A few weeks ago, the government launched its new housing strategy for England. The title isn’t particularly cheery and I don’t think it actually reflects the true nature of our housing market.
According to the English Housing Survey 2014/15 (EHS):
There were 22.5 million households in England, of which 64% were owner occupiers.
There were more ‘outright owners’ (33%) than those who owned a property with a mortgage (30%), bar in London.
The survey concluded that the ‘gradual decline in owner occupation’ from 71% to 64% has now ‘abated’.
So, of the 64% of people that own homes in England, half own without a mortgage and the latest news from the Council of Mortgage Lenders shows that repossessions for the remaining half fell by 25% year on year, to its lowest level since 1982 – just 7,700 cases in 2016 versus 10,200 in 2015.
And for those who are renting in either social housing or the Private Rented Sector, because they are students, migrant workers or are ‘in between’ homes, the market, from my perspective, is not ‘broken’ from their perspective either.
The figure from the EHS the government seems to ‘worry’ about and concentrate on in the white paper is: “Over the last 10 years, the proportion of households in the PRS with dependent children increased from 30% in 2004 to 37% in 2014”, which equates to approximately 912,000 more households. The government is concerned about this because their view is that families need stable homes, which they suggest the PRS doesn’t currently offer.
And it’s this ‘view’ from the government that it needs to improve things for renters and families that is driving future policies, which are likely to impact on buy to let.
Possible impact of the White Paper on buy to let:
Recognition of the need for more homes
On the one hand, this is good news, because the plan is to ensure Councils aim to build enough homes to match increased demand in their area. However, the ideal market from an investor’s perspective is the one we have had over the last few decades, where supply has been restricted. If demand and supply are matched over time, it’s likely to restrict capital growth, so investors will increasingly need to build in value at the time of purchase, as opposed to relying purely on a natural rise in prices.
Reduction in demand for the PRS
The government is also planning a plethora of new initiatives for those that can’t currently afford to buy and are living in the PRS. They include starter homes that are discounted at purchase, and properties that people can rent at less than the market rate, then put the money they save towards purchasing the property at a later date. There are also the existing Help to Buy and Shared Ownership initiatives.
In addition, there are plans to build more homes via housing associations and councils for those that need long term, affordable properties. This is essentially replacing homes they would previously have been able to access in the social sector, before they were sold off.
Although these plans and initiatives may reduce demand in the PRS in the short term, the predicted population growth is such that there is still likely to be a significant shortfall in supply over time.
Increase the number of properties built specifically to rent
A ‘new’ initiative over the last few years has been to encourage large-scale investment in properties being built specifically for the rental market by institutions that attract investment funds – for example, pension companies. There are already plans for 80,322 such homes, with more expected to be built each year.
The effect that these have on the PRS is likely to be very localised, so it’s important to know what ‘build to rent’ plans there are for your area. Visit http://www.bpf.org.uk/what-we-do/bpf-build-rent-map-uk.
Increased costs to let properties
It is also expected that the cost of delivering properties to let will rise, on top of the increase in taxes buy to let investors have already suffered via stamp duty and the loss of higher-rate tax relief on mortgages. That’s because it is likely more legislation will be introduced to improve electrical safety and local authorities are being given more opportunities to impose heavier fines on those landlords that don’t provide safe homes to let.
So, does this White Paper bring more ‘bad news’ for the buy to let investor? I don’t expect so. That’s because the new taxation rules have reduced the number of people entering the market, therefore reduced competition for existing landlords and those who have already decided to enter the market. There is also expected to be a huge increase in demand for rental properties in the future. In their forecast report published late last year, Savills estimates that “1.2 million more households in England & Wales will be private renters by 2019” and that rents will rise faster than house prices over the next 5 years
That being said, the policies outlined in the paper do suggest that investors need to keep an eye on supply and demand, particularly what new properties are being built to rent in their area, and take more care than ever to ensure their properties remain safely and legally let.
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