Coronavirus and private landlords
The coronavirus is throwing up big issues for private landlords and the private rented sector.
The main issue is the concern that tenants will lose their jobs and be unable to pay their rent.
Consequently, many landlords will be anxiously checking their records to see what sort of work their tenants do as some sectors and some types of jobs will be more immediately impacted – and hit much harder – than others.
Coronavirus and the Private Landlords – Government Help for Tenants
On 16th March, the government started with some eye watering sums to help businesses in different ways – and also some help for folks with residential mortgages.
Lenders who issue landlords buy to let and BTL company mortgages have said they can defer also payments on landlords’ loans for 3 months – and this deferment can be passed onto tenants. Rather confusingly, and slightly misleadingly, this has been termed a “mortgage holiday”, which has led to some tenants thinking, incorrectly, that they will be just let off the rent.
All good landlords will try to work with tenants they trust and will do all they possibly can to not lose good tenants by offering rent deferment, where they can afford to do this, but there is a limit to what landlords can do. For example, heating engineers still have to be paid for fixing a boiler and electricians for fixing serious electrical problems that cannot wait for the lock down to end.
Also, for 3 months, landlords will also be prevented from issuing new Section 21 possession orders.
The biggest bazooka from the government came on Friday 20th March, when they offered to effectively pay wages of employed people up to 80% of their pay up to £2,500 per month.
For the self-employed tenant there was some help too. The self-employed and members of partnerships can claim a grant through the coronavirus self-employment income support scheme worth up to 80% of trading profits up to a maximum of £2,500 per month. To qualify they must have submitted a tax return for the year 2018-19, traded in 2019-20 and had trading profits less than £50,000. There is also deferral of self-assessment income tax payments and Vat due from 20 March 2020 to end of June 2020, plus help via the Business Interruption Loan Scheme. Directors of their own companies paid through PAYE may get support using the Job Retention Scheme.
Unfortunately, for landlords who are not set up as companies there is no special help, unless low or no income from another source means they can apply for Universal Credit.
Also, for landlords set up as companies, who are in the habit of taking most of their income as dividends, there is no help. The government argues that it is too hard to separate out dividend income from the property company from other dividends (e.g. from share holdings in public companies). (It would be possible to do this retrospectively, but the government seems disinclined to look at this, perhaps mindful of the fact that the reason landlords and other company owners took dividends rather than declare profits in the first place, was because the tax rate was lower).
Coronavirus and the Private Landlord – Mortgages and Interest Rates
The Bank of England initially dropped the base rate by 1/2 of a percentage point, then on 19th March, down further to just 0.1%. So good news for those few landlords who have base rate tracker mortgages. Of course, this will be of nil benefit for the more risk averse folks who opted for long term fixed rates. That said, there are some decent fixed rate deals now emerging, especially for those who need less than 65% LTV.
The many lenders who offered lifetime trackers back in the old days must be even more aggrieved that West Brom were defeated five years ago at the Court of Appeal, when they tried to wriggle out of their lifetime tracker.
Predictably, the mortgage lenders have reacted to coronavirus with their usual mix of fright and panic. Most buy to let mortgage providers have cut LTVs to 60% of value, reflecting the higher risks in the economy and the fact that they are having to rely on “desk-top valuations”. Tougher rent to interest ratios continue to apply – typically 125% at 5% for basic rate taxpayers or 145% at 5% for higher rate taxpayers and lenders are less likely to accept applications from landlords for their first property. (When the current extreme panic dies down, the LTVs might rise again – unlike in 2008, the banks are not undercapitalisd this time round).
Coronavirus and the the Private Landlord – Impact on House Price and Rents
The cost of the virus will be truly staggering and the impact felt for years, indeed for generations.
My rough guess is that house prices will fall to as much as 10% to 15% below their value of January 2020, even if the so called “lock down” (or house arrest as I prefer to call it) were to stop by the end of April. House prices being sticky downwards, (sellers take a long time to accept their house is worth less), the process of prices falling 10 to 15% may take as much as a years to work through.
I think rents in the private rented sector will fall far faster – new rentals rates could drop by the same amount, but in a matter of weeks as landlords and letting agents will find demand and tenants’ incomes has plummeted.
In the very short term, viewings are supposedly not happening. Still, desperate landlords left with empty properties will offer some juicy discounts and both they and willing applicants will defy the quarantine to do viewings and strike great deals (great for the tenants, that is!).
