Confused

What one housing expert wants you to know about renting

It's not all bad.

Renting a home is a really emotional issue for a lot of people. If you asked them on the street, most would probably say rents are too high, landlords exploit short tenancies, that it’s insecure, and that it does not suit families.

But there’s a lot that most of us don’t understand about the housing market, and the specifics of how renting works. We spoke to Kenneth Gibb, a professor in housing economics at the University of Glasgow, and asked him what things he wished people understood better about it all.

More and more people are renting their homes

More and more people are renting, and less and less are owning their own homes. Some people, referred to as ‘rental investors’, are buying up lots of properties to rent, which pushes prices up for the people who do want to buy a home for themselves. But on the other hand, it can be a good thing to have a large renting sector: it’s a flexible way of managing housing, giving people quick access to a roof over their head – as long as you know how it all works.

A house is not (always) a home

This is the first thing people need to think about: a house might be a home to you, but to a landlord or an investor, it’s a ‘commodity’ - essentially just a valuable item. Which means that from the off, the interests of both parties are very different. If house prices go up, that’s great for the landlord, but not so much for the tenant. You’re basically coming at the transaction from different angles.

In economics speak, you’re putting ‘consumers’ and ‘investors’ into the same market - they’re both customers of those who own the property, but they’re in it for very different reasons. One key difference is that an investor likes a housing market where they can really easily sell or buy property, so they’d be keen on very little regulation on landlords - but a consumer wants a stable home.

Know your rights

It seems like an obvious one, but it’s vital people don’t go into the rental market uninformed.

One of the core problems of the way the rental market works is what economists call ‘information asymmetry’ - a fancy way of saying that some people know more than others, where ‘some people’ usually means landlords, and ‘others’ usually means tenants. The party with the information advantage can exploit that fact.

A good example is what’s called ‘price discrimination’, where a landlord could tell one person a property is worth a certain price, and another person a different price, in the hopes that neither of the two knows enough about the market to tell whether the prices they’re being named are fair. And once you’ve agreed, the house becomes your home and you may be willing to pay slightly more to stay there – another fact that landlords could take advantage of.

Being conscious of those ‘information asymmetries’ can help tenants be aware of what they might not know in conversation with a landlord. It’s important to make sure you’re informed by talking to impartial third parties or citizen advice organizations.

You don’t have to buy on your own

There’s this idea that everyone needs to be aiming towards buying a house at some point. But there are other plenty of other models out there: if you do want property, you could look into shared ownership, shared equity, or something like mid-market rent, where the price is somewhere in between social housing at the private market - all sorts.

All these ideas need to be properly researched in terms of your obligations and responsibilities. The choices open to you depend on your preferences but also where you want to live. But it’s important to remember you’ve got more options than you might think.

A lot of it is just ‘supply and demand’

Just like a lot of other things in economics, the idea of ‘supply and demand’ is at the heart of the way the rental market works. People tend to want more housing (demand) faster than houses can be built (supply), which is what causes big shifts in price.

Learning how to gauge when that’s going to happen, and how house prices and rents are moving around will help you make sense of the rental market even if you’re not looking to buy (not that it’s always predictable - humans aren’t, so it isn’t. But there are definitely signs you can watch out for, even if they’re not 100% reliable.)

Rent controls aren’t always as bad as you might think

Rent controls are government-set rules which limit what landlords are allowed to charge tenants.

Some systems are relatively lightweight – they only apply to a particular area, rather than putting blanket controls over a whole country. For example, Scotland is introducing something called ‘local rent pressure zones’, where the local authority can set a limit on rent increases specific to that area. Scotland is also introducing open-ended tenancies where landlords will only have limited powers to take back the property from a tenant.

Private renting and the benefits system are linked

A lot of private tenants depend on benefits to make their rents affordable. But there’s a tension between needing to help people with housing costs, and the effect that spending money on benefits for housing costs will have on rent prices. Since 2010, the government has set pretty strict upper limits on how much housing benefit people can get, and reduced benefit amounts across the board. But that might price a lot of people who are living on benefits in the private sector out of their homes.

Renting isn’t all bad

Private renting has lots of positive effects people don’t usually think about. If it’s done right, it can be a really accessible way of giving people the flexibility to move from home to home, if they’ve got short-term needs in a certain place.

