What happens to rents if landlords exit the market? Nothing.

Today we publish new research looking at the relationship between the size of the private rental market and rents, in light of the credit crunch, landlord tax changes, and proposals for tenancy reform.

We demonstrate that:

  • A fall in rental supply is matched by a fall in demand as renters become home owners
  • There is no impact on inflation-adjusted rents - in fact they've been falling
  • The experience of the past 14 years suggests rents are most closely linked to wages - i.e. what renters can afford to pay
  • This should give the government confidence to press on with substantial reform to tenancies

There’s widespread and growing consensus on the need to improve security of tenure for England’s 11 million private renters. And high time too – private renting is no longer a temporary tenure for the young but will be the home of millions of us well into the future, including families and older people. Recognising this, the Government has consulted on three-year tenancies, and Labour has pledged to end Section 21 ‘no fault’ evictions. The London Mayor is, like us, calling for open-ended tenancies, as introduced in Scotland last year.

But some landlords won't like this. They like being able to evict tenants without needing a reason, so they can sell up, or avoid their responsibilities to provide a safe home. What will happen if reform prompts these landlords to leave the market? In short, some renters will be able to buy a home, and those who can't will enjoy a better quality of life.

The property industry claims that if landlords leave the market, reducing the supply of rented homes, this pushes up rents. This is a bit disingenuous in the first place, because rents have been rising as the private rented sector has grown. But homes withdrawn from the market obviously don't vanish into thin air. The industry's line of reasoning is based on a misperception of supply and demand, as we demonstrate in our new paper ‘Do measures that discourage buy-to-let investment increase rents?’

The government has already discouraged buy-to-let investment through withdrawal of higher rate tax relief on mortgage interest, and a stamp duty surcharge on properties that aren't one's main residence. This raises costs for landlords. If a landlord sees their profits dented, they cannot simply raise the rent, because stretched tenants will shop around for a more affordable home. Landlords who try to raise rents will be undercut by the majority of landlords who are unaffected by tax changes (most don’t have a mortgage). Looking to the future, if landlords who see evictions and churn as part of their business model raise rents in response to greater security of tenure, they will be undercut by the majority of landlords who are unaffected because they value good long-term tenants. A landlord might therefore decide to sell, taking their property out of the rental market.

But market rents are set by the balance of supply and demand in the housing market as a whole, rather than simply in the private rented sector. It's obvious if you think about it – the landlord might sell their house to another landlord, in which case there is no impact on private rental supply or demand. Or it is sold, either directly or via a chain, to a first-time buyer. In that case, rental supply is reduced by one home, but rental demand is also reduced by one household as it moves into homeownership. In either case the overall balance of supply and demand in the housing market is unchanged, so there is no reason why rents should rise.


That's the theory. In our paper, we looked at two past occasions where there was a sudden change in supply or demand in the private rented sector - but not the housing market as a whole. To account for the fact that rents have been going up anyway, we looked at how rents responded in relation to wider consumer prices - and found that they fell.

As the credit crunch hit in 2008, mortgage lenders tightened lending criteria and the number of first-time buyers halved, boosting demand for private renting - the sector grew by an extra 135,000 per year between 2007 and 2010 compared with 2005-07.  According to the property industry’s logic, the sharp increase in demand should have caused rents to rise – yet inflation-adjusted (real) rent fell by 6.7% in the three years to January 2011.

Then, in 2016, the Government introduced tax changes for buy-to-let landlords designed to level the playing field for first-time buyers - the stamp duty surcharge and withdrawal of higher rate relief on mortgage interest. The size of the private rental market has already fallen by 111,000 households, and first-time buyer numbers are up. Those first-time buyers who snapped up properties previously owned (or simply not bought) by landlords no longer need rented homes, so the balance of supply and demand remains constant. And rents have not risen in real terms, but have in fact fallen by 2.8% since the surcharge came in.


We also find that there is no evidence to suggest that longer tenancies will scare off investment in new housing supply. Only a small proportion of new housing stock ends up in the rental market, and much of it is built and let by institutional investors who already offer terms at least as good for tenants as the Government proposes.

At Generation Rent we’re calling for the abolition of Section 21 evictions and open-ended tenancies where tenants who meet their responsibilities have the right to stay as long as they want along with the flexibility they need. If tenants are evicted on no-fault grounds then landlords should pay some compensation, which would mitigate the financial hardship of an unwanted move for tenants and encourage landlord-to-landlord sales with sitting tenants. Our security proposals would vastly improve tenant experience. 

If this prompts some landlords to quit, the evidence suggests that this will have no impact on rents. This should give the government confidence as it analyses responses to its recent consultation and decides how bold it is willing to be on the rental market. It’s clear that offering more security to private renters would vastly improve the experience of millions, whilst edging undesirable landlords out of the market and boosting homeownership. Suggestions that more security would lead to higher rents is simply wrong, and not backed up by theory or empirical data. There is no reason for the government to flinch from bringing in mandatory security improvements for tenants now.


