The housing market has been under immense pressure in recent years, with rental costs consuming an increasingly significant portion of household income. The rent-to-income ratio varies widely across the country, with London households spending 40.5% of their income on rent on average compared to a national average of 26.8% in 2022. Renters have been facing an affordability crisis, particularly in high-demand regions. While many attribute rising rental costs to market forces, government policies have also played a role in exacerbating the issue. From taxation changes to housing building, several decisions have contributed to the housing crisis. This article explores some of the key policies and their impact on rental affordability.  

1. Taxation Changes Targeting Landlords

The government has implemented taxation reforms affecting landlords, many of whom have sought to transfer these increased costs to tenants.

The End of Mortgage Interest Relief

Prior to April 2017, landlords could deduct the full cost of their annual mortgage interest from rental income when calculating their taxable profit. This mortgage interest relief was phased out by April 2020, however, and replaced with a 20% tax credit on 20% of the mortgage interest cost, thus landlord profits from rental income very significantly. This shift in taxation policy has led some landlords to exit the market, while others have sought to increase rent to offset reduced profits or even losses.

Impact on Renters: According to the Office for National Statistics (ONS), private rents in the country increased by 6.2 % in the 12 months to January 2024, reflecting an upward trend in rental costs [1].

Stamp Duty Land Tax Surcharge

Standard Stamp Duty rates are set to rise further from 1 April 2025 and a recently increased 5% stamp duty surcharge applies to additional residential properties, including buy-to-let investments, on top of this. Intended to prioritise first-time buyers, such policies deter new landlords from entering the market.

Result: The Royal Institution of Chartered Surveyors (RICS) reported a decline in landlord instructions, with a net balance of -21% in October 2024, indicating a reduction in rental property availability [2].  

2. Regulatory Burdens and Compliance Costs

Beyond taxation, landlords face increasing regulatory requirements, from energy efficiency upgrades to licensing schemes, elevating the cost of maintaining rental properties.

Energy Performance Certificate (EPC) Requirements

To meet climate goals, the government has proposed that all rental properties achieve an EPC rating of C or higher by 2030. This requirement impacts landlords with older properties, commonly found in cities with ageing housing stocks. Renovations to meet these new standards can be quite expensive.

Market Effects: The National Residential Landlords Association (NRLA) has expressed concerns that the costs associated with EPC compliance may lead some landlords to exit the market, exacerbating rental shortages [3].

Renters' Rights Bill

The Renters' Rights Bill is expected to become law in Spring 2025. It aims to enhance tenant protections by abolishing Section 21 “no-fault” evictions, limiting advance rent to just one month and generally strengthening renters’ rights more widely than ever before. Some landlords perceive these changes as increasing the risk of tenant default and difficulties in reclaiming their properties.

Landlord Reticence: The NRLA has indicated that ongoing concerns about affordability and regulatory changes may lead landlords to reduce their portfolios, further straining supply [3].  

3. Supply Constraints Worsened by Policy Decisions

A significant driver of rising rental costs is the lack of affordable housing. Government policies have, in some instances, exacerbated these supply issues.

Failure to Meet Housing Targets

Successive governments have pledged to build 300,000 new homes annually, but actual completions have consistently fallen short. In 2022, only 217,000 homes were built, according to the Ministry of Housing, Communities and Local Government (MHCLG).  

Consequences: The Resolution Foundation reported that housing shortages have contributed to a 12% rise in rental prices over the past decade, with London and the South East experiencing the greatest pressures due to demand far exceeding supply [4].

Conversion of Housing Stock

Government policies, such as the removal of mortgage interest relief and increased regulatory requirements, have driven many landlords to reduce their portfolios, contributing to a shrinking pool of rental properties. According to the 2024 English Private Landlord Survey, 31% of landlords reported reducing the number of properties they let. This marks a steady rise from 22% in 2021 and 12% in 2018, illustrating a significant shift in the private rental sector [5].

Tenant Impact: The decline in available rental properties has intensified competition among tenants. This increased demand, combined with limited supply, has driven up rents nationwide. For many renters, the reduced stock exacerbates the affordability crisis, leaving fewer options at increasingly higher costs.  

4. The Impact of Brexit and Economic Policies

Labour Market Pressures

The construction sector, heavily reliant on EU labour pre-Brexit, has seen a 40% reduction in EU workers since 2016, as reported by the Office for National Statistics (ONS). This workforce shortage has slowed housebuilding, further compounding the supply crisis [1].

Policy Response Gap: Despite government efforts to train domestic workers, the housing sector still lags behind the required levels of output, leaving housing demand unmet.

Inflation and Interest Rates

Economic policies and post-pandemic recovery efforts have driven inflation to its highest levels in decades. To combat this, the Bank of England raised interest rates to 5.25% by mid-2023. Landlords with mortgages have faced higher payments, often seeking to pass these costs on to tenants.  

5. The Unintended Consequences of Rent Control Discussions

Although rent controls have not yet been widely implemented outside Scotland, ongoing discussions around their introduction have created uncertainty in the market. Proposals for rent caps, particularly in London, have led to unintended reactions from landlords.

Case Study: Scotland

Scotland introduced temporary rent controls in 2022, capping increases at 3%. While the policy aimed to protect tenants, it prompted many landlords to exit the market. There have been reports of a 25% reduction in available rental properties in Edinburgh, ultimately driving rents higher as demand outstrips supply [6].

Market Signals: Similar trends could emerge across the rest of the UK if rent controls are introduced, with landlords pre-emptively raising rents or converting properties to short-term lets.  

A Perfect Storm of Policy and Market Forces

The government’s policies, though often aimed at addressing specific issues, have inadvertently contributed to rising rental costs. Taxation changes, increased regulatory burdens and insufficient housing supply have strained the private rental sector, leaving landlords to suffer potential losses and tenants to bear the brunt of higher costs.

This trend is likely to persist, deepening the affordability crisis for renters.

FAQs:

1. How have government tax changes impacted rental affordability?

Landlords have faced increased taxation, such as the dramatic reduction of mortgage interest tax relief, increase in stamp duty and the 5% stamp duty surcharge on buy-to-let properties. Some of these costs have been passed on to tenants, leading to higher rents.

2. What is the Renters' Rights Bill and how might it affect tenants and landlords?

The Renters' Rights Bill is expected to become law in Spring 2025. It aims to enhance tenant protections by abolishing Section 21 “no-fault” evictions, limiting advance rent to just one month and generally strengthening renters’ rights more widely than ever before. Some landlords perceive these changes as increasing the risk of tenant default and difficulties in reclaiming their properties.

3. Why is there a housing supply shortage and how does it impact renters?

Successive governments have pledged to build 300,000 new homes annually, but actual completions have consistently fallen short. In 2022, only 217,000 homes were built, according to the Ministry of Housing, Communities and Local Government (MHCLG).

4. What role does Brexit play in the housing crisis?

Brexit has caused labour shortages in the construction sector, slowing the rate of new housing development. Combined with rising construction costs, this has limited the supply of affordable rental homes.

5. Are rent control policies a viable solution to the housing crisis?

While rent controls aim to cap rent increases, experience in markets such as Scotland shows that they can reduce rental stock and lead to long-term price increases.