Housing and the Credit Crunch - Communities and Local Government Committee Contents

Memorandum by The Paragon Group of Companies PLC (CRED 38)


  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 20 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.


  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 (ie 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.


  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.

November 2008

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