Surprise! Tax Rental Housing More, Rental Housing Becomes More Expensive

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This really shouldn’t come as the greatest surprise to anyone but it’s blindsiding policy makers. If you tax something then you get less of it. A smaller supply meeting an equal demand leads to price increases, that’s just how markets work. So, if we tax the provision of rental housing more then we’ll have less rental housing around. Which, of course, then means that what remaining rental housing there is will be more expensive.

Which is exactly what has just happened:

Rent prices are predicted to rocket 15% over the next five years as the supply of new property onto the market continues to dry up while demand increases.

But haven’t George Osborne and Phil Hammond sorted all of this? Made sure that the evil rentiers are paying their way and thus we reach that place of milk and honeyed bedsits where all have a place to live at a rent they can afford?

The Royal Institution of Chartered Surveyors predicted that a fall in new homes coming on to the market would force rents up 15 per by 2023. Tenants in East Anglia and the southwest faced the steepest increases, it said.

Rents across the country are set to increase by almost 2 per cent in the next 12 months, according to the institution’s latest survey of members.

So, err, why would the supply of homes for rent fall?

Changes to the buy-to-let tax regime brought in last year mean that mortgage tax relief for landlords will be restricted to the basic rate of income tax by 2020.

RICS said the full impact of the changes and increases in stamp duty have yet to be felt.

Abdul Choudhury, RICS policy manager, said: “Withdrawing tax breaks that small landlords relied on, placing an extra 3% on second home stamp duty, and failing to stimulate the corporate build-to-rent market, has understandably [had an impact on] supply.

This isn’t about land value tax, not at all. That applies only to land values, as the name suggests, and as they’re not making that any more we don’t get this supply issue. Houses, homes, are built things. Thus changes in taxation can and will change supply. So, we’ve increased the taxation of those who rent out their houses. Therefore fewer people are willing to rent them out. That’s the reduction in supply, thus prices are rising for those still available.

What’s really frustrating about this is not just the obvious point, which is that we do know that taxing stuff makes it more expensive. It’s that we’ve been here before too. Government policy was, for at least the entirety of the post-war period up to 1980 or so, to lower the profit which could be made from renting out property. Which led to it being almost impossible to rent a property. Sure, back then it was done with rent controls, not taxation, but prices are prices.

We know this happens – make it less profitable to rent out housing and less housing will be rented out. And that it was Tory Chancellors who committed the latest sins of commission just makes it worse, doesn’t it?