There's been much talk lately about all the attacks on Buy to Let landlords and another talking point seems to be this idea of rent capping because rents are increasing and the public wants government to be seen to do something about it.
There are examples of rent capping in some cities around the world and one which is quoted frequently is the example of Berlin where rent capping exists and works quite well for that market place.
What commentators often fail to address when using Berlin as the example is that the market and economic conditions of the city and country are completely different to the UK. In fact it's impossible to equate any other city's implementation of rent capping with the UK because the economic factors are all so different.
For a start, Germany is a far more landlord friendly tax environment with lots more incentives for landlords to remain profitable.
That's the key to this, although there are people calling for rent caps as a measure in the UK, the government simply can't put too much pressure on landlords and put them out of business. If the government's measures were too extreme, and forced landlords to exit the private rented sector (PRS), that would lead to a catastrophic series of events that would destabilise the housing market.
The UK housing market needs the PRS to fulfil some of it's housing requirements and so this is a delicate balance.
In the UK, rent capping would artificially suppress market prices and with a lack of supply of housing, the fall out would be that the public demand more and more housing. Some landlords would sell up because the BTL business is no longer profitable and there would be a even larger deficit in housing supply.
Let's hypothesise on what the sequence of events might be for rent capping in the UK.
- Government introduces rent caps
- A percentage of landlords find a percentage of their portfolios are no longer profitable and decide to sell. There is evidence that this would occur as the latest stamp duty changes and mortgage interest relief changes has already caused a quarter of landlords to sell some of their properties which no longer work.
- An increased supply of housing enters a market where demand is outstripping supply, but first time buyers still cannot afford to buy them because their salaries are not high enough to afford the mortgages and save for a deposit.
- Private rental sector suffers and many more people can't find places to live due to lack of rental properties.
Of course this is just one hypothesis of which many could potentially happen. What I think is certain though is that the current market forces in the UK wouldn't provide a positive outcome on rent capping, no matter which course of actions happen.