At a time when the ideological direction of the government is under scrutiny, the Renters Rights Act (RRA) should serve as a cautionary tale for policymakers.

Speculation is growing around the identity of the next Prime Minister and Chancellor as Keir Starmer’s leadership comes under pressure. 

HIs potential successors are currently mapping out their tax plans, but what is happening in the lettings market is a timely reminder of how economic policy can come with unintended consequences.

Leading the challenge to unseat Starmer is Manchester Mayor Andy Burnham, who is attempting to first become an MP in the constituency of Makerfield in north-west England.

The RRA was introduced last month to tip the balance of power in favour of the tenant, which seems like an uncontroversial aim. The new rules cover the setting of rents, repossession, restrictions on selling and pets.

However, as with so much else in politics, the risk is an overcorrection. 

Landlords became a useful target for politicians in recent years due to the unscrupulous actions of a small minority. There were no votes in also stating that a small minority of tenants were problematic.

Landlords Sell Up

As a result of the RRA, more landlords have sold up, which has pushed supply lower and rents higher in many areas of London, where renting is more prevalent than the rest of the UK.

Average prices in prime outer London increased 3.2% in the year to May, which was the highest increase since June 2024, a time when rents were still coming down from pandemic-era highs. A monthly increase of 0.5% was the highest since September 2023.

There was a smaller 1% annual increase in prime central London. Supply has been less constrained in higher-value markets as more discretionary owners let their property out due to the current weakness in the sales market.

Underlining how supply has fallen, the number of new rental listings in PCL and POL was 13% below the five-year average in May and 11% lower than the same month last year, Rightmove data shows.

As a result of this imbalance, there were 6 new prospective tenants for every new rental property coming onto the market last month, Knight Frank data shows. This was the highest ratio since September 2022.

Series of Obstacles

The RRA is the latest in a series of obstacles facing landlords in recent years, which have included higher rates of stamp duty and the ending of tax breaks. 

A future requirement for an EPC C rating for rental properties may be a further deterrent.

This week [mortgage lender] Paragon said new mortgage lending fell 4.7% to £774 million in the six months to March, attributing the fall to wider economic concerns following November’s Budget rather than singling out the RRA.

However, it cited growing financial pressure on landlords and said the RRA is “likely to increase costs for all landlords, which will inevitably generate pressures on tenants’ rental levels over time.”

Paragon’s statement followed a RICS survey report in April showing a net balance of +14% of respondents reporting an increase in tenant demand, while the figure for landlord instructions (supply) was -17%. The ONS also reported that UK rental value growth ticked higher last month.

Squeezed Margins

While all this is happening, Wes Streeting, another contender for the Prime Minister’s job, is advocating for rates of Capital Gains Tax (CGT) and Income Tax to be aligned. Raising the former would squeeze landlords’ margins further and increase upwards pressure on rents.

The other issue is that CGT rates may be as high as they can go and increasing them further could lose the government money. HMRC believes a 10-percentage point increase would cost the exchequer £6 billion over three years, according to a recent Bloomberg story. 

Other sectors of the economy have also come under pressure as politicians jostle for position ahead of the Labour leadership contest. 

Asking supermarkets to cap food prices and accusing petrol retailers of ‘price gouging’ due to energy price spikes are just two recent examples of how winning votes is more important than winning an economic argument.

Tom Bill is head of residential research at Knight Frank