For buy-to-let landlords 1988 was a vintage year, with the introduction of ASTs and Section 21 along with the deregulation of rents. Here we look back 30 years at how the Housing Act 1988 transformed the rental market.
The introduction of the Housing Act 1988 is credited with opening up buy-to-let to an army of small landlords looking to invest their cash.
With the vast majority of people privately renting at the beginning of the last century – 76% in 1918 according to research body Civitas – the size of the sector had fallen to below 10% by the late 80s.
With an ever-diminishing pool of homes to let having a significant impact on labour mobility and landlords with little control over their properties, this was a housing crisis all of its own – and it was clear something had to change.
When Margaret Thatcher was elected in 1979 she vowed to ‘fix’ the sector and set about rebuilding the PRS by strengthening landlords’ rights and abolishing rent controls, in a move that would change the face of renting forever.
What was renting homes out like pre-88?
While it is still prudent to be careful about who you let your homes to, pre-1988 you had to be very careful indeed, as once tenants were in it could be very, very difficult to get them out again.
And while ‘no fault evictions’ have received a lot of negative press recently, without the powers afforded them by the introduction of Section 21 landlords were very risk averse, unwilling to rent to take on any but the most exemplary tenants, for fear they would not be able to regain possession.
Tenants, on the other hand, if they found a home to let, had full security of tenure and controlled rents.
All-in-all becoming a landlord came with a high level of risk, limited returns – in the short term at least – and as a result the pool of homes available was small and options for potential renters limited.
In response to this the Government came up with a solution that would – in its view – ‘redress this balance’. Changes that would give those people who owned property the confidence to rent it out, secure in the knowledge they would be in control.
The move would also make becoming a landlord more attractive financially – with the freedom to charge market rents.
Section 21 and the Assured Shorthand Tenancy
The Assured Shorthold Tenancy (AST) and the introduction of Section 21 was one of the two major changes introduced under the new 1988 legislation.
Under Section 21 landlords of an Assured Shorthold Tenancy were given the right to regain possession of their buy-to-let home after an agreed term – then six months – provided they served a property drafted Section 21 notice.
This was a seismic shift for landlords who were used to long-term tenancies, sometimes passing down through generations, with few options if they wanted to evict.
It was the introduction of the AST – combined with the introduction of buy-to-let mortgages in mid-nineties – that is credited with driving the buy-to-let market and fuelling the subsequent boom.
Deregulation of Rents
Rent controls were introduced in England in response to housing shortages during and after both World Wars, originally as temporary measures, with regulated rents brought in under Labour’s Rent Act 1965.
Part 1 of the Housing Act 1988 marked the end of such controls in both England and Wales, stating that, with limited exceptions, controls would be abolished for new private rented tenancies created after 15 January 1989.
The change – allowing landlords to charge market rents – also had a significant impact on the sector encouraging more people to seriously consider putting their money into buy-to-let as a profitable activity both short term as well as long term.
It also allowed landlords the freedom to invest in their properties.
Prior to this the rental homes available were often in a poor condition, with landlords either unable to justify or afford to make improvements other than the bare minimum, due to the artificially low rents.
Lawson’s ’88 tax breaks
In addition to the Housing Act, 1988 also saw Chancellor of the Exchequer Nigel Lawson offer tax breaks to encourage people to invest in property to let.
Delivering his budget in 1988 Lawson extended the Business Expansion Scheme, which offered full tax relief to people investing in non-public UK firms, to include companies specialising in residential lettings.
Investment was limited at £5m a year, with the scheme running for five years, until 1993.
He said the move would help tackle the shortage of private rented accommodation, which was an obstacle to labour mobility, vowing:
“This change will powerfully reinforce the impact of decontrol in reviving the private rented sector of housing in Britain.”
Research on the impact of the scheme conducted in the mid-90s claimed it saw £3.4 billion of investment from private individuals, over 900 companies were formed and 81,000 dwellings were brought into the private‐rented sector at a cost of £1.7 billion in tax relief – considerably boosting the supply of homes to let.
Times are changing
Three decades from these huge shifts, the PRS is continuing to grow – with demand set to increase even further.
Private landlords are currently providing homes to a fifth of the population, with the country needing a further 1.8million more homes to rent by 2025.
However, despite there being another Conservative Government in power, it seems that the tide has turned for the private landlord.
Today’s PRS is barely recognisable to those landlords who experienced these changes first hand. Once encouraged by the government to invest and expand, they are now hammered by the taxman and facing ever-increasing regulation.
Once the darlings of the Conservative party, many of today’s Tories appear to have turned their backs on individual landlords.
Instead, led by former chancellor George Osborne, courting the ‘big boy’ corporate and institutional investors and their build to rent plans, all the while creating more and more barriers for the small investor.
Changes to Mortgage Interest Relief, increased stamp duty on buy-to-let homes, scrapping the wear and tear allowance, a refusal to extend the 20 per cent rate of capital gains tax to residential property, these are all potentially devastating investments that have taken years to build up.
This is not to mention the increase in regulation and red tape – along with the expensive and unproven local licensing schemes springing up all over the country.
Rekindling the spirit of ’88
With the current housing crisis showing no signs of abating, and the PRS landlord now more vital than ever, RLA Chairman Alan Ward says the sector would benefit from a return to the spirit of ’88.
The association wants and is campaigning for change and the introduction of pro-growth taxation policies to encourage investment in the market.
He said: “It is almost impossible to describe the extent to which things have changed in the last 30 years.
“We have a Conservative Government, yet what they are doing seems to fly in the face of Conservative philosophy, which is to encourage individuals to look after themselves and their own futures – to be independent of the state.
“In the last 30 years private landlords have invested in and created three in five of ALL new homes, either by taking large redundant properties and dividing them, or buying off plan, which is important in terms of raising finance for housing developers.
“We are the backbone of the PRS. The Government needs to take a step back and look at what is actually happening out there, look at who are providing tenants with the homes they want and need, and adjust their policies accordingly.
“This country’s private landlords are facing an uphill battle, demonised by the media and with a Government that seems determined to force them out of the market with draconian tax changes and unnecessary red tape.
“Indeed, our research arm PEARL has found a huge 69% of landlords are not making any further investment – and that is largely a result of stamp duty changes alone.
“I would say to the Government; ‘we have had your support before, if we are to solve the ever-deepening housing crisis this country faces then we must have it again now – before it is too late.”