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Memorandum from 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
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
4. The recently published review of the PRS
conducted by Dr Julie Rugg[3]
has estimated that there are around 1.2m landlords providing PRS housing in
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 per cent of renters in the PRS had lived in their current address for less than twelve months, it also found that 21 per cent 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
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 per cent 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 per cent of investors were not thinking of selling any of their properties in the next twelve 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 per cent 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 3 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.
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. November 2008
[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, [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
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