Communities and Local Government CommitteeWritten evidence submitted by the Paragon Group of Companies

Executive Summary

Private rental is the only growing tenure type in the UK. It now accounts for 17%, or 3.62 million, of all households and constitutes a similar proportion of homes to the social rented sector.

It is already the dominant housing choice with transient sectors including students, economic migrants and those who relocate for employment purposes and is becoming increasingly popular for families and older age groups.

Significant improvements have occurred in the private rented sector (PRS) in recent years, many of which have been driven by buy-to-let landlords who take a professional approach to managing their properties, and this is reflected in tenants’ favourable opinions of the PRS.

Private landlords are already heavily regulated and sufficient powers already exist to take action against rogue landlords. At present, there are over 50 Acts of Parliament and 70 sets of regulations governing the PRS.

The critical problem that underlies concerns about the sector is a lack of supply rather than adequate regulation. The PRS is operating at capacity resulting in limited availability and competition in the sector.

Overly burdensome, top-down regulation such as rent controls would only serve to deter investment by private landlords, thus exacerbating the problem of supply.

It is debatable whether longer tenancies are desirable or necessary. Flexibility is one of the main appeals of the sector while many tenants can already obtain longer agreements from their landlords.

1. About the Paragon Group of Companies

1.1 Paragon is the leading independent provider of mortgages to residential property investors in the UK private rented sector through our specialist brands, Paragon Mortgages and Mortgage Trust. We are proud to hold a leadership position in the Council of Mortgage Lenders, and we are active members of the Intermediary Mortgage Lenders Association, the Association of Residential Letting Agents’ lenders panel, the National Landlords Association and the Finance & Leasing Association. We are also members of the Treasury’s Home Finance Forum.

1.2 We launched our first buy-to-let mortgages in 1995 and have increasingly focused our business on professional landlords who have proven experience in purchasing and letting residential rental property. This focus is reflected in the excellent performance of the Group’s buy-to-let mortgage assets and our reputation as a leading voice in the sector. We currently have approximately 40,000 landlord customers and manage over £8.2 billion of buy-to-let loan assets.

1.3 In addition, we operate a specialist loan servicing business for third parties through our Moorgate Loan Servicing brand. The division offers a professional, flexible, efficient and cost effective proposition to lender clients to help them manage their loan assets effectively. Clients include building societies, investment banks, specialist lenders, commercial banks and other financial services companies.

2. Overview: The Private Rented Sector

2.1 Private rental is the only growing tenure type in the UK. It now accounts for 17%, or 3.62 million, of all households and over the last 30 years the difference between the number of private renters and social renters has narrowed from over three million to now be roughly equal (3.62 million and 3.83 million households respectively).

2.2 The PRS is already the dominant housing choice for transient sectors including students, economic migrants and those who relocate for employment purposes. Long-term demand in the PRS is forecast to rise, fuelled by major socio-economic factors and a contraction in the owner-occupier and social housing tenures. Consequently, there has been a rise in the number of non-traditional private renters including families and older age groups; a survey of landlords shows that 51% of tenants are categorised as families with children.

2.3 Despite the growth of the sector, it still only accounts for a relatively small proportion of the total housing market when compared to other European countries such as Germany where 47% of homes are located within the PRS.

2.4 Private landlords are the backbone of the PRS with 71% of properties in the PRS owned by individual landlords. The remaining 29% is comprised of institutions and alternative providers, for example employers that offer accommodation to staff.

2.5 Individual landlords dominate in almost all countries. In France, an overwhelming 95.5% of landlords are individuals or couples. In Ireland, small investors who own one or two properties make up 90% of private landlords. Even in Switzerland, private individual landlords are in the majority.

2.6 While there is no such thing as a typical landlord, the average UK landlord is just over 50 years old, is financially astute, has been letting property for 12 years and holds an average of eight properties. The idea that the PRS is dominated by novice landlords is a myth; most individual landlords consider themselves to be professional investors and nine out of ten have more than six years’ experience in renting out property.

3. Standards in the PRS

3.1 Standards in the sector are perhaps best judged by tenants’ experiences. The latest statistics from the Department of Communities and Local Government show that 84% of private renters are satisfied with their accommodation, compared to 80% in the social sector.

3.2 The PRS has also seen rapid improvements in energy efficiency and the number of properties meeting the decent homes standard even as the size of the sector continues to expand (according to the latest English Housing Survey). This suggests that the vast majority of private landlords are committed to improving their property portfolios and investing in high quality housing stock.

3.3 The main factors that determine overall standards in the PRS are supply and demand. Currently, the PRS’ capacity is being stretched to the limit and housing supply is failing to meet demand. The UK population is expected to grow to 71.6 million by 2033 with an estimated 290,000 new homes required each year to satisfy that demand. Only 114,160 homes were built in England in 2011. Such pressures on available housing inevitably lead to higher prices and a lack of choice which in turn means that there is demand for some properties that there would otherwise not be.

