Buy-to-let or letting to buy your first property often conjures up a logistical quandry. The property market generally has in recent years been plagued by doom and gloom which mirrored the peaks and troughs of the property market. Recent Buy To Let news in the UK reporting on some buy-to-let landlords struggling to pay their loans or even having their properties repossessed. However commentary that we are heading for a buy-to-let exodus seem somewhat premature. A recent report suggests ageing landlords, weary of shifting taxation and new regulations, are selling up. The upshot is that this will invariably lead to a shortage in rental property. The concerns over any shortage of rental property will invariably inflate rents.
Buy-to-let doubles share of market to 20% in 20 years
Homeownership has fallen from an all time high of 70.9% in 2003 to 63.9% in 2018. This decline coincided with the revival of the private rental buy-to-let sector/market. Due to increasing property prices, social rental housing (and privately owned) is common among the young and lower-income households. In 2013 UK home ownership was reported to have sunk to it’s lowest level since 1987. The buy to let sector approximately doubling it’s share from under 10% in the mid-1990s to nearly 20% in 2018. Buy to let is 25 years old and has ridden the wave of highs and lows since it’s inception in 1996.
No Fault evictions offers tenant security
One fundamental and underlying issue of the UK’s contemporaneous private rental sector is the absence of rent control. Since the Housing Act 1980, rents are typically set by the landlords/owners. In 2019 though, the government confirmed that it will put an end to “no fault” evictions, thus providing tenants with more stability, security and protection from frequent moves at short notice. Housing in the United Kingdom especially the capital and the South East is among the most cramped and expensive in the world. The purchase price per square metre of a “comparable apartment” in a prime central location London ranks second to Hong Kong. U.K. rents are also exceptionally high, again second only to Hong Kong.
30 years of Slum clearance displaces 3.66 million
Social housing is considered to have had it’s inception in 1919, the year when councils were required by law to provide housing. The original aim to provide a decent standard of accommodation for army recruits. However following the second world war social housing had very much arrived. Over one million homes were constructed under Labour in order to replace those destroyed during the war. Of these one million homes 80% were local authority (councils). While the boom and regeneration continued through the 1950’s by the end of the decade slum clearance had taken precedence. From 1955 to 1985 around 1.48 million homes were demolished. Thereafter the real effects of neglect (early 70’s) and lack of maintenance/investment became only too apparent.
Housing Associations hold more housing stock than Councils
By 2008 local authorities had been left behind by housing associations who were responsible for the majority of UK social housing. Housing associations are not for profit organizations providing low-cost housing. Since the ’70’s they have been responsible for a growing percentage of social housing within the United Kingdom. Housing Associations do receive public funding, are state regulated yet formally independent of the government. Rental housing provided by associations over the last decade has remained constant around 10%. Contrast this with the fall in local authority housing over the same term from almost 9% to below 7%.
Buy-to-let fuels first time buyer angst
It is indeed the shortage and/or shortfall in social housing compounded by the ‘First Time buyer’ experience. Asides from the supply and demand issue what also fuels the sense of competition is the property investor. This is more relevant in London and the South East. Tenant demand has increased unabated due to affordability, changes in society, the recent pandemic (employment patterns) and the massive influx of students. According to the Department of Communities and Local Government the number of properties (private rented sector) increased by 1,310,000 between 2007 and 2012. Notably compare this to buy-to-let mortgages rising by 420,000 representative of the strength of demand.
Buy-to-let loans declined 75% post recession
In 2010 a survey by the DCLG confirmed 44% of purchases by landlords were without a mortgage. Furthermore 9% of properties had been inherited. Following the financial meltdown of 2008/9 lenders cut back on funding and withdrew from high risk markets (High LTV & sub prime). It was anticipated that these restrictions would affect first time buyers the most. However it was, in fact, buy-to-let lending that fell more sharply. The amount of buy-to-let loans declined 75% from 2007 to 2010, this surpassing the 45% fall in first time buyer lending. While the housing market recovered, albeit slowly, following the recession alarm bells then began ringing over Brexit.
