Memorandum by the National Landlords Association
(NLA) (CRED 49)
INTRODUCTION
We welcome the committee's inquiry into what
effect the "credit crunch" is having on the Government's
housing policies. We understand that the private rented sector
is removed from the remit of the committee's inquiry, probably
because the Government does not currently have any housing policy
or targets for the sector which could be affected by the housing
crunch.
However, we also believe that the private rented
sector has a vital role to play in housing people who cannot get
into the other two tenures and therefore any assessment of the
impact of the crunch on the Government's targets for owner-occupation
or social housing must also take into account the ability of the
private rented sector to continue to offer housing.
Therefore, of the three aspects highlighted
by the committee for consideration, it is the third aspect which
our contribution we wish to contribute to; namely the examination
of measures to help existing and prospective homeowners affected
by the credit crunch.
Whilst much focus has been given to the mortgages
of homeowners and the lack of properties for social renting, the
effects of the current crisis on landlords within the private
rented sector (PRS) has received scarce attention.
This submission is intended to outline how the
current economic crisis is affecting the PRS; to highlight what
specific dangers are putting homes within the PRS at risk; and
suggests what directions housing policy could follow to ensure
effective protection for both landlords and tenants in this important
part of the housing sector.
SUMMARY OF
POINTS
— Many landlords are in a good financial
position with low gearing or no mortgage at all.
— The growth in buy-to-let mortgages
in the past few years can to a large extent be accounted for by
long-term investors refinancing their existing portfolios.
— Short-term speculators who have bought
properties in the wrong place at the wrong time will face problems
but professional landlords who consider the best locations for
demand and buy at the right price should face fewer difficulties.
— There is anecdotal evidence of a
growth in "accidental" landlords—owner-occupiers
who have to move away but are seeking to let out their homes and
ride out the market hiatus rather than sell them immediately at
a loss.
— The lack of available finance for
mortgages has seen an increased demand for private rentals from
people who would otherwise be first-time buyers. At the same time
there remains sustained demand from other tenant groups.
— Complaints about an increase in rents
as a result of higher demand for private rented property are too
simplistic. Landlords face increased costs as a result of rising
interest rates on all sorts of finance and can only recover those
costs through rent. At the same time, the growth in available
properties means that tenants can shop around and a property offered
at too high a rent could be more difficult to fill.
— The wider economic crisis may impact
on tenants' ability to pay the rent regularly. Landlords rely
on the rent as the only way to repay their borrowing on the property
(and other costs) and irregular or non-existent rent payments
will leave them out of pocket. There is a risk that there may
be a rise in tenants losing their homes because of rent arrears
but the committee needs to understand that the alternative is
that the homes would be repossessed by the lender, making them
unavailable to other potential tenants.
— The current rate of repossessions
for buy-to-let mortgages is the same as for owner-occupier mortgages.
The recently announced protocol for lenders seeking possession
will apply to buy-to-let mortgages which is welcome. However,
we believe there may be a need for tenants to be kept informed
by the lender that they are pursuing action against the landlord.
At the same time, the timing of this is crucial since a misperception
by tenants that they are inevitably going to lose their home may
lead them to move out when their rent is actually helping the
landlord to repay the borrowing commitments.
ABOUT THE
NLA
1. The National Landlords Association (NLA)
exists to protect and promote the interests of private residential
landlords. With almost 20,000 individual landlords from around
the United Kingdom and over 90 local authority associates, it
provides a comprehensive range of benefits and services to its
members and strives to raise standards in rented accommodation.
The NLA seeks to safeguard landlords' legitimate interests by
making their collective voice heard by local and central government
and the media. The NLA seeks a fair legislative and regulatory
environment for the private-rented sector while aiming to ensure
that landlords are aware of their statutory rights and responsibilities
towards their tenants.
THE CONTRIBUTION
OF THE
PRS AND BUY
TO LET
2. Whilst there is no need to remind committee
members of the importance and contribution of the PRS (especially
in light of the clarity offered by the recently published review
of the sector by Dr Julie Rugg and David Rhodes), it is worth
reiterating some pertinent statistics relating to the size and
supply of PRS housing.
3. Current figures indicate that the PRS
provides homes for around 2.7 million households in England1.
This represents 13 per cent of the total number of households
in England, or around one in ten households with the UK as a whole2.
This figure may grow as a result of the impact of the credit crunch
on the other two forms of housing tenure.
4. The recently published review of the
PRS conducted by Dr Julie Rugg3 has estimated that there are around
1.2 million landlords providing PRS housing in England. Within
the sector is much diversity, both in terms of supply and demand.
The majority of landlords in England are neither institutional
nor own large property portfolios. The overwhelming majority,
73%, of landlords are individuals or couples, and amongst this
group portfolios are small: 44% have only one property and a further
27% own between two and four properties.
