Keir Starmer has pledged to build 1.5 million new homes. But if, as expected, most are flats, chances are that very few will want to buy them. Why? Because people are at last waking up to the fact that the leaseholds under which such flats are typically ‘owned’ are almost worthless.
The notion of getting onto the property ladder has a powerful hold on the British psyche. So much so, that it may be some time before anyone accepts the logic of what I am about to argue. The Renters Rights Bill begins its Committee stage tomorrow, with Labour anxious to speed it through. Once that Bill becomes law, I believe it will be the final straw that breaks the leasehold camel’s back. The market for buying flats in England and Wales will wither and die.
Let me explain. People have traditionally scrimped and saved to buy that first flat for two reasons.
The first is security. Renters have always been at the mercy of a landlord suddenly slipping a Section 21 notice under the door, giving them eight weeks to be gone. Or jacking up the rent massively when their one-year tenancy runs out. The new law will remove both these threats. There will be no more fixed term tenancies. And only a small number of reasons you can be evicted, all of which will require a court order. Renting will be more secure than it has ever been.
The second reason for flat buying was always money, of course. If you rented, you were throwing the stuff “down the drain”, month after month. If you bought, you could count – until now – on your equity ratcheting up year by year. When you needed to move on, you could sell the lease on your flat at a nice profit and take the next step up the property ladder.
But flat dwellers can no longer count on selling their leases for a profit – or indeed at all. The Financial Times wrote last month: “Flat prices have underperformed all other property types in the U.K. over the past five years.” The FT blames this on a number of factors. Working from home has enabled people to move away from the cities. Buy-to-let landlords, once big investors in the flats market, are trying to get out – another consequence of ‘renters rights’.
Grenfell has had a huge impact of course, opening our eyes to the truly awful quality of some modern build. Thousands of residential high rises remain without repair, making them un-mortgageable and therefore unsellable.
But the FT piece fails to mention the most damaging factor of all. Tenure. It is slowly dawning on the buyers of flats that they do not actually own anything at all. They have simply bought the right to occupy their properties for a set – and diminishing – number of years. They, just like the short term renters, have landlords. And the leases they have all signed allow those landlords to dip into their pockets at will, with shocking consequences.
There are annual ground rents which are a charge for nothing at all, and which in many cases double every 10 years or rise with RPI. This used not to be a problem, but once the banks got jittery about one aspect of flat security – fire safety – it was inevitable those jitters would spread. Now many lenders have also begun refusing mortgages on flats with doubling or RPI-linked ground rents, so they are unsellable too.
Then there’s the cost of maintenance and repairs. If you rent short term, repairs are the landlord’s responsibility. Most local authorities nowadays back this up with strict licensing schemes and regular property inspections, to make sure properties are in habitable nick.
Leaseholders, on the other hand, must pay for all maintenance and repairs, yet have zero control over what those works cost, the choice of contractor or how the work is carried out. In some cases, it never actually is. Leaseholders also pay for the insurance of a building they don’t own, but don’t get to choose the insurer or control the policy or its cost. And on top of these regular service charges, leaseholders can find themselves lumbered with Section 20 Major Works Orders to repair big ticket items like lifts or chillers, costing each lessee in a building thousands of pounds at a time.
So while the short term renter knows what his or her housing costs are and can budget for them, the leaseholder cannot. One flat buyer after another has put it to me the same way: “When I bought this flat, I never realised I’d be opening my wallet for my landlord to dip into whenever he chooses, for however much he chooses. I have lost control of my bank account.”
And now lenders are waking up to this danger too. How can they be sure, with all these uncontrolled costs, that their borrowers can actually afford the mortgage? Some banks are starting to refuse loans on leaseholds with high and escalating service charges. More unsellable flats!
Two really alarming bits of news on this in just the last few months. First, a couple of my acquaintance decided they wanted to buy a country place and would use their London flat as security for a mortgage. Both in the couple are high earning professionals without children. The perfect customers for any lender, you’d have thought. To their horror their bank’s valuer refused their application, on the grounds their flat was actually worth zero because their service charges were so high.
Then some friends in another supposedly up-market development tried to sell. There were few viewings. But eventually a couple liked the flat and the location. They were about to make an offer, when they discovered the service charges. In desperation, my friends offered to pay the next ten years worth of charges themselves and drop the price of the flat. Even that did not persuade the prospective buyers who pulled out. Several local agents are refusing to handle the building at all.
These are extreme examples, but as a campaigner for leasehold abolition, I have met people up and down the country whose lives have ground to a halt because they cannot sell flats they sunk their life’s savings into. They can’t take new jobs, or marry, or start families, or retire. They are in limbo. And under the terms of their leases, they cannot stop paying whatever costs their landlord demands, for fear of forfeiting their properties altogether. What they have is, after all, just another tenancy agreement. It can be torn up and they can be evicted, without a penny in compensation, with their mortgages still hanging round their necks.
The public are not stupid. They are becoming aware of all these horror stories. So if, as seems likely, most of Keir Starmer’s 1.5 million new homes turn out to be flats, and if there is no fundamental reform of tenure, then he may build them – but will anybody come?
Margaret Rothwell is a pseudonym. The author is a member of the campaign group, Free Leaseholders.
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