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COMMENT: Government has got itself in a muddle over the rental market

“Bidding wars, tenant CVs, queues outside properties – these phenomena have become common in the rental market across Britain.” So runs the editorial in this week’s Sunday Times.

According to Propertymark, the professional body representing estate and letting agents, there was a 49 per cent reduction in properties available to rent in March 2022, compared to March 2019. The UK average number of properties available to rent decreased from 30.4 to just 15.6 during the period, a clear indication of the loss of available rental space for people to live in.

During this same four-year period, 94 per cent of landlords removing their property from estate agents listings did so to sell. Only four per cent told Propertymark that it was to move to landlord self-management, while others said it was to move to short-term lets. Over half of rental properties sold in March this year alone did not return to the private rented market.

A Government that's lost its way...

It’s a strong indication that the Government has lost its way, lost control of the property market to the detriment of tenants and buyers – it surely must be a major impediment to the conservatives in the run-up to a general election. The unpopularity with the public on this one issue is on a scale without precedent, and in my view was totally avoidable.

Tory policies have inflicted a great deal of pain on renters: rent rises have averaged just over 5 per cent in the 12 months to June this year, according to the Office for National Statis­tics (ONS). All indications are that rents in some parts of London could have increased into double figures over the same period. All this at a time when inflation is at its highest level for a generation, dramatically increasing the cost of living for renters and pushing up mortgage costs for landlords.

Rent squeeze

This “rent squeeze”, as the Times puts it, is the result of recent interest rate hikes by the bank of England and thereby higher mortgage costs, which landlords will do their best to pass on to tenants when their profits dwindle to zero or even into losses.

Interest rates are not the only cause of this rent squeeze: the dysfunction in the buy-to-let rental market started when George Osborne, the then outgoing Chancellor of Exchequer, introduced a fiscal policy in 2015, in conjunction with the Bank of England, aimed at cooling the buy-to-let market, which had seen phenomenal growth.

Financial crisis fears

This rapid growth of buy-to-let not only worried the Bank, fearing over-extended borrowers causing another 2008 style property and financial crash, it also resulted in a public perception of a growing cohort of multi-millionaire buy-to-let landlords becoming rich at the tenant’s expense. They were said to be buying up houses, preventing first time buyers entering the market. The media kicked up a storm and the Government gave in to this media pressure.

The Government relented with a 3 per cent stamp duty surcharge on second homes and buy-to-lets. It removed the 10 per cent depreciation allowance, and phased-in a reduction of mortgage interest relief over 4 years, to be replaced with a tax credit, increasing the exposure of rental income to taxation. All this achieved its aim – it did cool the buy-to let market.

Buy the old aphorism, “be careful what you wish for”, or the “law of unintended consequences” very much applies here: yes it may have punished those millionaire landlords, stopped them in their tracks. It may have cooled lending, especially when coupled with much stricter lending criteria, but the consequences – as warned incessantly by landlords – is an even greater punishment inflicted on tenants, many of them struggling working families and young people.

The current shortage of rental property is down to, in my view, these policies and the Government’s failure to encourage and assist the building of sufficient new housing in a country with net migration running into the hundreds of thousands.

Net migration

In 2022, according to ONS figures, net migration added over 600,000 more people to the UK population, that’s more people arriving long-term than leaving, and it’s equivalent to two towns the size of Newcastle. This represents an increase of just short of 120,000 more that the 2021 figure (488,000) and nearly double that of pre-pandemic levels, with the then net migration figure much lower at 333,000. The 2023 figure is likely to continue to be just as high again as in 2022.

A shift in strategy

One consequence of the Government’s squeeze on buy-to-let landlords has been the shift from long-term to short-term Airbnb style letting. The tech platform and others like it has transformed the way landlords can market and manage lettings on a short-term basis which, and under current tax rules, this is more profitable and attracts far less regulatory control.

However, continuing the “law of unintended consequences” theme, it has led to some locations, mainly seaside towns and large city centres, where fully one quarter of rentals are listed on Airbnb as short-tem lets, depleating the supply of long-term rentals for locals folks and transient workers.

The result is a back-lash now against short-term lets. Councils – and in particular the governments in Scotland and Wales - are now questioning why landlords should be given tax advantages by simply switching from conventional lets, which are classed as investments for tax purposes, to short-tern Airbnb holiday style lets, which are classed as businesses with more favourable tax treatment.

Build to rent to the rescue?