Rents on existing contracts will take longer to fall, but will drop by the same level at their renewal dates or possibly sooner, if pressure from tenants who may struggle to pay rent is strong enough and when it becomes clear that market rents have fallen anyway.
The serviced accommodation sector is totally dead for the foreseeable future as holiday traffic and business traffic alike has been killed stone dead by coronavirus. Where they can, owners will be considering moving their properties back into traditional buy to lets. This extra supply of units will also act to depress rents in traditional long stay buy to lets.
But there are silver linings. As house prices fall back over the next two years, there will be great deals to be had, especially for the cash buyer, because mortgages will be harder to come by for a little while.
In terms of the overall economy, much depends how much longer the lock down will continue. With no sign of mass testing in sight and no exit plan or metrics for exit yet published, the house arrests looks here to stay for now, inflicting more long term damage to the economy.
With demand absolutely hammered and taxes at some point raised to pay back what will be an enormous government debt, inflationary pressures from consumers will be weak. But with many companies having gone to the wall too, supply may be weaker still. If so, this excess of demand over supply could lead to inflation coming roaring back in 18 months’ time. This could result in house prices going up smartly then, this will also be helped by low interest rates.
The future is uncertain, possibly unedifying, but potentially exciting for those who guess the economy right.
Apart from the economic effects and impact on jobs, there could be consequences if the sometimes over-zealous policing and restricted rights of movement are not applied with care and common sense. (I comment more on this at my other blog on the virus).
Internationally, this might also prove the death knell of the EU. Hungary has effectively declared a state of near martial law – to the annoyance of the rest of the EU. And Spain and Italy are upset about the lack of help from Germany, Holland and Finland, who in turn blame these countries for lack of action in the first place. Damage to the EU as a trade body could impact on the UK.
Areas in the UK that will suffer most are those dependent heavily on tourism, hospitality and travel and where jobs cannot be performed at home. I expect areas such as Cornwall will see the biggest falls in house prices and rents.
Where there is a strong high-value-added service sector in which jobs can be done from home, these areas will fare a little less badly. Areas supported strongly by government jobs may hold up too.
Note: I would be wary of taking the “mortgage holiday” and advised you don’t do this for now, if you can possibly help it. Like Richard Blanco of the NLA I am also unconvinced by government assurances that this will not negatively effect ones ability to get credit in future. I will look into this more just as soon as I can.
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“They may likely to argue, especially for those in company structures, that as business professionals landlords should be able to look after ourselves. ”
We know that government doesn’t tax all landlords as a business. Unlike Covid 19, the chancellors have been extremely selective on those considered to be THE weakest. It’s going to be the landlord, again.
Oddly, it’s counter-intuitive because it is a landlord who is best placed to assist tenants. Providing the government isn’t throwing grease on Debt Mountain, that is.
Thanks JPM. Things keep moving on so fast, don’t they
A great summary update, thank you. It’s good to hear your personal views as well. I too wish the media would include some positive stories about Coronavirus (as you mention, there are some, but these don’t seem to be reported). I want to have a daily count of how many people have RECOVERED from the virus.
Stay strong, we will get through this somehow.
Yes, very good point – a daily tally of who has recovered would be useful
It’s quite alarming how few journalists are willing to put forward this alternative and entirely plausible viewpoint, Matthew Parris being an honourable exception (and who was implicitly criticised in the final hour of Radio 4’s Today programme by the predictable Nick Robinson). It brings to mind the Hilaire Belloc lines: “You cannot hope to bribe or twist / Thank God, the British journalist / But seeing what the man will do / Unbribed, there is no reason to”
Not a Labour or Corbyn supporter, but the manufactured hysteria around him and his party prior to the last election – which was clearly effective – alarmed me, as I could see it could just as easily be targeted in the future against any individual or politician. Again, few if any commentators were brave and impartial enough to point this out – Peter Oborne being the honourable exception in that case.
Given we live in a democracy, it is difficult to understand why so few people are willing to question and openly disagree with the Party Line – we are hardly faced with imprisonment, torture or death for doing so. I remember the late Simon Jenkins pointing out that while working as a journalist overseas, the one place where people were always willing to give their name for publication was in the hardline, communist Soviet Union – whilst in Blighty the local newspapers were full of letters signed by ‘Name and Address Supplied’. Very odd.
The present Government response and inevitable damage to the economy would be appropriate for Ebola – not for Covid19 or similar.
