room when it comes to residential property investing. It’s a sensitive issue that invokes strong emotions, speaking to how important housing is. The tension comes about because property is both a financial asset and someone’s home. Different sides in this discussion argue for these different conceptions of property but both are true and the reason they are is the government’s role in the housing market over the last 40 years.
The common sense of governing since the 1980s has been to reduce the role of the state and encourage the emergence of markets in all areas of life. This includes social housing in the UK. The single biggest step towards this was the 1980 Housing Act, which gave 5 million Britons the right to buy their council owned homes for as much as a 50% discount.
This constitutes a huge giveaway to the people who qualified, who were means tested due to having a council house. The policy worked a treat for social mobility. By 1995, 2.1 million people had taken advantage of their right to buy. This brought £28 billion in to the treasury. Accounting for the discount, this means that at least £37 billion was transferred from councils to people at the point of sale. Between 1995 and 2015, house prices increased by 300%, meaning that that £37 billion giveaway has now matured into a £111 billion giveaway.
This is the kind of giveaway Jeremy Corbyn could only dream about. But the policy was opposed by the Labour Party up until 1987. Why? Because there was a sting in the tail. The Thatcherite policy was not just a giveaway to lower-income people but a retreat of the state from social housing, with the underlying logic that the market will provide better, more efficiently, and more creatively than the state.
Incidentally, this is the same logic that has enabled Elon Musk to dream about Mars colonisation and Jeff Bezos and Sir Richard Branson to escape our atmosphere –as private companies, receiving government subsidy, rather than as NASA astronauts. The point is that this logic is endemic to western societies today. We have created markets in many areas that, after World War II, were the province of the government.
The effect of this on housing is that many entities have stepped in to fill the void, creating a thriving eco-system of service delivery. This includes Housing Associations, institutional investors, and private landlords. The theory is that the competition and financial incentive is enough to provide the best service to the most amount of people, with the government stepping in to fill any gaps in service. This is exactly as intended – and it’s what we’ve been, as a country, voting for over the last 40 years.
Viewed in this context, landlords become essential service providers that are systemically necessary. Without small landlords there would be a greater burden on the government to provide housing to people, an expense governments have been pushing away since the 1980s. This is how small landlords should respond when their positions as investors are questioned: the world we live in, however imperfect, makes us a necessity.
The problem with this is that when there is money to be made many bad actors emerge to take advantage. These are people, investors or organisations, who only see housing as a financial asset, ignoring the fact that they are providing people with an essential service. They give the critics of landlords an easy target. So, what can be done?
Better regulation on bad landlords is a must and better implementation of existing regulation is a must. The government’s rogue landlord database only has 22 entries, despite estimates of 10,5000 likely candidates operating in the UK. This clearly isn’t working as intended.
As investors, we can do much more to embody property as both financial asset and essential service, doing the things that maintain and promote the growth of the asset while taking measures to improve the lives of tenants. Self-regulation is nearly always better than third party regulation.
In particular, focusing on issues related to the crisis of home affordability would go a long way. This involves self-restraint with rising rents. Once you get to a yield you are comfortable with for a property (helped by rental increases over time while your purchase price remains static) rent freezes should be considered. Another aspect of this could be a general push for increased wages at the bottom end, showing support for people who are struggling to earn the income necessary to purchase a home despite their hard work.
Many landlords already carry out these kinds of measures, especially rent freezes, yet it is often under publicised. Being louder about how we behave ethically and not shying away from this conversation can be really impactful, developing trust with tenants and decrying the landlords giving the rest a bad name.