What a year it’s been for landlords. Talk about, “may you live in interesting times”; change has come thick and fast in the private rented sector (PRS), and all the signs are this is set to continue.
Here I look at the changes that have hit the PRS and landlords large and small in 2015. Will this be the death of buy to let as some in the media are predicting, or is the renting momentum in the UK housing market just too big and powerful to be side-lined?
The Growth of the PRS
The doubling in the size of the PRS in the last 15 years or so (PRS now houses nearly 20% of the population) has presented the government with some challenges: whilst the growth in the provision of housing through investment by private landlords, on the one hand has been welcomed, to some extent it goes against the grain of long-standing Tory party policy – encouraging home ownership.
With the rise of the PRS instigated mainly by small-scale landlords, both social (council) and home ownership housing has declined. It would seem the government is intent on reversing or at least minimising the trend.
During the spring election campaign a flood of media stories about “rogue” landlords and the difficulties faced by “Generation Rent” hit the headlines. No doubt MPs were harangued by young strivers and their parents about the difficulty of buying property, whilst at the same time the Bank of England (BoE) was warning them about the worrying amount of debt represented by buy-to-let mortgages. The Bank is concerned this could lead to severe problems for lending banks if there’s another major downturn.
The result of all this has been post-election moves by George Osborne, by all accounts an astute political strategist, and Mark Carney at the Bank of England, to cool the buy to let market through two methods: taxation and mortgage controls. The tax changes, although being phased in over a five-year period, have been swinging and have surprised landlords with their complexity and severity.
Not since the introduction of a wealth tax in the form of Investment Income Surcharge, a 15% levy on all investment income, introduced by Harold Wilson’s Labour government in the 1970s, has a chancellor stepped so far outside taxation convention – taxing businesses on borrowing. It’s made property investors squeal; talk about the Wilson government’s wheeze: “squeeze property speculators until the pips squeak”. Not something you would expect of a Tory Chancellor.
One small crumb of comfort is that the new tax rules in the Finance Bill, if approved by Parliament, will be introduced on a sliding scale over 4 years, ending in 2020/21. By then, mortgage interest relief will be removed altogether, but a tax credit equal to the basic rate of tax will be applied – currently 20%.
This will mean that basic rate tax payers should not be affected by the changes unless the “extra” income from their rental property pushes them into the high rate tax band. Their notional income has increased due to the removal of mortgage interest relief, which could then adversely affect those claiming child benefit, and some others with special pension and savings arrangements.
High rate taxpayers will be most affected, and in particular those owning property personally (not via a company) and with high gearing on their rental property portfolio. As a rough guide, when the new rules are fully applied as from April 2020, a higher-rate taxpayer landlord with mortgage interest payments at around 75pc of the rent, after all other claimable expenses are deducted, will find their tax bill will just about equal any profit earned.
Just as challenging for landlords in 2015 has been the avalanche of suffocating regulations that have piled down on them. Not that many of the regulations were without purpose, or indeed needed, but one in particular in my view, is misguided.
Changes to the deposit rules in the Deregulation Act following the Superstrike judgement have brought common sense back to the deposit rules after a whole string of anomalies and amendments, due to poorly drafted legislation in the first place. Landlords now have no excuse for getting it wrong, but still we constantly hear of landlords unable to evict because they did not protect.
New prescribed forms for section 8 and the notice of rent increase under s13 of the Housing Act 1988 were introduced in April, now freely available. New regulations under the Consumer Rights Act 2015 have made it mandatory for agents to publish their letting fees on their websites and display them in their offices, and self-managing landlords also need to take heed.
October 1st saw a slew of changes to the section 21 procedure in England affecting new tenancies after that date. A new single notice for fixed-term and periodic tenancies starts a process which is dependent on the landlord or agent protecting deposits and serving the deposit notice within 30 days, plus serving (1) a valid gas safety certificate, (2) an EPC, and (3) a current version of the government’s “How to Rent” booklet. New strict rules on serving dates and length of notice accompany all that.
Smoke and CO alarms also became compulsory after 1st October. Most notably the dreaded retaliatory eviction rules came into force. This is where tenant eviction can be delayed by six months in post 1st October tenancies. If the tenants made a complaint about repairs before the s21 notice is served and the landlord has not properly responded, or a relevant council notice has been served, then the s21 process is stopped.