A house involves what economists call a ‘joint good’ - when you live in a house, you’re not just choosing it; you’re choosing the neighbourhood, the location, the amenities close by. For some people, it makes more sense to rent in an urban setting with lots to do and see, than to own in a suburb.

Fundamentally, our views on renting are the product of our experience and direct knowledge – the rigorous evidence on what is a diffuse and complex combination of different sub-sectors is patchy, uneven and often unsystematic.

At the end of the day, our views on renting are the product of our experiences, which makes it such a hard sector to concretely evaluate and assess.

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Reader Comments

  • Macrocompassion

    Look to who owns the land of Greece and why they are not using it properly!

    Discover how much the value of the land is being speculated in by holding it unused and the resulting lack of opportunity. Why can’t small scale farmers begin their own production of farm produce and the selling of it to local suppliers for domestic consumption?

    Adam Smith (“Wealth of Nations”,
    1776) says that land is one of the 3 factors of production (the other 2 being
    labor and durable capital goods). The usefulness of land is in the price that
    tenants pay as rent, for access rights to the particular site in question. Land
    is often considered as being a form of capital, since it is traded similarly to
    other durable capital goods items. However it is not actually man-made, so rightly
    it does not fall within this category. The land was originally a gift of nature
    (if not of God) for which all people should be free to share in its use. But its
    site-value greatly depends on location and is related to the community density
    in that region, as well as the natural resources such as rivers, minerals,
    animals or plants of specific use or beauty, when or after it is possible to reach them. Consequently,
    most of the land value is created by man within his society and therefore its
    advantage should logically and ethically be returned to the community for its
    general use, as explained by Martin Adams (in “LAND”, 2015).

    However, due to our existing laws, land is owned and formally registered and its
    value is traded, even though it can’t be moved to another place, like other
    kinds of capital goods. This right of ownership gives the landlord a big
    advantage over the rest of the community because he determines how it may be
    used, or if it is to be held out of use, until the city grows and the site
    becomes more valuable. Thus speculation in land values is encouraged by the law,
    in treating a site of land as personal or private property—as if it were an
    item of capital goods, although it is not (Mason Gaffney and Fred Harrison:
    “The Corruption of Economics”, 2005).

    Regarding taxation and local community spending, the municipal taxes we pay are
    partly used for improving the infrastructure. This means that the land becomes
    more useful and valuable without the landlord doing anything—he/she will always
    benefit from our present tax regime. This also applies when the status of unused
    land is upgraded and it becomes fit for community development. Then when this
    news is leaked, after landlords and banks corruptly pay for this information,
    speculation in land values is rife. There are many advantages if the land
    values were taxed instead of the many different kinds of production-based
    activities such as earnings, purchases, capital gains, home and foreign company
    investments, etc., (with all their regulations, complications and loop-holes).
    The only people due to lose from this are those who exploit the growing values
    of the land over the past years, when “mere” land ownership confers a financial
    benefit, without the owner doing a scrap of work. Consequently, for a truly
    socially just kind of taxation to apply there can only be one
    method–Land-Value Taxation.

    Consider how land becomes
    valuable. New settlers in a region begin to specialize and this improves their
    efficiency in producing specific goods. The central land is the most valuable
    due to easy availability and least transport needed. This distribution in land
    values is created by the community and (after an initial start), not by the
    natural resources. As the city expands, speculators in land values will
    deliberately hold potentially useful sites out of use, until planning and
    development have permitted their values to grow. Meanwhile there is fierce
    competition for access to the most suitable sites for housing, agriculture and
    manufacturing industries. The limited availability of useful land means that the
    high rents paid by tenants make their residence more costly and the provision
    of goods and services more expensive. It also creates unemployment, causing
    wages to be lowered by the monopolists, who control the big producing
    organizations, and whose land was already obtained when it was cheap. Consequently
    this basic structure of our current macroeconomics system, works to limit
    opportunity and to create poverty, see above reference.

