2011 and the Outlook for the Housing Market, for Landlords and for the Buy to Let Sector
In the last year the private rented sector continued to be in the news.
At LettingFocus.com we are not surprised and landords and suppliers to the private rented sector should not be surprised either.
A key reason is of course Housing Benefit, (or Local Housing Allowance (LHA) as it is known when private landlords are involved), and it is the large and growing cost of this benefit that’s the cause of all the trouble and it’s this that the coalition government has vowed to tame.
A range of treatments are being applied to douse the fire of the Housing Benefit dragon – from applying absolute maximum caps to housing benefits, to cutting the local payment rate to the 30th percentile of local rents to cutting it by 10% for those who have been on Job Seekers Allowance longer than 12 months.
All these measures come on stream at different times in the next 2 years though the first measure (cutting to the 30th percentile) will bite for new LHA claims from April.
Policy Fiddles and Sticking Plasters
Later on, from 2013, the government wants to break the link between the rate of LHA paid and local rents and instead make increases in LHA linked to the rate of inflation. At LettingFocus we think this particular idea will be hard to “make stick” but this is still a long way off and far away enough in time to be quietly dumped as policy.
Just in the last few weeks, the government has come up with a new idea – to allow local authorities the discretion to go back to paying LHA direct to landlords in return for a lower level of rent “if the direct payment to the landlords secures the tenancy for the claimant.” Now that’s an interesting idea and represents the latest in a long line of small concessions from the government on the Housing Benefit issue.
It makes some sense for the taxpayer, though landlords won’t like the idea of getting a lower level of rent.
As an independent observer of all this I also note with some amusement how the government has, at great cost, also widened and fiddled with the definition of homelessness in order to deal with the consequences of cutting Housing Benefit rates.
For example, lots of money will still be available to councils at the old median rates of Housing Benefit to set up long lease schemes with landlords (and so far the Daily Mail and the like who whinged so much about the cost of Housing Benefit haven’t noticed!)
The changes to Housing Benefit will have big implications for the whole private rented sector, including for private landlords whose tenant clients are not on any type of benefit.
Landlords in the more expensive London boroughs who are currently letting to tenants on LHA at rates above the new maximum caps will see the biggest negative impact as it will be them who will be most affected by the new maximum caps and this will have a knock on impact on local rents at the lower end of the market in the more expensive London boroughs. However, tenants and landlords in all parts of the UK will be affected by all the other measures to a greater or lesser degree.
One interesting consequence of the changes – and which we were the first to predict – is that cheaper areas in London could actually see more demand from tenants migrating from more expensive areas hit hardest by the new caps. It’s hard to be sure how great this impact will be but any increase in demand in the currently cheaper London boroughs will increase rents in these areas.
Also, the government’s move to set new social rents closer to market levels will tend to make more former social tenants think harder about the private rented sector as a viable housing option. This will help stoke the overall level of demand for private rented accommodation going forward.
The implications of all these changes to Housing Benefit are great and we are working hard in a consultancy capacity to help local authorities and housing associations plan for these changes.
Rents are Booming
Meanwhile, over the last year, private sector rents are booming in most parts of the UK.
To some extent rising rents represent something of a long overdue “catch-up” because rents have grown much more slowly than house prices since house prices started their long (and occasionally stuttering) march upwards back in 1996.
Most commentators think a big factor in recent strong tenant demand must be the difficulties experienced by would-be home buyers in getting a mortgage – leading them to rent instead.
We don’t find this argument terribly convincing because mortgages at 90% loan to value are readily available for first time buyers who have good credit records. We think the more likely explanation is that would-be buyers are just choosing to rent because renting gives them more flexibility and is much less risky than being saddled with a mortgage in a time of uncertain job prospects.
Mortgage Finance is Easing
And what of finance for private landlords?
Since Lloyds Banking Group got cold feet, the arrival of some new entrants into the buy to let mortgage market has meant access to credit has got a little easier. But the effect is very slight and compared to the “Golden Years of Easy Credit” from 2003-2008, today’s buy to let mortgages still come at high margins over base rate and high fees. Mortgage rates for loans over 70% LTV come with especially high margins and fees.
Mortgage applications are no longer waved through either – landlords seeking buy to let mortgages can expect lenders to pore over new mortgage applications and ask about everything, stopping just short of enquiring about a borrower’s inside leg measurement.
But at least the base rate itself is low though. And the low base rate is the reason why long term private landlord players are in a very good place because the majority of landlords who took out mortgages before the summer of 2008 still enjoy buy to let mortgages at between just 0.5% and 1.75% over base rate. Much lower than any new mortgage deal on offer today!
Add rising rents to this low cost money and it adds up to plenty of cash flow which means “old hand” landlords can rely mostly on cash for their next property foray. This gives them the edge over other buyers who are more dependent on mortgages to fund house purchases.
These equity rich buyers, with low historic mortgage rates may have “never had it so good” as the now sacked Tory politician correctly said.
And the Outlook….
What’s the outlook? Well, of course, it depends where in the country you are.
Overall, the UK economy remains very depressed and public and private sector job cuts are biting. Plus the Euro is in a terrible mess (though German exporters continue to benefit hugely from the resulting low Euro, thus making the death of the Euro a very unlikely outcome.)
Unsurprisingly, given the economic backdrop, UK house prices have slipped down over the last 12 months though many areas continue to defy the gloom. In particular, London house prices continue to hold up in the more “prime areas”, though even here the picture is very mixed.
The key for private landlords is as simple as it has always been. First, you must “stress test” your borrowings – which means if you are thinking of taking out a mortgage loan, ask how easily you could meet mortgage payments if interest rates rise. Could you increase rents to compensate? How would you cope with a void period when the property is empty?
If you have done this and still feel confident, then take the leap but make sure to buy in the right area where the economy is turning up and where housing demand, and especially tenant demand, will grow in the future. And above all, carefully pick your tenants only after thorough reference checks have been carried out.
Suppliers to the Private Rented Sector are Getting Smarter
Private landlords can also enjoy the fact that more suppliers -from mortgage lenders to insurers to local government – are getting smarter at selling products and services to the sector.
At LettingFocus we advise many organisations, both public and private – to help them improve their strategy, marketing, training and operations in our sector. There is still a long way for many suppliers to travel but as they get better at what they do, private landlords will continue to benefit, providing they are prepared to shop around a bit.
There will be no blog next week. We’ll be back and blogging around 10th January.
MORE ABOUT LETTINGFOCUS AND WHAT WE DO
LettingFocus.com is the home of Private Rented Sector expertise and Information for Landlords.
I’m David Lawrenson, a landlord and property investor myself for over 25 years and author of “Successful Property Letting” – the UK’s top selling commercially published property book for the last 3 years. 25,000 copies sold.
Services to Businesses and the Public Sector
Primarily I am a consultant to a range of organisations including banks, building societies, local authorities, social housing providers, institutional investors in the PRSI and insurers – helping them improve their landlord facing or buy to let product strategies, marketing and services.
For example, I help banks improve their buy to let mortgage lending practices and I help housing associations / local authorities find private landlords (private rented access schemes, local letting agency models etc.)
I also write for property websites and am regularly quoted by the media.
Services for Private Landlords
We also find a limited amount of time to help landlords and property investors by coaching them on how to make money in the private rented sector using ways that work, which are ethical, fair to tenants and which involve minimal risk to the investor. We pride ourselves on giving independent unbiased Buy to Let Advice
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