Select Committee on Communities and Local Government Committee Written Evidence


Memorandum by Paragon Group of Companies PLC (SRH 24)

SUMMARY

  1.  Paragon welcomes the opportunity to submit evidence to the Communities and Local Government Select Committee's inquiry into the supply of rented housing. This is a timely inquiry given the ongoing implementation of the Barker Review and the reorganisation of the Department for Communities and Local Government (DCLG).

  2.  Paragon is one of the UK's largest providers of Prime buy-to-let (BTL) mortgages to professional and investor landlords. We are the UK's largest lender to professional landlords and the third largest BTL lender with a 10% market share. We launched our first specifically targeted buy-to-let mortgages in 1995 and since then have increasingly specialised in this market. We are leading members of the Council of Mortgage Lenders and have played a central role in its BTL working group. These leading roles in the market and within our industry body have given us significant market and policy experience since our foundation in 1985.

  3.  The key points of our submission are:

    —  The private rented sector (PRS) has undergone considerable change and modernisation over the last 20 years. It has bridged the gap between social renting and owner-occupation and now provides a genuine alternative to home ownership.

    —  Demographic trends such as rising student numbers, increased inward migration to the UK and demand for housing flexibility from young professionals have served to drive up the level of demand for private rented accommodation.

    —  BTL investment has played a key role in broadening opportunities to rent privately and, by increasing competition within the private rented sector, has helped to widen choice and drive up standards in the sector.

    —  BTL has improved the quality of the PRS stock. According to the DCLG's English House Condition Survey 2004, since 1996 the percentage of non-decent homes that are privately rented has decreased by 31%

    —  The comparatively low default rates of BTL borrowers and their long-term commitment to the PRS has been a stabilising influence on the wider housing market.

    —  BTL has not led the change in housing but has merely responded to the changing demographic needs of society.

    —  The role of the PRS in responding to housing demand should be protected and encouraged by Government and given more weight within its broader housing policy.

OVERVIEW

  4.  The UK population is growing faster than previously expected and housing needs are changing. The Barker Review estimated a need for 177,000 new dwellings in England per annum to 2011. The trend is towards smaller housing units and people settling down later. This can be attributed to a number of factors including partnerships later in life, people living longer, access to higher education broadening and greater inward migration (in particular from the EU).

  5.  In the context of these demographic changes, the PRS has assumed an important role within the housing market. Over the last decade, it has made a major contribution to housing and regeneration in the UK and has experienced sustained growth. This has worked to the mutual benefit of local communities, landlords and financial institutions, playing a valuable role in the delivery of wider government policy.

  6.  The Housing Act 1988, which introduced the Assured Shorthold Tenancy, made the relationship between landlords and tenants more balanced and the housing market more flexible. The movement away from rent controls made landlords more willing to invest in rental stock. As a result, greater supply side elasticity was injected into the PRS, leading to more choice in the type and value of rented property. As such, the PRS became a viable alternative for many potential tenants.

EXPANSION OF PRIVATE RENTED SECTOR SINCE 1988 HOUSING ACT

Source: DCLG

  7.  As a result of these changes in housing regulation, the PRS became better equipped to fill the gap between owning and social renting. This was crucial in light of the significant decline in local authority housing stock since the 1980s, brought about in large part by the introduction of Right to Buy. The PRS expanded rapidly in the early 1990s and has continued to grow since then, albeit at a more modest rate. There has been a further growth period over the last five years due to recent demographic changes.

DWELLING STOCK RENTED FROM LOCAL AUTHORITIES

Source: DCLG

  8.  The PRS today consists of 2.7 million dwellings in the UK or 10% of the total housing stock. Of this total, 2.4 million are in England, representing 12% of the English housing stock. The sector has grown by over 10% in the last ten years and, according to the Centre for Economics and Business Research, is forecast to grow by a further 40% over the coming 10 years.