3.4 The most effective method of improving standards in the PRS, or indeed in any housing sector, is to increase the supply of stock and to get the whole housing market working well again. This means enabling the expansion of the PRS rather than limiting investment with substantial regulatory hurdles.

4. Rents and Rent Controls

4.1 Rents are perceived to be escalating rapidly, especially in South East England because of strong tenant demand and constraints on housing capacity. However, our regular survey of landlords showed that only a fifth reported an increase in rent income in the third quarter of 2012. The vast majority (68%) reported the same income.

4.2 Consideration also needs to be given to the yield that landlords obtain from their property as this gives a more accurate view of how the market is performing for both landlords and tenants. Our survey findings show that the average nationwide yield—the property portfolio’s annual rental income as a percentage of its total value—has remained approximately 6% since Q1 2011. There are a number of possible causes but the overall picture is clearly not one where landlords are “profiteering” especially when interest on the mortgage finance is taken into account.

4.3 Survey data also shows that yields in central London (7.1%) over the last quarter were only the third highest in the country after the East of England (7.5%) and the North East (7.2%).

4.4 Rent controls have been suggested by some as a means of curbing high rents but there is clear evidence from the UK and abroad to support the consensus among economists that a ceiling on rents reduces the quality and quantity of housing. To quote the eminent economist Paul Krugmann (NY Times, 2000): “the analysis of rent control is among the best-understood issues in all of economics, and—among economists, anyway—one of the least controversial”; it could be very damaging for tenants, landlords and the UK’s housing market and associated sectors if this consensus is ignored at a time when access to mortgage finance is constrained and the social housing sector is in decline.

5. Regulation of Landlords, Lettings Agents and Managing Agents

5.1 It would be inaccurate to portray the PRS as an unregulated sector as there are 50 Acts of Parliament and 70 sets of regulations that apply to it, a fact noted by the Government’s Red Tape Challenge. Local authorities already have sufficient powers to tackle rogue landlords, although evidence suggests that the powers are not currently utilised to their fullest.

5.2 The critical issue for decisions on regulation is how they might affect the supply and demand dynamic in the market. Top-down regulation, including mandatory registration or licensing, will only serve to deter investors at a time when more and not less investment is needed. Government should focus on ensuring that the current legislative framework is delivered effectively.

5.3 The use and promotion of accreditation schemes can help to improve standards without imposing unnecessary burdens on private landlords. There are a number of schemes already available: many of our customers are already accredited members of bodies such as the National Landlord Association and in December 2012 the Mayor of London launched a London Rental Standard that is aimed at driving higher standards.

5.4 While private landlords are well regulated there is a regulatory gap with lettings and management agencies. At present lettings agents are not required to abide by a government, ombudsman or regulatory body code of practice. Tightening up this area may help to restrict the number of tenants renting from rogue landlords but it will also address the fact that many tenants’ problems come from sub-par management of problems once they are in the property.

6. Tenancy Agreements

6.1 There have been calls for longer tenancies to be rolled out across the PRS to supersede the existing assured short-hold tenancy agreements. It is difficult to see how this can be done without overly bureaucratic top-down directives but we should also consider whether it is desirable or necessary in the first place.

6.2 Longer tenancies may suit some tenants and landlords. However, one of the main reasons that people choose the PRS is for the flexibility that it offers. Caution must be taken before encouraging tenants and landlords to accept longer tenancies where they are not specifically desired. Locking in a set rent might be attractive initially but parallels such as saving or loan products show that there would have to be penalties if either party wished to break the terms of the agreement and in the vast majority of cases it is the tenant that wishes to move on from the property.

6.3 There is also the question of whether it is necessary. Our research shows that on average tenants stay in a property for 2.5 years and one in ten stay longer than five years. This suggests that the market is perfectly capable of providing longer term arrangements where they are wanted without any government intervention.

7. Local Authority Housing Duty and the PRS

7.1 Local authorities’ ability to discharge their housing duty to the private rented sector, and the general decline in size of the social sector, will place additional pressures on the PRS. As noted above, supply in the sector is already being squeezed and the PRS must continue to expand if it is to keep pace with demand. Investment in the sector should be encouraged and interventions that cause that investment to slow or disappear should be resisted.

7.2 There are also concerns among the landlord community over the impact of the DWP’s decision to end direct payments. We note the findings of the DWP’s recent pilot project where levels of payments by tenants on the projects varied from 88% to 97% and 316 tenants were switched back to payments to their landlords, and we urge the Government to keep this issue under close scrutiny.

January 2013

Prepared 16th July 2013