So the Conservatives, whose stated aim is to encourage more home ownership, have got themselves into a right royal muddle with property. Their idea that build-to-rent (BTR) by large institutions with professional management would come to the rescue of the declining buy-to-let provision, mostly provided by small-scale landlords, is unlikely to be sufficient to solve the problem. Institutional investors, certainly in the short-term, can build only a fraction of the housing required. In any event they only supply a particular segment of the rental market. To make sure these are profitable they go for premium housing aimed at young professionals and stable families.

According to the latest data from Savills, the last quarter of 2022 data shows the UK’s Build to Rent (BTR) stock now stands at nearly 80,000 completed homes, with a further 50,500 under construction. There’s a future pipeline of around 113,000 new homes, including those in the pre-application stage, which brings the total BTR stock at around a quarter million homes, still a drop in the ocean when compared to the just under 5 million privately rented dwellings in England alone.

Also, it would seem BTR is currently afflicted by the same problems as the rent of the house building market. In the current severe slow-down, where annualised building starts fell by around a quarter during the year to Q4, 2022, some house builders are struggling to survive.

In the US and in Europe, institutional landlords are much more common than in the UK. Here, the private rented sector has traditionally been pro­vided by small scale individual investor landlords. These are the people Osborne went after. Instead of encouraging a controlled expansion, he removed the attraction of buy-to-let, namely a safe investment with a steady yield and good capital growth. He dashed a 20-year growth record that had successfully taken up the slack when council housing was on a rapid decline.

Private money was being attracted to housing provision, but the Government, instead of encouraging the trend, wanted to reverse it, partly on the basis that with some tax incentives, institutional investors would create a more professional renting market, similar to those in Europe and the USA. But instead the market began to shrink, as these anti-landlord measures were introduced from 2017 onwards.

The UK’s rental stock as a consequences has failed to grow and keep pace with demand. The situation is now being exacerbated by first time buyers’ inability to get on the housing ladder because of the high interest rates now prevailing. Some people will be renting well into middle age the way things are at the moment.

The shortage of rentals and the hike in landlords’ mortgage costs are pushing up rents levels inexorably, adding to the pain of new and existing tenants. According to estate agent Hamptons, a typical buy-to-let investor, refinancing an interest-only 2.2 per cent two-year fixed mortgage at the present market rate of 6.9 per cent would need to raise the rent 45 per cent to cover the extra cost.

On top of this landlords are looking at the serious extra investment some of them will need to make to bring their properties up to the standard required to achieve an energy perform­ance certificate (EPC) grade “C” or above by 2028.

Rent controls

The left and the housing charities got their way: they wished to bash the “evil” buy-to-let landlords but what they got was a steeper housing crisis seriously affecting tenants. Scotland’s tenancy law reforms went a lot further that those in England with predictable results. First they tried to freeze rent levels and had to soften the policy to local area rent caps.

None of it has worked out well: tenants complain bitterly that land­lords are hiking rents aggressively when they take on new tenants, and landlords complain that the severe restrictions under Scottish renting laws are not worth the candle and threaten to sell or not to invest in any more properties. In England rent controls proposals constantly call for by London mayor Sadiq Khan have been rejected by both the Government and Labour.

In imbalanced market

Sky high rents indicate a market that lacks supply and competition. When prices are high in any market it sends out a signal to suppliers to enter, but when there is regulatory risk, when profits are so restricted that money can make a better and easier return elsewhere, landlords won’t invest.

In my view the Government needs to think seriously about providing a better incentive for landlords to invest in rental property, to ease their path so that private money can flow into the housing stock and relief the pressure on rents and the pain for tenants.

Re-thinking buy-to-let taxes

The only way to do that is to change the way rental income is taxed, and possibly remove the stamp duty surcharge. Demonising landlords has been a politically popular strategy, suiting the left leaning think tanks, housing charities and the popular media, but the results have been catastrophic for tenants.

The perfect storm of higher inflation, interest rates and mortgage repayments has resulted in a severe slowdown in house building, a shortage of housing of all kinds, and sky high rents. The Conservatives need to think deeply about this situation and do something about it quickly.

As the Sunday Times says:

“Being able to rent a home at a reasona­ble price, and have a realistic prospect of owning one, gives people a stake in soci­ety. The housing crisis poses immediate problems for the government, but it is ulti­mately a cross-party issue. Ignoring it is not an option if Britain is to have any kind of successful future.”

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