Memorandum from The Paragon
Group of Companies PLC (CRED 38)
Summary
1. The
Paragon Group of Companies PLC welcomes the opportunity to submit evidence to
the Communities and Local Government Select Committee's inquiry into housing
and the credit crunch. The inquiry is timely given the difficult conditions
that currently prevail in the wider housing market and, against this backdrop,
the growing importance of the Private Rented Sector (PRS), and of buy-to-let
investment, in providing alternative housing for those who are putting off
house purchases.
2. Paragon
is the UK's
leading specialist provider of prime buy-to-let (BTL) mortgages to professional
and investor landlords. We launched our first specifically targeted buy-to-let
mortgages in 1995 and over the last 13 years have increasingly specialised in
this market. Paragon currently has 40,000 landlord customers and services
90,000 individual accounts, with £11 billion of assets under management. We are
a leading member of the Council of Mortgage Lenders, playing a central role in
its BTL working group, and also of the Intermediary Mortgage Lenders
Association, Association of Residential Letting Agents and National Landlords
Association. Our roles in the market and within our industry bodies have given
us significant market and policy experience.
3. The key points of our submission are:
· In the context of a marked slowdown in house sales
and limitations to the availability and growth of social housing stock, private
landlords are providing an increasingly vital source of affordable and flexible
accommodation for many people.
· While the modern PRS already provides a housing
option that a substantial proportion of the population proactively choose as
their preferred form of tenure, it is now also becoming a much more important
source of housing for people who are unable or unwilling to purchase a home,
especially given low levels of consumer confidence.
· The implications of the economic climate for the
Government's social house-building targets have brought the role of the PRS
into greater focus. Despite the economic downturn, experienced private
landlords remain well-equipped to meet the housing needs of people who are no
longer looking to the owner-occupier sector but cannot find accommodation in
the social sector.
· Alongside measures to assist existing and
prospective homebuyers, the DCLG's housing policies should also encourage
private landlords to maintain and increase their commitment to the private
rented sector. Any steps to reform the regulatory framework of the PRS,
particularly in light of the recent Government-commissioned review of the
sector, must ensure that a fair balance between the interest of landlords and
tenants continues to exist. Otherwise there is a risk that landlords may be
discouraged from remaining in the sector.
· It is equally important that the Government's wider
efforts to support the banking sector and revitalise the market for mortgage
finance do not overlook the need to maintain a healthy buy-to-let market. BTL
lending over the last decade has underpinned the expansion of the PRS and
played a key role in driving up property and management standards. Ensuring
that it can continue to do so is critical given the growing importance of the
PRS.
· Demand for privately rented properties remains strong
so, while the lack of liquidity in capital markets has affected all lenders to
one extent or another, the prime BTL sector continues to perform well. It is
absolutely vital that the Government's bank recapitalisation programme, and its
interlinked desire to restore banks' lending availability to 2007 levels,
encourages lending against prime BTL assets and does not group BTL with
non-performing sub-prime mortgages or other lending activity considered at-risk.
· In this respect it is vital that policymakers recognise
and are completely clear about the distinction between prime BTL lending and
speculative property investment. These activities are very different from one
another and must not be confused.
· The products of prime BTL lenders are aimed at experienced
professional landlords - these are typically financially sophisticated
individuals who invest in property for the long-term, are guided in their
purchase decisions by proven levels of rental demand and are often lowly-geared.
Property speculation, on the other hand, has been fuelled by property
investment clubs who target investors seeking capital appreciation to achieve
short-term gain. While these purely speculative practices should be
discouraged, a vibrant BTL sector is absolutely critical to a healthy PRS and
must be protected and encouraged, particularly at the present time.
An Increasing Role for the PRS in the Current
Economic Context
4. Despite a tendency for housing policy
to focus on home ownership and affordable housing, the PRS has assumed a
critical role in the modern housing market. The sector has gone through a
period of considerable change and modernisation over the last twenty years.
This process has seen it increasingly bridge the gap between social renting and
owner-occupation and make a major contribution to housing and regeneration in
the UK.
5. The modern PRS
is already the tenure of choice for a number of key groups within the
population. Demographic trends such as rising student numbers, demand for
housing flexibility from young professionals and sustained economic migration
to the UK
have driven up demand for private rented accommodation, and BTL investment has
enabled the PRS to respond. BTL
has played a key role in broadening opportunities to rent privately and, by
increasing competition amongst landlords within the PRS, it has helped to widen
choice and drive up standards in the sector.