5. Despite popular opinion (however misguided),
the PRS has proved to be popular and has grown substantially over
the last twenty years. In fact Dr Rugg has suggested that "..
the vast majority of individuals will have some experience of
renting privately at some stage in their lives".4 In terms
of size, the number of homes in the PRS has grown twice as much
as owner occupation in the period between 1988 and 2006, whilst
the social rented sector has seen a steady decline.5 Whilst the
Rugg review found that 40% of renters in the PRS had lived in
their current address for less than 12 months, it also found that
21% had been in their current property for over five years.6
BUY TO
LET
6. The growth in the private rented sector
has been partly down to the growth of the buy to let market, which
in the UK is currently worth around £120 billion.7 The Rugg
review has suggested that it represents 28% of the PRS.8
7. Rugg also concludes that "small-scale
landlordism does not necessarily mean financial instability"
with many landlords in a good financial position: most have low
loan-to-value ratios and many have unmortgaged properties. The
growth in buy-to-let mortgages does not mean a direct growth in
the number of landlords: in 2007, 46% of gross advances of buy-to-let
mortgages were remortgages: existing landlords were using buy-to-let
products to refinance their existing properties.
8. All the indicators seem to show that
the vast majority of buy-to-let investors have approached their
investment looking at the long term. The Association of Residential
Letting Agent's (ARLA) authoritative quarterly survey of the buy-to-let
market found that 78% of investors were not thinking of selling
any of their properties in the next 12 months.9 In fact, around
a third of investors responded that they are looking at how they
can strategically increase their portfolios.
9. Whilst there is every possibility that
the remaining 22% of buy to let investors are still retaining
a viable and sustainable letting business, there is likely to
be a distinct minority who, before the current credit crisis,
had been enticed in too the buy to let market by the opportunity
for short term property speculation. They may have over-levereged
their investments and will find a more challenging economic climate
has suddenly made their investments unsustainable.
EFFECT OF
THE CREDIT
CRUNCH ON
THE PRIVATE
RENTED SECTOR—GROWTH
OF "ACCIDENTAL"
LANDLORDS
10. As with all sectors of the housing market,
the situation is changing on a frequent basis and therefore the
information we provide here can only be a snapshot of the market
at the point of writing this submission.
11. There is anecdotal evidence of a growth
in people who have become "accidental" landlords by
letting out their homes rather than selling them. If an owner's
circumstances change and they are forced to move from their home
(for instance to take up a job elsewhere in the country) normally
they might sell their property. In the current market, rather
than sell for a low price or leave the property on the market
for a long time with few viewers, some owners will consider holding
onto their homes for the short to medium term until the market
picks up again.
12. This option might not be possible for
recent buyers who will have little equity in the property and
will therefore rely on selling in order to finance the purchase
of a new home elsewhere. But figures from the Survey of English
Housing indicate that 54% of all owner-occupiers will have owned
their properties for 10 years or longer (37% of owners who still
have a mortgage on the property) so there will be a substantial
group of owners who have sufficient equity to ride out a short-term
drop in values by renting out their homes.
13. We would urge such accidental landlords
either to join a landlords' association who can provide them with
the advice and help they need on their legal obligations as landlords,
or use a reputable letting agent to manage the property.
EFFECT OF
THE CREDIT
CRUNCH ON
THE PRIVATE
RENTED SECTOR—LEVEL
OF DEMAND
14. The difficulties in accessing finance
for people who would otherwise be first-time buyers has led to
a growth in demand for private rentals. The average tenant is
now staying in a property for 16.7 months—a slight increase
in tenancy length. There continues to be sustained demand from
other tenant groups—students, migrant workers, low-income
tenants, and other people whose lifestyles do not lend themselves
to the commitment of a mortgage. We believe that the private rented
sector will be well-placed overall to meet this demand since most
landlords look on property investment as a long-term endeavour.
GROWTH OF
RENTS IN
THE PRIVATE
RENTED SECTOR
15. There have been complaints recently
that the increased demand for private rentals has led to an increase
in rents in the private sector. We believe that such a link is
too simplistic. It is particularly important to note that private
landlords are also faced with an increase in costs—the withdrawal
of buy-to-let mortgages and increased interest rates on all sources
of finance will leave landlords with higher running costs. The
rent is the only way of recovering those costs.
16. While longer tenancies might make landlords
feel more secure in asking for a slightly higher rent, the growth
in the market from "accidental" landlords may leave
tenants able to shop around and this will limit the rents that
landlords will ask. For professional landlords it is more important
to have a property occupied and returning some rent rather than
left empty because the rent demanded was too high compared to
neighbouring properties.
RENT ARREARS
17. The current economic climate is likely
to have an affect on everyone's incomes. Although most renters
correctly see their rental payments as a priority, in these difficult
times many may face difficult financial decisions and may be tempted
to consider the rent an optional cost.
18. The difficulty for many landlords is
that the rent is the only way to recover their costs, particularly
that of the mortgage or other finance mechanism. Whilst a delay
in one month's rent may be absorbed by a landlord, non-payment,
chaotic or regular non-payment cannot be tolerated for long as
the finance lender will be expecting regular payments to be maintained
by the landlord who will be left considerably out-of-pocket. Tenants
who do not pay the rent on time increase the risk of mortgage
arrears and/or repossession by the lender.
