12 minute read
Private rented sector review
The PRS will again show its resilience
Richard Rowntree
MD, Paragon Bank
While some speculate that the cost-ofliving crisis could see an upturn in tenant arrears, the health of the sector is underpinned by strong demand, something that is likely to remain amidst current economic conditions.
The colder, longer, darker nights that herald the onset of autumn match the mood of the nation as our economic worries grow. Businesses and consumers alike are facing challenging months ahead as the reality of energy costs and other inflationary pressures bite.
Like many sectors of the economy, landlords will face some pressures. Landlords are experiencing record levels of tenant demand, but it’s inevitable that tenant arrears will increase. Operating costs, such as maintenance, are also increasing.
However, I feel that the private rented sector (PRS) will again show its resilience. Yes, the headwinds are there, but the PRS has always demonstrated counter-cyclical and defensive qualities; in times of economic downturn, the sector has historically performed well.
We know that people largely prioritise paying housing costs, and that niceto-haves, such as TV subscriptions, takeaways, and holidays abroad, are the more likely casualties of tightening purse strings.
Much of the media coverage on the PRS has focused on hikes of 20 per cent and more in rents in certain markets, but it’s important to remember that these indices capture new tenancies and that the overall private rental inflation recorded by the government is a more modest three per cent.
Landlords, on the whole, try to work with their tenants to keep them in their homes. The record level of tenancies being renewed – “the big stay put,” as Propertymark called it – is testimony to this, and our research shows evidence of landlords working with tenants who may experience financial difficulties.
Even if we do see an increase in tenant arrears, lessons learned from the global financial crisis mean that mortgage underwriting is today more stringent, and landlords are not as highly geared as in the late noughties.
Analysis from Moneyfacts revealed that mortgage rates have risen more steeply in the residential market compared to buy-to-let following the Bank of England’s successive increases to the base interest rate.
This is because landlords present less risk to lenders owing to the ability of their properties to provide income. This is especially true of the professional end of the market, where larger portfolios mean that if one tenant falls behind with rent, other income is usually enough to cover the shortfall.
Our most recent research shows that landlord profitability has remained stable. Even though the research shows that landlord confidence has faltered, this is primarily in the outlook for the UK economy rather than the prospects for landlords’ own lettings businesses.
I think central to this outlook is strong demand for privately rented homes. Even though property purchase prices have started to cool, this is following the sharpest increases in over a decade. When we also consider that the pressure on household finances comes at a time when the cost of borrowing continues to rise, particularly in the residential space, we see that the ability to get on the property ladder will be hindered for many.
Many indices, including our own, show tenant demand at significantly higher levels than in recent years at a time when the supply of rental homes is constrained. It is estimated that around 10 per cent of landlords have left the sector in recent years, with legislative reforms and changes to Energy Performance Certificate (EPC) requirements potentially exacerbating the situation.
Fewer landlords mean reduced choice for tenants, and lower levels of supply amidst high demand will only serve to increase rents further, so it is our responsibility to do what we can to protect our customers.
Alongside campaigning for regulation that protects landlords as well as tenants, one way we can aid our customers is by minimising the impact of so-called payment shock.
Increases in the cost of funding for lenders have resulted in rate rises which means that customers reverting on to SVRs will see higher monthly repayments compared to those of their previous fixed-rate mortgage.
We’ve been proactive in trying to minimise this, advising customers to speak to their brokers about switching to a new product, something we now allow up to six months ahead of their fixed-rate mortgage maturing. Brokers can take a similar approach, and, by contacting clients and discussing their options well in advance, can help to save them money while generating business. M I
Government must take needs of PRS seriously
Steve Cox
chief commercial officer, Fleet Mortgages
Momentous days in UK politics seem to come much more frequently than they used to.
Consider this. Between 1979 and 2010, we had four prime ministers (Thatcher, Major, Blair, and Brown); in the past 12 years alone, we have also had four prime ministers (Cameron, May, Johnson, and Truss), with the last being announced on this very day of writing.
The next general election can take place no later than 28 January 2025, with wide anticipation that it will actually take place in 2024. That’s two years away, at which point we might have another prime minister in the role – or, as some are speculating, the previous prime minister might be back leading the Conservative party, in which case we might have a former prime minister back in the job.
It’s a head-scratcher, to be sure, but let’s look at the immediate future and see what the housing in-tray looks like for Prime Minister Truss, and how it might work out for the private rented sector, advisers, landlords, lenders, and all other stakeholders.
I think many would agree that the biggest issue facing the UK housing market currently is a lack of supply, and it is just as relevant to the PRS as it is to owner occupation. In fact, there is a very sound argument to suggest that a lack of supply in the PRS needs to be addressed just as vigorously as, and perhaps even more so than, it does for those seeking to purchase.
Much has been talked about over the last decade regarding how politics has shaped the PRS and how successive governments have sought to ‘professionalise’ the landlord community.
In terms of improving the quality of housing, getting rid of rogue landlords, and providing tenants with increased rights – few would disagree with focusing resources on this. However, the government has sought to do this by increasing the costs of being a landlord, cutting the profitability of property ownership, increasing taxes, and making it more difficult to purchase investment properties.