Update, 19 October: a new version of the paper has been uploaded; the only change is to update the figure from the LFS on p7, from 125,000 to 111,000. 






The Times


Showing 12 reactions

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  • David Abbs
    commented 2018-11-30 17:09:52 +0000
    A key ally of Generation Rent has blown a lethal hole in Craw’s Law/Mulheirn’s Theorem. Nick Ballard, National Organiser of ACORN, pointed out that most tenants who want to buy can’t afford to. He said “If a tenant wants to buy out their landlord and has the savings to do so then that’s great for them. But the reality is most renters have very little in savings.”


    So when landlords sell to FTBs as they are driven out of the market by the abolition of Section 21, they will not be selling to renters, they will be selling to people who stayed with their parents to save up.

    Supply of rental accommodation will go down, demand will stay the same (ceteris paribus) so rents will rise and so will homelessness. That is what Generation Rent and ACORN are campaigning for.
  • Rob Thomas
    commented 2018-11-26 18:59:05 +0000
    There is a fundamental fallacy in your analysis. You say:

    “the total number of properties in the PRS can only fall by landlords selling (directly or indirectly) to first-time buyers, who will by and large be renters. As landlords exit the market they therefore cause a reduction in the supply of private rentals that is matched by a corresponding fall in the demand for private rentals. The balance of supply and demand in the rented sector, and hence rent, therefore remains unchanged.”

    As a seven year old could probably point out, a large proportion of first time buyers are people who had previously lived with their parents and therefore were not in the private rented sector. At the margin, whether a house sold by a landlord was bought by a tenant or someone who had been living with parents would be determined by the relative purchasing power of these two buyer groups.

    Many relatively affluence first time buyers will have moved straight from living at their parent’s home. Property sales by landlords will thus often benefit these buyers at the expense of renters who must find another home in the now shrunken private rented sector.

    You miss another point, on a like-for-like basis private rented properties have more occupants than owner-occupied properties. For example, a four bedroom house in the private rented sector is more likely to have four or more occupiers than the same property in the owner-occupied sector. So moving property from the rented sector into owner-occupation is likely to reduce the total number of people housed, increasing homelessness.

    I suspect that Generation Rent promotes these policies because you ostensibly represent aspiring owner-occupiers that feel unfairly locked out of the housing market. You promote policies that increase the supply of owner-occupied property even at the cost of reduced supply of rented homes. I’m not convinced that you care about the tenants who will face higher rents because they cannot afford to buy when landlords sell, but to make yourselves feel better you peddle ridiculous claims that fewer rented homes won’t increase rents.
  • David Abbs
    commented 2018-11-26 15:00:02 +0000
    Generation Rent’s belief – that rents will be unaffected as landlords leave the market due to the abolition of Section 21 – is based on a fallacious theorem from a Trustee. See https://www.property118.com/generation-rents-dream-based-fallacious-theorem-trustee/

    Your leaders are misleading you. You are campaigning for increased rents
  • Rob Thomas
    commented 2018-10-29 13:55:41 +0000
    To James McKindley

    I have chosen my words carefully and there is no error in my comment. People can be drawn into the higher rate band by the way the removal of mortgage interest deduction is calculated, but you MUST be drawn into the higher rate band to be affected by this change.

    For example, imagine someone with a salary of £35,000 and gross rental income income of £40,000 with £20,000 of mortgage interest and £10,000 of other rental costs and no other income. Under the old rules, their taxable income would be £45,000 (£35,000 salary plus £10,000 rental profit). Under the new rules, once fully implemented, their taxable income will be £35,000 plus £30,000 (rental profit BEFORE mortgage interest). This gives them a taxable income of £65,000, pushing them into the higher rate band.
  • Andy Wilson
    commented 2018-10-20 16:53:04 +0100
    Absolute drivel, reports like this work against the tenants, as people in power believe it and pass laws to penalise landlords, which ultimately leads to increased rents and less houses to rent. when all the landlords have gone, thanks to generation rent and shelter I hope that the people who write these reports are made to face all the homeless people and explain to them how much better off they are, now there is no private rental sector.
  • James McKindley
    commented 2018-10-20 14:45:14 +0100
    To Rob Thomas.

    Rob I appreciate your comments but I must draw your attention to a large error in your text. You state that the reduction of mortgage interest applies to higher rate taxpayers but the changes can affect people in all tax bands. Indeed they could affect people who pay no tax at all. This is because the mortgage interest is added to true income and can thus move them up tax bands and even take them to a level where their fictitious income exceeds 100k and they lose some, or all of their personal allowance. Even with the 20% tax credit added back in it is possible for someone to be taxed more than they earn and even to be taxed on a loss. This underlines that rents must increase and I can assure Wilson Craw that in my area rents have indeed rocketed recently.
  • Rob Thomas
    commented 2018-10-20 11:46:40 +0100
    Speaking as a professional economist, I can say this is a flawed piece of analysis. And I can confirm that, ceteris paribus, a fall in the number of landlords will lead to higher real rents.