    The most basic cause of our continuing poverty is the lack of properly paid
    work and the reason for this is the lack of opportunity of access to the land
    on which the work must be done. The useful land is monopolized by a landlord
    who either holds it out of use (for speculation in its rising value), or
    charges the tenant heavily for its right of access. In the case when the
    landlord is also the producer, he/she has a monopolistic control of the land
    and of the produce too, and can charge more for this access right than what an
    entrepreneur, who seeks greater opportunity, normally would be able to afford.

    A wise and sensible government would recognize that this problem derives from
    lack of opportunity to work and earn. It can be solved by the use of a tax
    system which encourages the proper use of land and which stops penalizing
    everything and everybody else. Such a tax system was proposed 136 years ago by
    Henry George, a (North) American economist, but somehow most macro-economists
    seem never to have heard of him, in common with a whole lot of other experts.
    (I would guess that they don’t want to know, which is worse!) In “Progress and
    Poverty” 1879, Henry George proposed a single tax on land values without other
    kinds of tax on produce, services, capital gains etc. This regime of land value
    tax (LVT) has 17 features which benefit almost everyone in the economy, except
    for landlords and banks, who/which do nothing productive and find that land
    dominance has its own reward.

    17 Aspects of LVT Affecting Government, Land Owners, Communities and
    Ethics

    Four Aspects for Government:

    1. LVT, adds to the national
    income as do other taxation systems, but it replaces them.

    2. The cost of collecting the LVT is less than for all of the production-related
    taxes–tax avoidance becomes impossible because the sites are visible to all.

    3. Consumers pay less for their
    purchases due to lower production costs (see below). This creates greater
    satisfaction with the management of national affairs.

    4. The national economy
    stabilizes—it no longer experiences the 18 year business boom/bust cycle, due
    to periodic speculation in land values (see below).

    Six Aspects Affecting Land Owners:

    5. LVT is progressive–owners of
    the most potentially productive sites pay the most tax.

    6. The land owner pays his LVT regardless of how his site is used. A large
    proportion of the ground-rent from tenants becomes the LVT, with the result
    that land has less sales-value but a significant “rental”-value (even
    when it is not used).

    7. LVT stops speculation in land prices and
    the withholding of land from proper use is not worthwhile.

    8. The introduction of LVT initially reduces the sales price of sites, even
    though their rental value can still grow over a longer term. As more sites
    become available, the competition for them is less fierce.

    9. With LVT, land owners are unable to pass the tax on to their tenants as rent
    hikes, due to the reduced competition for access to the additional sites that
    come into use.

    10. With LVT, land prices will
    initially drop. Speculators in land values will want to foreclose on their
    mortgages and withdraw their money for reinvestment. Therefore LVT should be
    introduced gradually, to allow these speculators sufficient time to transfer
    their money to company-shares etc., and simultaneously to meet the increased
    demand for produce (see below).

    Three Aspects Regarding Communities:

    11. With LVT, there is an
    incentive to use land for production or residence, rather than it being unused.

    12. With LVT, greater working opportunities exist due to cheaper land and a
    greater number of available sites. Consumer goods become cheaper too, because
    entrepreneurs have less difficulty in starting-up their businesses and because
    they pay less ground-rent–demand grows, unemployment decreases.

    13. Investment money is withdrawn from land and placed in durable capital
    goods. This means more advances in technology and cheaper goods too.

    Four Aspects About Ethics:

    14. The collection of taxes from
    productive effort and commerce is socially unjust. LVT replaces this extortion
    by gathering the surplus rental income, which comes without any exertion from
    the land owner or by the banks–LVT is a natural system of national income-gathering.

    15. Bribery and corruption on information
    about land cease. Before, this was due
    to the leaking of news of municipal plans for housing and industrial
    development, causing shock-waves in local land prices (and municipal workers’ and
    lawyers’ bank balances).

    16. The improved use of the more
    central land reduces the environmental damage due to a) unused sites
    being dumping-grounds, and b) the smaller amount of fossil-fuel use, when
    traveling between home and workplace.

    17. Because the LVT eliminates
    the advantage that landlords currently hold over our society, LVT provides a
    greater equality of opportunity to earn a living. Entrepreneurs can operate in
    a natural way– to provide more jobs. Then earnings will correspond to the
    value that the labor puts into the product or service. Consequently, after LVT
    has been properly introduced it will eliminate poverty and improve business
    ethics.