Brexit and Pandemic fail to dampen market
The Bank of England predicted in late 2018 a ‘no deal’ Brexit could see house prices fall back by as much as 35% in the 3 years to late 2021. This was largely averted due in part towards negative rates and the Stamp Duty Holiday. The Land Registry’s UK House Price Index is widely held as the most reliable barometer for UK property prices. This system works on a 2 month lag and can be read in conjunction with the ONS house price indices. The latest figures from the ONS currently available for August and confirms UK average house prices increased by 10.6%. The latest data from the Land Registry confirmed the average UK house price (August 2021) was ££264,244 .
Property prices rose by 2.9% in comparison to the previous month. Given that the housing market has come through a recession, Brexit and a pandemic in rude health it would suggest it remains one of the most robust investment vehicles.
4 Key Positives
On balance we should also factor in the following:
Households future rental figures
By 2032 the United Kingdom will see rental figures not seen since the early 1970’s with more than a third of households renting privately.
Population will drive demand further
UK population is estimated to grow from 66.4 million in 2018 to 69.4 million in Mid 2028. The population is expected to surpass 70 million in 10 years time (2031). The population in the UK as at 2020 was 67.22. This represents an average of approximately 255,000 births per annum.
Government Housing target falls well short
In 2015 the government had lofty ambitions to improve housing stock by 1 million by 2020. Even the government admitted in their white paper that the housing market was broken (Fixing our broken housing market (February 2017)). Furthermore to deliver half a million homes by the end of 2022. It’s own 2019 manifesto pledge was to “continue to increase the number of homes being built”.
However the grim statistics detailing the shortfall (Birmingham and Newcastle based property developer Stripe Homes) is as follows. We are now within a year of their 2022 deadline. The data confirms that barely 200,000 homes have been built (let alone 300,000). The figure was nearer in 2006 when 223,500 homes were built, a regression has therefore ensued. Following the recession of 2008 numbers again fell away and has not come close since. It was only in 2019 the 200k figure was surpassed with 214,000 homes delivered.
The research, based on historic trends, may well have seen 225,000 homes built in 2020. In real terms this is relative to an increase of only 1,500 homes in almost 15 years. Again using historic data post 2015 StripeHomes has analysed estimated time frames and the requirement to fulfil the 300,000 homes per year target. The data suggests that in 2021, 235,500 new homes will be delivered and thereafter 10,000 homes added to each year. However, at this rate of progress, the target of 300,000 will not be achieved until 2028.
Number of students in higher education
In 2019/20 there were an estimated 2.53 million students enrolled in higher education courses within the UK. This is the highest number in an 11 year period dating back to 2009/2010. There were 538,615 international students studying within the UK. 142,985 of these were EU residents and 395,630 were non-EU.
Onerous taxation, regulation and The Housing Act
Since March 2020 possession notice periods have been tweaked numerous times leading to some confusion over how landlords seek possession during the pandemic. Since 1 June 2021, the majority of possession notices have required the landlord to give a minimum of four months’ notice if they serve either a Section 21 or a Section 8 notice. Shorter notice periods are available if a section 8 notice has been served by the landlord.
Notice periods from 1 October 2021
From 1 October 2021, notice periods will return to their pre-pandemic levels.
2021 is the first full year where mortgage expenses can not be deducted from rental income. Alternatively landlords get a 20% tax credit on interest payments. To mitigate many landlords are setting up limited companies (19% corporation tax) as opposed to higher personal income tax rates. Hamptons research confirms a record 41,700 new buy-to-let ltd companies were formed in 2020, an increase of 23% from 2019.
Capital gains tax was increased (2020-2021) from £12,000 to £12,300. Capital gains rates are higher for landlords (28%) than for basic rate tax payers (18%)
Landlords need to keep their house in order
Tower Hamlets Council brought 57 successful prosecutions against rogue landlords and letting agents in the past 3 years as it strives to protect private renters. Courts issued fines of over £361,662, of which £115,461 were handed to landlords and £225,500 to letting agents. Twelve received civil penalties totalling £76,661 while 13 landlords were given a criminal caution. The largest single fine was £167,000 handed out to Sterling De Vere for imparting false information to clients. The estate agent was also successfully prosecuted for two other offences under the Housing Act 2004 and fined £16,200. The local authority covers all rented property in the Weavers, Whitechapel, Spitalfields and Banglatown areas.
The money is recovered using rent repayment orders (RROs). These orders mean up to 12 months’ rent can be reclaimed from landlords who fail to license properties when required to do so.