  9.  Recent growth in the PRS has been underpinned by sustained BTL investment. Suggestions that this investment is an unsustainable and passing fad are based on an inaccurate belief that residential property investment is a new, speculative business. "Buy-to-let" as a term was coined in 1996 as part of an initiative launched by the Association of Residential Letting Agents (ARLA), but investment in private rented property was taking place long before then through commercial mortgages and regular residential mortgages.

  10.  The Council of Mortgage Lenders only started collecting statistics on BTL in 1997 and some commentators have interpreted the growth in BTL lending, as reported by the CML, as evidence of a boom. However, the CML only measures the growth in new specialist lenders in the market—such as Paragon. The core back book of loans to residential property investors by mainstream lenders are omitted from the statistics. As much as 40% of BTL lending activity is remortgaging, as established landlords move from expensive commercial mortgages.

  11.  Despite the recent growth of the BTL market, the PRS remains predominantly under-geared with mortgage debt representing only around one fifth of the total value of the PRS. 77[76]

SOURCES OF TENANT DEMAND

  12.  Media commentary on BTL investment and the PRS is often misinformed by a perception that landlords are simply buying up increasing numbers of properties to rent. Actual demand for rented property from new tenants is rarely discussed. In our experience, the growth in the private rented sector is being driven by societal change, not just house price increases, and it is sustained tenant demand that is driving the investment activity of BTL landlords.

  13.  Demand for private rented accommodation tends to emanate from a number of key sub-sections of society. In Paragon's experience, tenants typically come from groups such as students, mobile professionals, the "Friends" generation (twenty-somethings between home and owner-occupation) and immigrants. The PRS also plays an important role in meeting social housing needs.

Students

  14.  Government has expressed a desire for 50% of school-leavers at the age of 18 to go into higher education. The figure currently stands at 41%. The growing student population is leading to increasing demand for rented property. Widening access to university also means that many more people are entering the labour market later, often with considerable student debt. In the 2005 Barclays' Student Survey, student debt increased by 380% in the last 10 years. It is commonplace for graduates to spend many years building their finances to the point where they can afford to buy their first property. This trend has also increased demand for rented property.

Mobile professionals

  15.  The average age of first-time buyers is now 34. Until people are ready to purchase their first property, many find accommodation in the PRS. The sector plays a particularly important role in offering young professionals flexibility in their employment choices. Without ties to a property, younger people are more mobile and able to respond to an increasingly flexible labour market. A rigid housing market with high levels of owner-occupation in the UK has traditionally been one of the key factors limiting labour mobility.

The "Friends" generation

  16.  Whilst the price of property has contributed to the decline in the number of first time buyers, it is not the only reason for people putting off buying their first homes. Many people in their twenties are choosing to settle down later in life, opting to live with friends instead. This trend is not new; there is evidence to suggest that it has been developing over recent generations. The CML, for example, note that the trend towards later entry into the housing market for first time buyers can be traced back to the housing slump of the late 1980s/early 1990s. 78[77] Home ownership aspirations for the under 25s fell from 79% in 1993 to 37% by 2003, as they delay marriage and children and demand flexibility and increased mobility.

% UNDER 25s WITH HOME OWNERSHIP ASPIRATIONS

Source: Housing Finance Journal, CML

Immigration

  17.  The growth in immigration is probably having the greatest impact on demand for private rented accommodation. Data from the Home Office shows that immigration into the UK in 2005 was at record levels, with almost 600,000 people coming to live in the UK from elsewhere in the world in 2004. Many new entrants are Eastern European economic migrants. Over 420,000 immigrants from EU accession states had their applications to the Worker Registration Scheme approved between May 2004 and June 2006. The Government Actuary's Department estimates that the average annual net immigration in coming years will be 145,000 people per year.

  18.  Immigrants do not usually have funds to buy a home or qualify for social housing, so almost all will seek homes in the private rented sector. The evidence is that most will stay there. Research from the Council of Mortgage Lenders shows only 20% of immigrants become homeowners within five years of entering the UK. This means demand from immigrants could boost the private rented sector by 55,000 homes every year.