6. Since the introduction of BTL, there
has been a steady improvement in the quality of the PRS
stock. The DCLG's English House Condition Survey found that the percentage of
non-decent homes that are privately rented has decreased by over 30% since BTL
was formally launched in 1996. Furthermore, the long-term commitment of
professional landlords and the comparatively low default rate in the BTL sector
underlines the stabilising influence that BTL investment has exerted on the
wider housing market.
7. In the current economic climate, with
uncertainty pervading the wider housing market, private landlords are providing
an even more vital source of accommodation for many people. As the credit
crunch and the economic downturn has taken hold, market data suggests that
building rates are slowing, mortgages for first-time buyers are becoming less
available or affordable and strains on the social housing stock are increasing.
Earlier this year the Local Government Association argued that the economic
slowdown and the credit crunch could result in two million households, or five
million people, on the waiting list for social housing in less than two years.
8. In this context, more people are
looking to the PRS to meet their housing needs. Rather than stimulating a
decline in demand for BTL mortgages, we are finding that the downturn in the
broader housing market - and the consequent decision by many potential homeowners
to put off house purchases until the market settles - is driving up demand for
privately rented property. While the current lack of liquidity in markets is
limiting landlords' ability to invest in new stock to meet rising demand, the
appetite to invest is still very much in evidence.
9. Our own data shows that there is strong
tenant demand in the PRS, which is placing upward pressure on rents and
maintaining robust rental yields. 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 defer home purchase until later in life
and instead rented privately.
Specific Policy Concern
10. Paragon strongly believes that 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, particularly at a time when private
renting is increasing in significance.
11. We were therefore encouraged that the
recent review of the PRS by Professor Julie Rugg and David Rhodes of the University of York recognised the important role of
the sector in meeting a wide range of housing needs and recommended that
landlords of all sizes should be encouraged by Government to grow their
businesses. The view that privately rented property is in some way inferior to
other housing options was always misplaced and we hope the review will help
dispel it for good.
12. The DCLG's response to the effect of the
credit crunch has largely been focused on putting in place measures to assist
individuals who are struggling to meet their mortgage loan commitment, to widen
home ownership opportunities through an extension of shared equity arrangements
and speed up social home building. While we understand the motivation for these
policy responses given the tightening of household budgets and growing evidence
that people are finding it harder to keep up mortgage repayments, the Government
should also look to harness the role that is already being played by private
landlords as another strand of its housing policy responses to the credit
crunch.
13. There are clear restrictions on the
ability of the social sector to be expanded sufficiently quickly to meet the
demand of all people who are, for whatever reason, unable or unwilling to enter
or remain in the owner-occupied sector at the present time. Landlords typically
operate within a tight geographical area, allowing them to understand trends
and needs in particular areas and invest in properties to meet identified
tenant demand. We would therefore urge the Government to examine how the PRS
could be engaged more closely in meeting local social housing need through the
further development of schemes such as choice-based letting.
Mortgage Finance
14. Given the importance of the PRS in the
housing market, it is critical that the Government's broad responses to the
current difficulties in the banking sector - which, in parallel with restoring
stability, are designed to revive lending to businesses and homeowners - do not
overlook the significance of the BTL mortgage market. A thriving BTL market is
necessary to ensure that the PRS can continue to meet housing demand and assist
in further driving up standards in the sector.
15. Sir James Crosby is, at the request of
the Chancellor of the Exchequer, currently reviewing what market-led
initiatives might be necessary to improve the functioning of secondary and
primary markets in UK
mortgage-backed securities. His interim assessment, issued in July, gave a
downbeat assessment of the immediate prospects for these markets. Reopening
them is the single most important issue facing the sector at the moment.
16. While Paragon faces similar funding constraints
to other lenders who have in the past used these markets to raise funds, the
fundamentals of the BTL sector remain extremely strong. It is crucial that
policymakers do not confuse BTL with sub-prime lending; on the contrary, BTL is
a strong, secure asset and must be treated completely separately from sub-prime
in the Government's response to difficulties in both the banking and housing
sectors.
17. The Treasury recently agreed commitments
with certain banks receiving support from its recapitalisation scheme that require
them, amongst other things, to maintain their lending to homeowners and small
businesses at 2007 levels in return for an injection of capital. While the
precise nature of these lending commitments is not clear, there have been some
suggestions that the assisted banks may be required to exclude lending against
certain at-risk assets, for example non-performing sub-prime mortgages. While
there is a clear need to ensure that there is no return to some of the
irresponsible lending practices seen at the sub-prime end of the owner-occupier
mortgage market in recent years, it is vital that prime BTL lending is not
grouped together with sub-prime mortgages or speculative property trading, as is
sometimes the tendency of commentators in the media.