What this has effectively done is hit good landlords as well as bad. In fact, you might also argue that the rogues have just got on with being rogues. They operated outside the rules before they were introduced, and have operated outside them as those rules increased.
Instead, the ‘unforeseen consequences’ have been that good landlords have decided that it is too expensive to be active in this sector and have exited. The supply of PRS properties has therefore fallen, but the need for this type of housing has not gone away; indeed, it has been heightened.
People who couldn’t afford to buy have not somehow magically gained the finances to be able to buy. Firsttime buyers have not bought every single ex-PRS property that came to market. Instead, tenant demand has continued to rise – and not just in the major cities and towns, but also in more rural settings.
As supply has fallen and demand has risen, rents have naturally increased, and we have now reached a point where – during a period of significant inflation – that cost is significant. Could this have been avoided? Might this next iteration of the government make some significant changes that help drive more supply into the rental sector?
Although it is certainly needed, moves to make it easier for landlords to buy more properties may be deemed politically unpopular. The stamp duty holiday showed how landlords might react if provided with this opportunity, but, again, the narrative of first-time buyer versus landlord is so embedded that any similar move in the future could come with too much criticism for a new PM to bear.
However, a solution is going to be needed. The PRS needs to be treated as the equal of home ownership. Millions of people depend upon it, millions want to rent, millions have no means of purchasing, millions need a healthy supply to choose from – otherwise, you actually inflate the chances of more rogues preying on people who are desperate and vulnerable.
The announcement earlier in the year that housing associations would be able to sell off their properties to tenants is likely to put even more pressure on the PRS to step up. Again, will this policy be jettisoned? It can’t really work unless there is a concerted effort to improve supply within the PRS.
The good news for the government here is that landlords are acquisitive, they have ambitions to grow portfolios, and they continue to do so even when many factors work against them. Lenders, too, are willing and able to fund landlords’ ambitions.
However, the growth in portfolios isn’t matching the demand, and until we can find a closer equilibrium, rents are going to continue to rise – especially as mortgage and other costs rise – putting more tenants under pressure.
It is a big in-box for a new PM/ Levelling Up secretary/housing minister to take on, but the fact is the PRS needs as much attention as home ownership. Failure to act here will merely exacerbate the issue. The time for action is now. M I
We can help make another rule change a little less taxing
Jane Simpson
MD, TMBC
Ashift to digital tax submissions seems sensible and overdue in our modern age, but landlords appear unaware of the new requirements. Although the responsibility of educating landlords on regulation shouldn’t fall solely to brokers, raising awareness of such changes can help both parties.
The white paper “A fairer private rented sector” and a proposed overhaul of EPC requirements have been the most talked-about aspects of government policy of late – understandably so, with both set to usher in wholesale changes across the private rented sector (PRS). In the shadow of these regulatory updates, a mandated switch to a fully digital system for income tax self-assessment (ITSA) has flown somewhat under the radar.
Although the transition to what has been labelled ‘making tax digital’ (MTD) will not have the same impact as the broader reforms and move to a more sustainable PRS, the new tax system will definitely bring about considerable changes in the way landlords work.
The government says that MTD supports businesses through their digitalisation journey and provides a digital service that many have come to expect in their everyday lives.
The changes will apply to taxpayers with business and/or property income over £10,000 a year, including landlords. With rents at their current levels, very few landlords will fail to reach this threshold, and it is likely to be something that a lot of landlord customers will need to be aware of, so any homework that brokers do will come in handy.
The new system could really help brokers when collecting income details from landlords, too.
Using MTD for ITSA will require landlords to keep digital records of their income and expenditure, with quarterly summaries and an endof-year report submitted to HMRC using MTD-compatible software.
This means no more waiting until January of the following year to get all the information together and, having viewed some of the digital platforms available to landlords, I’m sure this will make life easier for them in the long run.
Customers will have the ability to track individual properties, take photos of receipts, use open banking to track rents, and link into HMRC, making the submission semiautomated. Some of the platforms can be more than just tax management tools thanks to the option to track things like AST and mortgage renewal dates or view EPCs.
As a result, the impact of this on the mortgage world could be very positive.
Currently, SA302s and tax returns are generally needed to prove income, which means we are reliant on landlords submitting end-of-year returns, and the picture we get isn’t always accurate and up to date.
The shift to digital should make it much easier for landlords to prove their income, or even show an interim picture within a tax year, helping underwriters assess cases based on the most up to date information. This could be the beginning of a move toward lenders accepting information stored in digital tax apps, which would make pulling together all the necessary documentation much easier and really streamline the application process.
The transition was initially scheduled for April 2023, but the government has extended the deadline by a year in recognition of “the challenges faced by many businesses as the country emerges from the pandemic over the past year.” This means that tax returns covering the 2023–24 financial year will need to be submitted digitally – so landlords will need to be ready from April next year.
All the transformation seen across the sector currently means it would be almost impossible for brokers to be experts in all aspects of regulation, and it is unfair to expect financial advisors to bear responsibility for ensuring landlords are compliant. Despite this, it can be beneficial for brokers to have an awareness of what is on the horizon. Even simply notifying customers of any changes and signposting them to more information can minimise the risk of them being caught out. This is something for which I’m sure landlords will be grateful, and it can help strengthen relationships and position brokers as people with their fingers firmly on the pulse. M I
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