This last measure I see as quite misguided and is already causing landlords problems: we are seeing instances (two this month) of tenants responding to landlords’ letters about rent arrears with lists of dis-repairs. I think the government might have handed tenants a charter to stay. I can only say we told you so. I wracked my brains about this and came up with the term: “retaliatory dominion” – a term that I think that adequately explains the intentions of some tenants in this situation – “it’s my domain and I’m staying put, never mind that I don’t pay rent!”
In November we saw the introduction of “Rent Smart Wales”, where all agents and landlords now have one year from 23 November to be licensed and pay fees, if they are to manage a rental property. I suppose landlords in England must be thankful for small mercies given the likely coming changes to tenures in both Scotland and in Wales.
1st of February will see the introduction across England of Right-to-Rent immigration checks on all tenants before lettings, and in some cases during tenancies. This will result in up to a £3,000 fine per occupant if you get it wrong. This adds a further degree of complexity to letting, and it means that all tenants, regardless of ethnicity, will need to go through a standard assessment process if prosecutions under the discrimination laws are the be avoided.
Next up is mandatory licensing of all Houses in Multiple Occupation (HMO). Currently mandatory licensing with the much stricter HMO management regulations applies to those HMOs with three stories and 5 or more occupants.
Government is now considering changing this to include either all two storey HMO properties, or those with 5 or more occupants. In addition, national minimum room sizes of 6.5sqm for single and 10.2sqm for double rooms, in-line with overcrowding standards, are likely to be specified for rental properties.
During the year many landlords have been brought under various selective licensing schemes brought in by local authorises, some selectively as was the original intention, to combat poor housing standards, but some across cities. Most of these with dubious effectiveness and all adding costs to challenge the profitability of the rentals involved.
Housing Market Troubles
Government moves to rebalance the supply/demand metric in the housing market by various build to rent and first time buyer schemes are likely to have a slow and minimal effect on the market given the planning restrictions (Section 106 legislation) and a shortage of suitable sites.
The supply of new homes has been well below target through successive governments by as much as 50%. There is no real incentive for the private sector to build low cost housing and whilst institutional investment and professional management of large rental blocks is a laudable aim to increase supply, the economics are questionable and the target market is not low cost.
What of the Future?
All this is against a backdrop of a rapidly growing UK population which will rise by almost 10 million over the next 25 years, according to official estimates. The number of people living in the country is projected to rise from 64.6 million in mid-2014 to 74.3 million in 2039. More than two-thirds of the increase will be the result of assumed net migration and the indirect impact of people arriving according to the Office for National Statistics (ONS).
Just in the next ten years the population will rise by 4.4 million and is projected to reach 70 million by mid-2027. England’s population is projected to increase by 7.5% by mid-2024, Northern Ireland’s by 5.3%, and Scotland’s and Wales’ by 3.1%.
London’s population is currently rising by 100,000 per annum. The new homes target is 50,000 per annum and delivery has been under 25,000 per annum. London is destined to become the biggest city in Europe. Is it any wonder that Generation Rent is struggling to buy, and the average age of a first time buyer is 39.
It is also the case that with the limited resources local authorities apply, and the slow and ineffective deterrent imposed by the justice system, councils struggle to maintain standards at the bottom end of the PRS. Beds in sheds are running out of control across some cities, and rogue landlords are being allowed to thrive. This rogue minority bring discredit to the majority of responsible landlords who are providing much needed safe and reasonably priced accommodation.
The unfortunate consequence of all this is that the landlords most likely to down-size or leave the private rented sector (PRS) altogether are those at the more professional and responsible end of the landlord spectrum. These are the people providing much needed accommodation of a safe and high standard, just the ones who you would want to encourage not to leave; a major reason why the Chancellor’s policy may not succeed in the end.
Despite obstacles presented by higher taxation, tougher regulation, and eventually higher interest rates, property investments, in the view of a recent property market report by Jones Lang LaSalle, “will still make reasonable returns compared with other alternatives… there is unlikely to be any meaningful sell-off of private landlord rental property over the next few years, especially as we see both prices and rents rising steadily. However, there may be slightly less exuberant enthusiasm from new investors, which may have a longer-term impact on rental supply”.
Buy-to-let then will still present good overall returns compared to the alternatives for those landlords willing to do their homework, develop the right financial and management strategies and invest in the right locations.
See the Council of Mortgage Lenders Report published 17 December 2015 – “Market commentary: 2016 and 2017 forecasts” here
For Guidance on the New Section 21 & Revenge Eviction Rules see here
How will the Private Landlord Survive 2016? – https://t.co/OL6qXeKwzQ
— LandlordZONE (@LandlordZONE) December 18, 2015