Tuesday, 31 July 2012

Unintended Consequences?

I am returning to the theme of Housing for this post, but will concentrate exclusively on the rental sector.  Oxford City Council have introduced new licensing conditions on what are called Houses of Multiple Occupancy (HMOs).  Nationally, an HMO needs to be licensed if it is "large" and is considered to be "large" if:
  • There are five or more tenants.
  • the house has three or more floors.
See the relevant part of DirectGov.  

However in Oxford, the Council has decided to tighten these regulations.  They will consider an HMO to require a license if:
  • There are more than two tenants.
  • The house has two or more floors.
The licensing system in Oxford is not being funded by the general tax payer, but by a system of fees on the HMO licenses themselves.  The fee is proportional to the size of the house in question, but can rise to around £500.

So what will be the economic effects of this policy.  First, in the short run, landlords who do apply for the license will actually be unable to pass the tax on to their tenants!  This might well be surprising for some, but the economic logic here is as follows.  The scarcity of housing means that landlords are effectively already extracting from their tenants the maximum willingness to pay of each tenant.  So there is no room to extract more.  However, in the longer run, landlords may decide that the bureaucratic costs of applying for the licenses and making any changes that the council requires as a result are just too great and stop renting their properties to multiple tenants.  Indeed, this is just what seems to be happening in this story from the Oxford Mail.

Once landlords start leaving the HMO market, then rents will rise as the (already too small) supply of rental housing contracts.  But what happens to the houses that were being rented as HMOs?  Will they be rented or sold to families and singletons?  Will this drive down the rents or prices that families and singletons have to pay?  Unlikely.  The fundamental problem of scarce housing still exists.  Indeed, high housing costs are one of the reasons that people delay starting families and live with friends in HMOs for longer.

It is more likely that in order to extract maximum value from their properties, landlords will instead divide them up.  They will turn each floor into a separate flat with its own toilet and kitchen facilities etc, so that they are not HMOs and rent out the floors separately.  In order to create the extra kitchens and bathrooms this will require, the total number of bedrooms will fall.  So the total housing supply falls leading to higher rents for the younger people starting out in life who will be renting these properties.  Naturally this process will take time; cost money; and require planning permission.  But if the council is serious about limiting HMOs (see below), it may well become the best option for those who own homes in Oxford.

For tenants forced out of their homes, this is a tragedy.  Such consequences of a policy are often referred to as "unintended consequences", this is the term used in the Oxford Mail story.  However in this case, the consequences are so transparently obvious that it is difficult to call them "unintended".  Indeed a brief perusal of Oxford City's website and the website of the local political party that controls it reveals that, far from being an unintended consequence, forcing out people like the tenants from the Oxford Mail's story is the point!  Note that Oxford City's website includes a section "Why are HMOs a problem in Oxford?"  The phrasing of the question itself reveals more information than the answer.  The controlling party boasts of having "... taken action to ensure local communities have a balance of housing, rather than HMOs taking over entire areas."  The prejudice against HMOs and the young people who normally live in them is clear.

Why is the local council trying to reduce the number of HMOs?  Oxford City's website highlights two general problems with HMOs.  To paraphrase:
  • Across the entire country, the landlords can be a bit dodgy and neglect safety issues.
  • There tend to be a lot of complaints about the people who live in them.
There is no satisfactory reason why we should expect that the first problem is unique to HMOs.  Indeed it shows a somewhat disturbing set of priorities in some respects.  If a dodgy landlord doesn't get the boiler checked we want to stop them renting to a group of young professionals or students and would rather they rented to a family?  Really?  Wouldn't it be better to ensure that all tenants knew their rights and that they could demand that the landlord get an annual gas safety certificate?  Wouldn't it be better to encourage tenants to report anything in their property that was unsafe?  (To align incentives, they could be encouraged to do so at the end of a tenancy during negotiations over return of the deposit).  If the point of these rules is really to help tenants, it strikes me that evicting them is an "innovative" strategy.

Regarding the second issue, the council are being exceptionally short sighted and this is possibly a case of unintended consequences.  From this perspective, the problem of HMOs is not the houses or the landlords, but the people who rent them.  The people who rent them are unlikely to leave Oxford and camp outside the ring road.  Rather it is more likely, in the long run, that they will be the people who rent the same houses again once they have been converted into flats.  In that event, I would expect the number of complaints to actually increase.  Currently entire houses are rented and people who live in them know each other.  Noise travels between the floors, but differences and arguments about this can be worked out between the various house mates who all know each other and are friends.  Friends are able to resolve these differences relatively amicably.  The noise externality is "internalised" in economics speak.  However once these houses have been converted into separate flats, noise will still travel between them, but the people who live in the different flats won't know each other and won't be friends.  They are therefore more likely to involve the council in disputes about noise and so on.  This policy will further reduce community cohesion rather than increase it!

I once thought National policy on Housing in the UK was misguided.  (See previous post on housing).  Compared to some local policies, it now appears positively insightful.  And that is saying something...

5 comments:

  1. To my mind consequences cannot actually be "unintended" unless they weren't even considered. Yet we know that several people, inside and outside the council, warned them of these inevitable consequences over a period of years.

    If it's not actually deliberate then it is at least "reckless" as to the actual consequences on those displaced because of their actions. The impact on any individual household group of being displaced is horrendous. Something I am sure none of the councillors involved would want inflicted on them. This sort of recklessness is a large part of why I have become an anarchist/voluntaryist since my time as a councillor. No part of the state ought to be allowed to get away with inflicting what was both warned of and predictable on hapless victims.

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  2. Wouldn't the cost of the void time and conversion work required to divide a property so as to avoid being an HMO substantially exceed the cost of licensing as an HMO? If sharers are already paying the most they would be willing or able to pay by way of rent so as to make it impossible to pass on a proportion of the HMO licensing cost to them, would that not also mean that they would not be able to afford tenancies in the subdivided houses (which would need to be more expensive to cover the conversion costs and the increased space)?

    As single under 35s would also not be eligible to claim housing benefit other than at a rate commensurate with a room in a shared house, the strategy you outline for landlords to use in avoiding HMO licensing would shrink the pool of available tenants and potentially drive down rents for the subdivided houses.

    I think, perhaps, you are rather overstating the economic effects of Oxford City Council's proposals.

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    Replies
    1. Botzarelli, You'd be correct if this was just about licensing fees. It is actually about the whole licensing system. Looking at the discussion that is going on, the explicit goal is to reduce the number of HMOs, which means that continuing as an HMO will not be an option for some landlords. Raising the cost of licensing is just one way in which the council can try to reduce the number of HMOs. I expect they will also adopt the more direct approach of simply refusing to license so many now that so many more need to be licensed.

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