Alarm bells over the health of Britain’s private rented sector have been raised for the second time in two weeks, leading some to worry that a rental crisis is on the horizon.
Figures released today by the Royal Institution of Chartered Surveyors have confirmed that tenant demand is rising across the the country while the number of new landlords entering the market is dwindling.
This extends a run of successive quarterly declines dating back to the middle of 2016 – already the longest uninterrupted sequence of falling landlord instructions since records started in 1998.
The findings follow a Residential Landlords Association study released last week, which found that a quarter of private landlords are looking to sell at least one property over the next year.
New figures show the longest sequence of falling landlord instructions since records began
The future doesn’t look bright for landlords
Many landlords will have seen their profits slashed over the past three years at biting tax changes have taken their toll. All the indications are that the regulatory environment isn’t going to soften up any time soon.
Two pieces of legislation, one proposed and one incoming, are likely to have a further impact on landlords in the coming years.
Tenant Fees Bill
The Tenant Fees Bill, set to come into force from June and first proposed by Chancellor Philip Hammond in 2017 will see a ban on landlords and letting agents in England charging tenants any additional fees when they sign up for a new rental property.
Fees will be limited to charges for replacement keys and late rent payments only.
Security deposits will be capped at the equivalent of five weeks’ rent, and holding deposits to one week’s rent.
Government analysis suggests tenants will on average save around £300 every time they move house as a result of the ban.
It’s likely that letting agents will pass some of these costs onto landlords, who in turn could raise rents to cover their higher costs.
The second is the proposed abolition of Section 21, which would ban ‘no fault’ evictions where landlords can give tenants notice without having to give a reason.
That the Government looks minded to scrap this, has been seen as a major victory for campaign groups who have long argued that this would put an end to so called ‘revenge evictions’ by unscrupulous landlords.
This is all great news for tenants, but not necessarily for property investors.
Surveyors have suggested the lettings fee ban and the proposed abolition of section 21 could lead to more landlords exiting the market.
A Rics spokesman said: ‘We do not believe that the current proposed changes around Section 21 will help bring about the changes within the industry that the Government hopes, without significant and sweeping changes to the overall process including the courts.’
David Smith, policy director for the RLA, said: ‘All the talk of longer tenancies will mean nothing if the homes to rent are not there in the first place.
‘If rushed and not thought through, planned changes to the way landlords can repossess properties risk making the situation even worse.’
Either way, rents are projected to rise to by around 2 per cent at the national level over the coming 12 months, according to Rics, with growth then accelerating to an average of 3 per cent a year over the next five years.
The Tenant Fees Ban and the abolition of Section 21 are likely to push more landlords out
Is this good news for first-time buyers?
Part of the Government’s stated justification for buy-to-let reform over the past three years has been to decrease competition for people trying to buy their first home.
And while it’s difficult to tell exactly who is buying homes, there are indications that fewer landlords investing in property has benefited first-time buyers.
Aneisha Beveridge, head of research at Hamptons International, said: ‘Generally first-time buyers and landlords buy quite similar homes.
‘In 2015, some 16 per cent of first-time buyers purchasing their first home faced a competing offer from an investor in London.
‘However, since taxation on buy-to-let has increased and landlords are purchasing fewer homes, first-time buyers purchasing a home in London came up against an investor just 11 per cent of the time.’
The UK as a whole has seen the same downward trend in first-time buyer versus investor competition, but London has seen a more significant drop off.
A paper on the private rented market released this week by the Institute of Economic Affairs argues that constricting the supply of privately rented homes will only benefit higher income first-time buyers.
Lender offers new way to rebalance a buy-to-let portfolio
This week Precise Mortgages announced an innovative new approach to income assessment for portfolio landlords.
Bank of England rules stipulate that landlords with four or more mortgaged properties must be able to show they can pass lender affordability tests across their whole portfolio.
Precise has taken this measure and developed an affordability test that allows landlords to pass based on a blended rental income and loan-to-value of all properties in their portfolio that are mortgaged by Precise.
This means that so long as the landlord’s overall interest cover ratio meets the minimum requirements – typically 145 per cent at 5.5 per cent – and their overall LTV is below the lender’s maximum, there is scope to include very low yielding properties in a portfolio so long as they are balanced by very high yielding properties.
Landlords will therefore be able to use surplus rental income from their portfolio or other earned income to pass the lender’s affordability test on each property.
It could also mean landlords may now be able to remortgage rather than sell their low yielding properties.
The lender is accepting top slicing on all eligible personal ownership, limited company, portfolio, HMO, and holiday and student let applications.
Authors Rosalind Beck and Philip Booth argued: ‘Restricting the supply of homes for rent will make renting more expensive for renters and is likely to reduce the number of let properties and increase the number of owner-occupied houses.
‘However, this will only allow a small number of people at the margin to purchase a home.
‘Those marginal buyers are likely to be a non-representative subset of people. It is likely that they will be richer on average than those who rent and whose rents rise because of the reduced supply and increased costs of renting.’
What about the rest of the housing market?
It’s not just the rental market that is stalling; the owner occupier market has seen the lowest number of new instructions since 2016.
House prices are under pressure, particularly in London and the South East, while the South West has now seen prices falling for the past six months.
At the same time, Northern Ireland and Scotland continue to buck the trend, with respondents to the RICS survey reporting a further rise in prices.
Brian Murphy, head of lending for Mortgage Advice Bureau, said: ‘April’s findings appear to be similar to those of previous months, with a diverging picture still evident as some regions continue to perform better than others.
‘Interestingly, despite the broader geographical differences, the performance of various sectors of the market are adding yet further nuances, as demand for homes up to £500,000 appears to be holding steady, while many of those in the upper bracket of £1million or above appear to be finding the market challenging.
‘One explanation for this could be that first-time buyers and family movers have decided to push ahead with their plans for this year regardless of the current political climate, while the more discretionary-led buyers, who would be purchasing luxury homes, are potentially taking a more circumspect view.’
Yesterday, Halifax reported that average UK house prices rose by 1.1 per cent in April, compared to a 1.3 per cent fall last month.
Year-on-year growth looks more muted however, with Nationwide’s house price index indicating a 0.9 per cent rise in house prices in April compared to the same month last year.
Robert Gardner, Nationwide’s chief economist, said: ‘Indicators of housing market activity, such as the number of property transactions and the number of mortgages approved for house purchase, have remained broadly stable in recent months, even though survey data suggests that sentiment has softened.
‘While the number of properties coming onto the market has slowed, this doesn’t appear to have been enough to prevent a modest shift in the balance of supply and demand in favour of buyers in recent months.’