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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