The National Landlords Association has warned of the ‘devastating’ economic impact of Section 21 abolition on the private rented sector (PRS).

A report compiled by Capital Economics on behalf of the NLA predicts a fall in private rented properties of nearly a million premises, with 770,000 fewer rental homes available to tenants on Universal Credit or housing benefits.

This represents a decrease in the total size of the PRS of around 20%, and of nearly 60% for housing benefits and Universal Credit claimants.

Chris Norris, director of policy and practice at the NLA, said: “The government has clearly failed to recognise the realities of the private rented sector by proposing the abolition of Section 21.”

What is Section 21?

During World War I, a shortage of rented accommodation led to the introduction of security of tenure for some tenants in 1915.

This was reinforced in 1977 by that year’s Rent Act and Protection from Eviction Act, which prohibit eviction unless one or more of the conditions of Schedule 15 is met.

While rental arrears are one such condition for eviction, they are discretionary, meaning a court must rule on whether it is reasonable to evict the tenant for non-payment or late payment of rent.

However under the Housing Act 1988, which introduced assured tenancies and assured shorthold tenancies, Section 21 permits eviction without reason – and without fault or blame – as long as tenants are given sufficient notice.

As part of the government’s ongoing reforms of the PRS, the abolition of Section 21 has been proposed, which the NLA claims would lead many landlords to reduce their property portfolio or leave the market completely.

Economic impact of Section 21 abolition

The NLA’s report predicts some staggering figures in its forecast of the economic impact of Section 21 abolition:

  • A 20% decrease in private rented housing stock (960,000 fewer dwellings).
  • A 59% decrease in private rented dwellings for UC and housing benefit claimants (770,000 fewer dwellings).
  • An increase in rents for 13% of private rented properties (600,000 dwellings).

Even if Section 8 evictions are made easier, faster and cheaper to take through the necessary court process, the NLA still predicts impacts around one to two fifths the scale of those mentioned above:

  • 180,000-390,000 fewer private rented properties.
  • 130,000-300,000 fewer properties for benefits claimants.
  • 110,000-240,000 properties to see rent increases.

“Any government which thinks it appropriate to risk the loss of nearly one million rental homes at a time of housing crisis needs to reassess its priorities as a matter of urgency,” said Mr Norris.

“Rather than playing to the gallery, the government should be looking to support and incentivise good landlords to remain active and provide homes to those who need them, rather than making it harder and causing these landlords to exit the market.”

Treacherous times for property investment

The potential abolition of Section 21 continues a trend of changes made to legislation that impacts on property investment in the guise of protecting tenants, but at the cost of landlords.

Previous changes include the government’s crackdown on letting fees. Guidance for this was published on April 3rd 2019, with the ban coming into force just two months later, leaving many landlords hurrying to catch up with the new rules.

The NLA says that the effects may already have started to emerge. In 2017, the number of private rented dwellings in England fell – for the first time since 1999 – by 46,000.

Its own research found “a significant proportion” of private rental landlords would reduce or completely liquidate their property portfolio if Section 21 were abolished, while the rest would be likely to choose their tenants much more carefully.

Wider economic impacts on property investment

Of course there are broad questions surrounding the current and short-term future economic impacts on property investment, particularly around inflation, interest rates and house prices during and after the conclusion of Brexit.

Following the Brexit delay on March 29th 2019, the NLA predicted the Bank of England base rate would be likely to remain at or near to 0.75%.

Once Brexit is ‘resolved’, inflation may rise above its long-term 2.0% target, triggering an increase in the base rate to 1.0% in 2020 and 1.5% in 2021.

As a consequence, mortgage interest rates could rise to reach around 2.8% in late 2021, adding to the cost of investing in property for buy-to-let investors.

Meanwhile over the same period, the NLA estimates house prices will rise by no more than 3.5% each year to 2021 in any region, and are likely to post around 1.0% in 2019 and 2.0% over the following two years.

It’s a fine balance, especially when factoring in the volatility of Brexit uncertainty, and it remains unclear whether the coming 2-3 years are likely to see net capital gains on rental property resale prices or net losses.

Short-term impacts on rental property yields

For those who choose to remain in the PRS in the immediate future, Section 21 abolition is just one of a number of forces driving rental yields higher.

The NLA notes that weaker supply places upward pressure on rents, which is compounded by other influencing factors:

  • Higher wages allowing more young adults to leave their parents’ home.
  • Lower support for property ownership as mortgage rates rise in the next few years.
  • Ongoing recovery in the London market tightening rental conditions.

“Overall, we think rents will rise by an average of 1% during 2019, before accelerating to 2% in 2020 and possibly to 3% in 2021,” the NLA’s report states.

“However, rising rents will bring limited comfort for investors. With house price increases expected to remain subdued over the next two years and mortgage costs rising, any increase in returns will be modest.

“With no turnaround in sight, this suggests that the sell-off in buy-to-let may extend into the longer term.”

Disclaimer: The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.