One can’t help wondering if Boris and Co. were mindful of the importance of the over 60’s to their electoral success, and so decided to avoid legislating for enforced quarantine for the 70+s. And of course, if they held back from quarantining the elderly, they could not really justify quarantine for the medically vulnerable either.
Given the unpleasantly partisan nature of politics at the moment, it would not surprise me if the simple explanation is that desire for electability trumped the need to protect the economy. After all, Johnson, Sunak and co. are going to come out of all this smelling of financial roses whatever.
(and at the risk of sounding paranoid, recent articles in the NYT amongst others about the strange behaviour of the financial markets and apparent unprecedented largescale conversion into cash for hoarding need to be looked at again in the light of the last budget)
Never a fan of Boris, but even I have been surprised by his lamentable parliamentary performance. Again, some other lines come to mind, this time from Roger McGough –
“I wanna be the leader
I wanna be the leader
Can I be the leader?
Can I? I can?
Promise? Promise?
Yippee I’m the leader
I’m the leader
OK what shall we do? ”
Anyway, thanks for your perceptive post that has almost helped to confirm my sanity.
Thank you for this.
You make a very perceptive series of point there.
Yes, I read Matthew’s piece. Also, a similar one in the Times Business section by Philip Aldrick. Both have predictably been attacked online at Tw*tter, but not to the same extent as Katie Hopkins.
If this virus had hit in the late 1950s when, I believe, life expectancy was some 30 years less, life would have probably carried on, because with far less elderly and chronically sick people, the death toll compared with those infected may have been less than 0.5%.
This is not being heartless. Like Matthew Parris I have very elderly parents – one is 88, the other is 92 and also my Mother in Law is in a home (aged 88) and my aunt who lives on her own is 92. I think that qualifies me to say that we must protect them as far as we can, but we must also accept that they are at a time, when we must accept they could die.
So, if one of the carers looking after any of them – cleaners in my parents / Aunts home or car workers in the case of my Mum In Law accidentally infects them, with the result being that they might die, I am ready to accept this, though I love them all dearly.
Their cleaners partners and carers partners should be able to go to work to keep their family afloat. If that means they infect their partner who then infects my Aunt/Mum/Dad/Mum-in-Law, this is a price we must accept.
A very good summary David,
From a personal point of view, I am a professional landlord with properties in many areas of the UK. I believe that I have been very fortunate to date and have very few issues to address as a result of the lockdown (touching wood at the moment !). Up to a point I believe we will reap what we sow. I have always gone the extra mile in terms of looking after our tenants and will always set the rents below the market rate for the area. Many of my tenants who take good care of the properties have not had a rent increase for many years. I am confident that they will do their utmost to cover the rent.
As with any business the most important element is the customer and in our case the customer is the tenant.
The level of risk undertaken by landlords in terms of BTL loans is key to withstanding periods such as this. If you are under stress then maybe your original business stress testing was questionable. Nothing in this business is guaranteed.
I believe the next few months may prove an opportunity if you have accumulated some cash. Bargains from stressed sales may very soon appear at auction.
I think it may take at least 2 years for things to turn around. All will be dictated by the time taken to role out a vaccine and that is a long way off. Until then social distancing will be the norm particularly for the elderly. Although the lockdown will be eased in some areas, until this is under control most people will avoid gatherings whether for business or social for many months to come. Clearly investments directly or indirectly linked to transport, tourism, sport, restaurants, cafes or pubs will take a massive hit.
I wish you and your readers the very best of health at this time.
Richard Spong
Agreed Richard, and good to hear from you again.
I’m amazed how many other landlords have been contacted by all their tenants re possible so called “rent holidays”.
We only had contact from one of ours -a nd they paid in the end anyway. (See my forthcoming article in LandlordZone for for on this).
Perhaps other landlords let to more risky tenants or are in more precarious areas, in terms of the local economy or more likely, fail to properly do affordability and reference checks.
Yes David, sometimes it is as basic as being kind and caring for your tenant / customer.
You and I have both been to many property meetings and seminars over the years where Landlords are fixated with the maximum profit they can wring out a tenancy.
Some had the temerity recently to canvas us, in response to the Governments tax changes, to agree a date for us all to increase rents to counter the increased tax on their BTL mortgages, UNBELIEVABLE ! In other words, you make the tenant pay for your poor business decisions.
Look after your tenant and more often than not they will look after you. I know that most of my tenants are happy in their homes and they are not going to risk upsetting me by not paying rent if they can afford to do so. Particularly if alternative options are likely to be more expensive.