Monday, 18 March 2013

Home-Owner-Ist logic: More supply = higher prices

From the BBC:

A million home owners who do not live full time in their property could see their council tax rocket in April, as most automatic discounts are to end. The change, which will affect second homes and empty properties in England, could see bills for 2013-14 rise by 200%...(1)

Katrina bought a property in Rotherham to renovate while she still lived with her mother. Her council tax will rise from just under £50 a month to almost £150 as a 50% reduction becomes a 50% premium.

"There is no law against taking a long time to get it renovated. If they'd told us a year ago maybe I could've pushed and got it finished. But I've been given less than a month's notice."(2)

... Landlords too will find their costs go up. At the moment they get six months free of council tax between lettings of unfurnished property. But from April that will end.

Adrian Thompson, Director of the Guild of Residential Landlords rents many properties out in the North of England. He says rents will have to rise. "I can see no choice in the matter. Returns are very low anyway. I can't see any choice."(3)

1) As a poor cousin of LVT, charging full Council Tax on empty and second homes might, at the margin, encourage them to be brought into use. We observed the same effect when the government tightened up the rules on empty property discounts for Business Rates a few years ago.

2) Which sort of illustrates the point. Hopefully she'll now get on with it.

3) Bizarre. There will be slightly more supply and the same number of people looking for homes to rent, which will push rents down, however slightly. And council tax payable during void periods cannot possibly affect the amount which tenants are willing to pay while they actually live there, why would it? Why is it their problem?

If anything, landlords will be dropping rents (or doing up their empty ones all the quicker) to ensure that they have the shortest void periods. Or has he so far been generously charging lower rents than he could have done?


Bayard said...

3) He would say that, wouldn't he? He's just doing a bit of shoud waving for the press, but I bet he knows he's lying. I'm surprised he didn't mention pensioners into the bargain.

Mark Wadsworth said...

B, good call. The BPF actually made that claim when the business rates exemptions were reduced: "But this will hit hard pressed pensioners who have invested wisely in vacant buildings and harm business."

Bayard said...

In the short term, as far as the tenants are concerned there's always the hassle of moving to be weighed against the payment of higher rents,but in the longer term, the landlords will have a problem re-letting at those higher rents, unless the Guild of Residential Landlords has some success on persuading all landlords in the area to put up their rents.

Mark Wadsworth said...

B, there's the hassle of moving and there is the hassle of finding new tenants, that cancels out.

And demand for rented accommodation is price sensitive; if all landlords demand uniformly higher rents then people will just share housing (for example adult children will stay with parents for longer; younger people will share a house rather than renting a flat each) or people will move elsewhere.

If they could put up the rents to a higher amount than now, why haven't they already done it?

Bayard said...

"B, there's the hassle of moving and there is the hassle of finding new tenants, that cancels out."

Yes but the hassle of moving comes first, e.g. it is not unknown for landlords to let a property at a lower rent to get it filled, then, after six months, put the rent up, knowing that the tenants won't want to move again so soon. As a landlord, I was advised to use this tactic.

"If they could put up the rents to a higher amount than now, why haven't they already done it?"

Probably because there's too much competition and always will be.

Mark Wadsworth said...

B, the other view is, if you've got a steady paying tenant, don't put up the rent, better the devil you know.

As to your last comment, is there competition or isn't there? Even if landlords were organised enough to form a cartel, so what?

Actually, landownership is a monopoly anyway (or a series of small local monopolies), the maximum total rental value of existing housing is exactly what it is.

If one landlord owned every single house and set the revenue maximising rent for each one, he would not be able to get more rent than if there were millions of landlords who own one house each, because each landlord sets the maximum rent anyway (give or take a few quid).

Even with a single monopolist, demand is still price elastic and that is what sets the upper limit.

Bayard said...

"the maximum total rental value of existing housing is exactly what it is."

In theory, yes, but in practice, it is also sensitive to supply and demand. If you have a lot of property coming onto the rental market at once, say a large infrastructure project finishes and lots of people move away to another project elsewhere, then the cannier landlords will try to fill their properties by lowering rents, even though the ability to pay of the remaining population is unchanged and whilst properties remain empty at the lower rents, they can't put the rents up again.
Obviously this doesn't work in cities, because people just move in from elsewhere in the city to replace the people that leave, but in more sparsely inhabited areas it's a noticeable effect.

Mark Wadsworth said...

B, the total rental value is fairly fixed (for a given level of overall economic activity).

For sure, it sloshes around from one place to another. When they open a new out of town shopping centre, the rental value of what was farmland rockets and the rental value of existing high street falls; if the North Sea oil runs out and they do fracking instead, then rents in Aberdeen fall and rents in Blackpool go up.

But the total rents remain the same.