19. So far there has been little evidence
of a growth in landlords seeking to evict tenants for non-payment
of rent. However, as the effects of the credit crunch bite and
if a recession begins (which will impact on tenants' incomes)
this situation may change (although we stress that this is not
inevitable). The committee needs to understand, however, that
landlords have no option but to seek possession for rent arrears
if private rented properties are to remain available rather than
being taken back by the lenders and sold.
REPOSSESSION OF
PRIVATE RENTED
PROPERTIES—THE
EFFECT ON
TENANTS AND
HOMELESSNESS
20. Figures from the Council of Mortgage
Lenders indicate that currently only 1.1% of buy-to-let mortgages
are in arrears of more than three months (compared to 1.33% in
the wider market). The rate of repossessions is the same as for
owner-occupied property: 0.16%.
21. If a mortgage lender takes possession
of a rented property with tenants in situ they have two options:
to evict the tenants in order to sell the property with vacant
possession or to take over the tenancy as the landlord. In the
current housing market the lenders may be more inclined to keep
the tenants on and recover the value of the property by selling
at a later date.
22. If the lender does wish to gain vacant
possession of the property it can do so in two ways (assuming
the tenants are on an assured shorthold tenancy). It can either
serve a section 21 notice which will give the tenants two months
notice to find another home before the lender goes to court for
a possession order. Alternatively the lender can serve a notice
under Section 8 of the Housing Act 1988, citing ground 2 for the
reason for possession: that the mortgage lender has taken over
possession of the property. In this case it is possible for the
court to allow possession without a notice period having been
given.
23. The Government's action to encourage
lenders to use repossession as a last resort (by moving forward
the Civil Justice Council's work on a pre-action protocol for
mortgage arrears) was both welcome and reasonable. Repossessed
properties represent a reduced asset and significant costs to
the lender who has to maintain an empty property till it can be
auctioned, usually at a significant reduction of its mortgage
value.
24. Whilst the Government's action was primarily
designed to protect owner occupiers, the pre-action protocol does
apply to buy to let mortgages. However, we believe that the particular
situation of landlords with tenants in situ present requires further
action—in particular the tenants may need greater notification
that the lenders are pursuing action against their landlord. The
timing of this, however, is crucial because we do not want to
see tenants moving out because of a misperception that they might
be about to lose their home when their rent payments are actually
enabling the landlord to continue to meet some or all of the borrowing
commitments.
SALE AND
RENT BACK
25. The recent restriction in the availability
of credit and deflationary trend being experienced in the residential
housing market has led to the development of a relatively new
sub-market within the housing market. This "sale and rent
back" (SRB) market generally focuses on individual owner
occupiers who for various reasons encounter financial difficulties
and are having difficulty servicing existing loans. Over the course
of the last decade these individuals have been able to take advantage
of escalating property values by further leveraging their homes
thus consolidating extraneous debts in the form of secured finance.
As the credit market has contracted home-owners have been unable
to continue this trend and therefore face financial difficulty.
Subsequent to the inflated value of residential property these
people often have sufficient equity in their homes to repay some
or all of their outstanding loans but are unable to release said
capital to do so. SRB firms essentially offer to purchase property
from owner-occupiers on the condition that the vendor may remain
resident as a private tenant.
26. Theoretically SRB is a very effective
means of releasing capital previously accrued in individuals'
homes whilst allowing them to remain part of the local community
without the need to seek other accommodation. It is also an effective
means for residential landlords to efficiently expand their portfolios
without experiencing potentially costly void periods. It is also
common for prices agreed in respect of SRB deals to be below market
value, reflecting the comparatively low demand for tenanted property
relative to that which has vacant possession.
27. In practice, whilst the majority of
landlords engaged in SRB have operated ethically and responsibly,
a small minority of property investors have highlighted the potential
for consumer detriment and as such the OFT has called for FSA
regulation. If this sector can be effectively "cleaned up"
to such an extent that consumer confidence is boosted SRB could
provide a significant measure to help prevent repossessions.
28. The NLA are intend on ensuring that
the private rented sector is in a position to provide a viable
solution to many potential repossessions and a means for responsible
and successful landlords to expand their portfolios in a sustainable
manner.
CONCLUSION
29. We hope that the committee will welcome
these comments on the private rented sector which is the nation's
third housing option and consider them alongside their deliberations
on Government policy and targets for owner-occupation and social
housing. Please do not hesitate to contact me if you have any
further queries.
REFERENCES
1 Communities and Local Government, Housing in
England 2006/2007 report, September 2008.
(http://www.communities.gov.uk/publications/corporate/statistics/housingengland2006-07)
2 Rugg, J and Rhodes, D, The Private Rented Sector:
its contribution and potential, Centre for Housing Studies, University
of York, October 2008. (http://www.york.ac.uk/inst/chp/Projects/PRSreview.htm)
3 Op. cit.
4 Op. cit.
5 Op. cit.
6 Op. cit.
7 CML, Buy to let market summary, CML Research,
2008. (http://www.cml.org.uk/cml/statistics)
8 Op. cit.
9 Need citation.
November 2008
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