    Taking the two periods you discuss above, in the first (the 2008 financial crisis), you are correct to say that it reduced the number of first time buyers, leaving more people stuck in private rented accommodation. However, you completely miss the other key effect – that both nominal and real interest rates fell dramatically, so investors needing an income found private rented accommodate a good asset to invest in. The fall in real rents after 2008 suggests that the latter effect was more powerful than the former.

    Turning to your second event, the taxes introduced to cut landlord profits since 2015, firstly, the stamp duty change only affects new purchases, so won’t impact the stock of PRS properties directly. Secondly, the reduction in the mortgage tax deduction for higher rate taxpayers only came into effect partially in 2017-18. Landlords who need to sell to respond to this change (which is fully implemented only in 2020-21) still have time to sell before the tax really bites.

    And the paper completely fails to mention an event that took place in 2016 – the EU referendum. This has certainly led to a fall in the number of Europeans coming here and many have gone home (mainly because the lower pound makes work in the UK less attractive), which the official numbers probably seriously under-estimate (because it’s easier tacking new arrivals seeking NI numbers than those getting on a bus back to Poland or elsewhere).

    Cause and effect will always be difficult to ascertain in practice because lots of factors are driving changes in rents, including government benefit changes, real wage growth, the rate at which younger people leave the parental home etc. and the lags between cause and effect are uncertain. The above analysis ignores any discussion of lags, which shows how little thought has gone into it.
  • Gromit
    commented 2018-10-20 10:22:15 +0100
    According to Wilson-Craw rents have gone down. So where are all the Tenants who feeling financially better off as a result?
  • James McKindley
    commented 2018-10-20 09:23:25 +0100
    Generation Rent, Shelter and several other organisations are out to do as much damage as they can. Who will suffer from it? Quite simply those that need to rent. As others have posted here, homelessness is soaring as landlords sell up. The number of families in emergency accommodation has increased quarter by quarter 27 consecutive times. I hope you’re proud Wilson-Craw because you are definitely playing your part in their suffering.
  • Rob Thomas
    commented 2018-10-19 17:44:34 +0100
    I see from this research that Generation Rent now acknowledges that private sector rents have actually fallen by 5% in real terms since 2005 and that incomes have risen faster than private rents over this period. So why are you constantly telling us about soaring rents making life difficult for tenants?
  • David Abbs
    commented 2018-10-19 16:49:08 +0100
    Your council tax goes up every year so you pay more than the previous year. If it goes up by less than the rate of inflation do you say that council tax has gone down? No, neither does anyone else. But that is the trick that Craw has used.
    See https://www.property118.com/generation-rent-tries-hoodwink-policymakers/#comment-106967
  • Michaela Anaka
    commented 2018-10-16 09:41:33 +0100
    A very simplistic view from an author who no doubt has not been around for half a century. It has always been difficult to get on the housing ladder and buy a property it requires saving and earning power to be able to afford to buy.
    The size of the private rental market is already down by 111,000 As landlords are selling up in droves due to the punitive S24 tax and too much legislation. The number of homeless people single and families has risen by at least a million and will continue to rise.
    Many tenants are evicted under the no fault process usually for rent arrears and breach of tenancy. Not because the landlord wants them out on a whim! Many landlords are just working class people who have invested their life savings in property for a pension in future.
    Being a homeowner is not an entitlement it is privilege. And not everyone can be a homeowner.
    Being a homeowner comes with great responsibilities and it is not a secure form of tenure like being a tenant. After all if someone falls behind on Theo rent they can just walk away from a private landlord. There is no credit file marks and a tenant can even claim benefits and help to prevent themselves from becoming homeless.
    If a homeowner defaults on their mortgage their property will be repossessed there’s no housing benefit and their financial record is marked for life affecting them for the rest of their life.
    Private landlords provide housing for renters where the government is failing to do so.
    The answer to the housing crisis is more social housing and not laws to penalise hard working class people who are landlords who are saving for their pension.
    The viewpoint of getting rid of landlords so that generation rent will have lot of choice of property to buy is like chasing unicorns. Buying a property doesn’t end in buying it! There’s usually no freedom to move after for a long time, so there’s no flexibility of movement, property requires maintenance, late mortgage payments seriously affect credit rating. Being a homeowner brings much more responsibility than being a tenant.
    Owning a property as far back as 50 years ago was an aspiration it was never an entitlement. And most young people could not afford to buy a property. The difference was at that point their was an abundance of social housing even for single people and generation rent had a much larger choice of housing. Albeit having to wait on list for social housing, single persons on low wage had the chance of a secure social rented property.
    Affordable homeownership was never an option.
    Homeownership is a privilege. Always was and always will be, it require great discipline and sacrifice and should never be compared to renting.