18. An accurate understanding of genuine BTL lending,
and of the crucial role of investment in the PRS by professional landlords
using BTL products, must inform any Government action directed at reviving
lending levels. Speculative property investment is very different from genuine
BTL investment but the two activities are often confused. Speculative property investment,
often encouraged by property investment clubs, typically involves people paying
large sums of money to subscribe to investments in new build or off-plan properties
at 'discount' prices; the focus is on the prospect of re-selling to make
short-term profits. Mainstream BTL lenders, in contrast, focus on the long-term
investment potential of private rented property and their products are aimed at
investors who have a similarly long-term investment horizon; the
most recent landlord survey by the Association of Residential Letting Agents,
published in September 2008, found that most landlords expect to keep their
property portfolios for an average of 16 years.
19. Maintaining the availability of prime BTL
lending to experienced private landlords is essential for a healthy and diverse
PRS, and must form part of the Government's response to current funding
constraints. The Government must avoid stifling responsible BTL lending to experienced
landlords in any efforts it makes to stamp out irresponsible lending practices
in the sub-prime sector or other sectors. BTL has been instrumental in
unlocking the appetite for professional landlords to invest in the sector and their
continuing ability to do so will ensure that the PRS can play a full role in
meeting housing needs in the current environment.
Arrears and Repossessions
20. The credit performance of our borrowers
has remained robust despite conditions in the wider mortgage market. Demand has
remained strong at the professional end of the market and increasing tenant
demand in the current environment has actually seen void periods fall amongst
our landlords.
21. The Government has understandably been
urging a more responsible approach to repossessions as the credit crunch places
increasing numbers of borrowers under financial strain. Some organisations such
as Shelter have drawn attention to the problems that can result for tenants in
the case of repossessions in the BTL sector. We recognise these concerns and
take our approach to arrears management and repossession extremely seriously.
22. Paragon
operates what we regard as a market-leading approach in the event that one of
our borrowers runs into difficulty with their repayments. We look at a range of
options when arrears emerge but we always ensure that the welfare of sitting
tenants is our highest priority. In all cases at present, where we have
to take control of a property due to chronic non-payment, we will leave a
sitting tenant in the property and ensure that the property is professionally
managed and maintained, either directly or through a competent and qualified
third party (i.e. a managing agent).
This secures the tenant's position, ensures that the property is maintained
and safe and the rent payment profile maintained.
Private Sector Mortgage Rescue
23. The DCLG announced new mortgage rescue arrangements as
part of its package of measures to support the housing market. These are
directed at the most vulnerable families who can no longer afford their repayments and who would
be eligible for homelessness assistance. They will be overseen and delivered by local
authorities and registered social landlords.
24. There has been a willingness within the lending
industry to provide privately-funded mortgage rescue solutions. Proposals that
have been put to the DCLG have the potential to extend support to a much wider
section of home-owners under financial pressure than the Government's own
arrangements are intended for or would be capable of. The capacity of the
private sector to assist in this respect could become even more important as
the economy moves towards recession and financial pressures intensify.
25. Appropriately regulated and funded private sector
mortgage rescue arrangements could provide an important additional tool to the
Government as it continues to focus on how to limit disruption to the housing
market and homeowners. It may also represent an alternative model to some of
the sale and rent back schemes that have aroused concerns amongst policy makers
in recent weeks but which have nonetheless become increasingly popular,
suggesting a growing need amongst homeowners. It is therefore important that
the Government continues to discuss these mortgage rescue proposals fully with
industry, as it has indicated it will.
Conclusion
26. The Communities and Local Government
Committee's inquiry is very important and timely in the current economic
context. With many potential first time buyers unwilling or unable to purchase
homes, and existing homeowners coming under increasing pressure to maintain
their repayments, other sections of the housing market are becoming
increasingly important sources of accommodation, not least the PRS.
27. It is vital that the Government's housing
policy responses to the credit crunch take full account of the role of the PRS
as a vital source of accommodation, and of BTL investment as a key underpinning
of the PRS. We hope the Committee will help to highlight some of these issues
as its inquiry progresses.
Novenber 2008