Housing Benefit

  19.  Whilst the key sources of demand for privately rented accommodation are, in our experience, those groups outlined above, there is also clear evidence that a broader range of housing needs are being served by the PRS. Housing statistics issued by the ODPM in December 2005 point to a significant role for the sector in meeting social housing needs. They show that in 2003-04, 434,000 private renters were in receipt of Housing Benefit—this represents 22% of all private renters. 79[78]

  20.  Landlords tend to work within a tight geographical area, allowing them to understand trends and needs in particular areas and invest in properties to meet identified tenant demand. With local authorities unable to expand social housing and limited funding for housing associations, we would urge the Government to examine how the PRS could be engaged more closely in meeting local social housing need.

ROLE OF BTL IN IMPROVING THE PRS

  21.  BTL has created a flexible base of investors who are able to respond effectively to tenant demand. Many of these individuals are investing in high quality property and letting directly or through agencies. The very process of BTL lending encourages an improvement in the pool of landlords and private rented housing. BTL lenders carry out well-controlled risk profiling of potential borrowers, and property valuation surveys prevent landlords from borrowing to invest in poor quality property. Furthermore, robust pre-loan checks on borrowers minimise the scope for criminals to engage with the private rented sector.

  22.  A higher level of professionalism has been brought to the PRS by BTL. Survey data suggests that a large proportion of private rented stock is owned by established professional or private investor landlords. CML data on BTL borrower profiles suggests that the average residential landlord has six years experience and owns 7 rented properties. The typical Paragon borrower has 11 years of experience and owns 12 properties. Government statistics show that while 55% of landlords own 3% of private rented stock, 12% of landlords own 75% of PRS stock.

OWNERSHIP OF PRS STOCK BY LANDLORDS

Source: DCLG Survey/Paragon

  23.  CML and Paragon data suggests that residential landlords are committed to the private rental market for the long-term, with the average landlord expecting to be involved for 15 years. ARLA's 2006:Q2 survey identified that landlords expected to be involved for 16 years. This contradicts the image often portrayed of BTL investors as largely short-term and speculative investors.

  24.  New investment in the PRS facilitated by the advent of formal BTL loans has increased competition and choice in the sector. This in turn encourages landlords to maintain and improve the standards of their accommodation and treat their tenants appropriately. BTL investment has helped to provide private rented accommodation where other forms of tenure have failed. This has reduced pressure on Government to meet specific housing needs directly.

  25.  Market-wide surveys suggest that the growth in BTL is in fact having a positive impact on the wider housing market by helping to create a more flexible PRS that offers greater choice to tenants at more competitive costs. Furthermore, research suggests that BTL is helping to drive up standards in rental stock. 80[79] These benefits are supportive of the Government's core ambitions for the housing market.

  26.  Studies also suggest that BTL is likely to become an increasingly stabilising part of the market as it continues to develop. A CML survey of the profile and intentions of BTL investors found that landlords were increasingly committed to the PRS for the long-term and would remain in the sector even if house prices fell. 81[80] ARLA's 2006:Q2 survey said 87% would hold even if house prices fall. More recent research points to the fact that BTL mortgage default rates are considerably lower than in the owner-occupied sector, and that the wider opportunities to privately rent brought about by BTL investment mean that people who would otherwise be forced prematurely towards home ownership—and be severely financially stretched as a consequence—now have greater scope to purchase a home later in life. 82[81]

POLICY CONCERNS

  27.  The majority of landlords, and certainly those that are customers of Paragon, adhere to the high standards that the Government wants to encourage throughout the PRS, and it is crucial that they are given the freedom to continue fulfilling their key functions within the housing market. The PRS is already very heavily regulated. The National Landlords Association estimates that there are around fifty Acts of Parliament and seventy separate sets of regulations affecting the letting of private residential property. 83[82] A considerable amount of new regulation is being applied to the PRS under the Housing Act 2004 which could threaten the continued vibrancy of the sector.

  28.  Mandatory licensing of Houses in Multiple Occupation (HMOs) by Local Authorities was introduced in April 2006 and Local Authorities have also been given powers to selectively license all kinds of privately rented accommodation in areas suffering low housing demand or anti-social behaviour. The Government is currently finalising details of a new tenancy deposit regime which will apply to all assured shorthold tenancy agreements and intends to launch the scheme on 6 April 2007. These changes are presenting the landlord community with some major challenges, not least in terms of the new costs and administrative burdens associated with regulatory compliance.

  29.  The Government must ensure that the ability of the PRS to respond to housing demand in an efficient and flexible manner is not compromised by recent and impending reforms of the regulation of the sector. It is important that the interests of both landlords and tenants are fairly reflected in the new regulatory framework and that demands placed on individual landlords or their letting agents are proportionate to the Government's policy aims.

  30.  Furthermore, where Local Authorities have been given new powers to regulate the PRS—for example, in respect of HMO and selective licensing—these must be implemented consistently across local jurisdictions to avoid skewing local housing markets. Tenants will undoubtedly benefit from the regulatory changes being implemented, but Government should restrict any further interventions to those areas where it is absolutely justified.

  31.  It is also crucial that Government policy towards the PRS is informed by high quality research and statistics, and an accurate understanding of the BTL sector and its role within the PRS. Central Government, Local Authorities, and other bodies involved in the development of housing policy must not, for example, confuse the distinction between property investment clubs (PICs) and BTL lenders. The products offered by each are in fact very different.

  32.  PICs encourage potential investors to pay large sums as subscriptions for access to new build or off-plan properties at "discount" prices; the focus is the prospect of re-selling to make short-term profits. Mainstream buy-to-let lenders, in contrast, focus on the long-term investment potential of private rented property. Their products are not aimed at investors who want to make a quick buck. Indeed, CML data suggests that only 5-10% of lenders' buy-to-let loans are secured on new-build property, and even less than this on flats. 84[83] This distinction between the two products should be borne in mind by housing policymakers to ensure that the BTL sector is not damaged by policies aimed at the activities of PICs.

CONCLUSION

  33.  Home ownership does not suit the lifestyles or meet the needs of everyone at every point in their life, and many people now choose to rent. The modern PRS represents a genuine alternative tenure to home ownership and social renting for many households. It meets the housing needs of a number of significant population groups including students, immigrants, and young professionals, and also provides accommodation for a significant number of people in receipt of Housing Benefit. It is therefore vital that the Government pays due attention to the PRS alongside its efforts to boost home ownership through shared ownership initiatives.

  34.  BTL investment has increased competition and choice within the PRS, helping to raise the standards of private rented accommodation and broaden its availability. Landlords have been able to meet sustained demand for rented accommodation from a wide range of sub-sections of the population, and policymakers should consider how they can be harnessed to assist with the provision of housing need, both private and social, within mixed communities in the future.

  35.  There is a risk that the growing weight of regulation being applied to the PRS will discourage landlords from investing further or remaining in the sector. It is vital that a genuinely joined up approach to regulation is adopted by Central Government and other agencies responsible for overseeing the sector. The regulatory framework should be proportionate and, where administered by Local Authorities, consistently applied. Further regulation of landlords and their properties should be restricted to areas where it is absolutely justified. Only then will the important social and economic benefits that currently flow from the PRS be maintained.



76   Buy to Let, The Revolution-10 Years On, Prof Michael Ball, University of Reading, September 2006. Back

77   CML Housing Finance, Issue 09, September 2006. Back

78   Housing in England 2003/04 Part 3: Social Renters and Private Renters, ODPM, December 2005. Back

79   Buy to Let, The Revolution-10 Years On, Prof Michael Ball, University of Reading, September 2006. Back

80   The Profile and Intentions of buy-to-let investors, CML Research (Kathleen Scanlon with Christine Whitehead, LSE), March 2005. Back

81   Buy to Let, The Revolution-10 Years On, Prof Michael Ball, University of Reading, September 2006. Back

82   A Healthy Private Rented Sector-What The Government Should Do, NLA, August 2005. Back

83   CML calls for vigilance on property investment clubs, CML, 20 June 2005. Back


 
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