The Perfect Rental Storm
May 21, 2018
Over the past two decades, the rental market has suffered a reputational issue thanks to an increase in scare stories around slum landlords, ‘profiteering’ second-home owners and a preoccupation with the trials of the London rental market.
However, new reports reveal the national demand from tenants for private rental properties is increasing as a reduction in new properties for rent is forcing prospective tenants to bid against one another in sealed bids and pushing up rental prices to record levels. This is echoed by ARLA Propertymark who revealed that 59% of lettings agents say that they expect rents to rise in 2018 compared with just 19% who expect them to fall.
It therefore feels this is the perfect time to explore how we reached this reputational impasse and why we must now acknowledge that the rental market provides an essential, valuable service. We need to question whether our nation’s obsession with owning property might be causing unnecessary stress and unhappiness to generations of young people unable to afford the property ladder. Leading financial journalist Charlotte Burns, in a Huffington Post article, proclaims that “We need to stop telling young people that renting is awful and buying is the only option”. But after years of being spoon-fed the reasons why we need to buy, it’s a challenge to re-shape thinking around renting. However, re-thinking renting could have far wider, positive implications. It could help to support the wider residential market in the longer-term such as innovative rental co-operatives, new iterations of housing associations, and stronger landlord-tenant relationships where renting becomes the preferred norm rather than the second-choice.
Storm #1: An Unhealthy National Obsession
Much of our obsession with home ownership is driven by our cultural desire to create wealth from the earliest age possible. Or that’s what we’ve had drummed into us. However, according to new research, renters can actually make their money grow faster than home owners if planned correctly says a recent US study by Florida Atlantic University, Florida International University, and the University of Wyoming. And if we compare ourselves to our European neighbours, Germany has the lowest rate of home ownership in the European Union where rents take up a modest 23 per cent of net pay and have done for the last 30 years. In fact, since 1957, German apartment sizes have more than doubled per inhabitant. In Paris, rent caps peg rents to the median income protecting the city’s long-term rental system.
The Resolution Foundation proves the growing importance of the private rented sector to our country’s younger generation predicting that over 40% of people in Britain born between 1980 and 1996 will be renting their homes by the age of 30. It might be too late for Generation X and the upper part of the millennials, but how can we help future generations re-think the way they live embracing ‘generation rent’ with a positive slant rather than believing it to be a sign of weakness or a fallback position?
Storm #2: Private Landlord Exodus
Landlords are at the root of the current restriction in the supply of private residential properties. They just can’t seem to catch a break which is why we have ended up in a potentially dangerous situation where buy-to-let landlords are trying to exit the sector at a time when they are needed most. The National Landlords Association stated just this week that approximately 380,000 landlords could flood the sales market with a blend of flats and terraced houses putting tenants’ homes at risk, while causing significant disruption to the lives of longer-term tenants such as increased distances from schools, places of work and communities.
The Royal Institution of Chartered Surveyors (RICS) recently revealed that, following policy changes such as increases in stamp duty, more landlords are expected to leave than join the market in 2018. RICS members believe that, in consequence, rents are likely to rise by three per cent a year for the next five years, outstripping rises in house prices. It’s not just stamp duty; landlords have faced increasing pressures from mounting regulation and continued reductions in cash flow, largely due to Section 24 of the Finance Act that removes the landlord’s ability to deduct the legitimate expense of mortgage interest, so many landlords with debt have to pay more income tax. The predicted great landlord ‘sell-off’ by the National Landlord Association poses additional dilemmas for landlords wanting to dispose of properties. The cost of b-t-l property shedding is an expensive and time-consuming task. Landlords are subject to capital gains tax implications, the complexity and high costs of conveyancing, and an unpredictable lack of rental income if tenants are evicted under Section 21 or choose to leave once they know the property is going on the market.
Storm #3: Landlords and Tenants
It’s a myth to believe that every landlord-tenant relationship is fraught with anxiety. There are many many happy landlord-tenant relationships that have existed as such for several years. However, the increasing pressure on landlords to sell is going to put relationships to the test. If the 19% of landlords predicted to sell-up one of their buy-to-let properties in the near future actually happens, then the majority will sell in the traditional way using Section 21 to evict tenants or waiting until the tenancy expires so that the property is available to purchase as seen and with vacant possession. That’s a considerable number of displaced tenants on the street or forced to move out of their property only to be faced with finding a smaller property – perhaps in an area that they don’t want to re-locate to but forced to through price rises and limited stock. Those properties will also be vacant for approximately 10 – 16 weeks while the sales process completes meaning less rental property and more people looking for homes.
Storm #4: Rental Prices
The supply-demand imbalance is placing upward pressure on rental values according to JLL Residential who reported that they have seen a 57% increase in applicant registrations and 40% rise in offers made from those looking to rent. If this trend is to continue, it could create a world of misery for new and existing tenants who, without the option of buying property are now forced to fight over rental accommodation that might not even be in their ballpark price area or preferred geographical region and settling for smaller sized properties. Just take a look at what has happened in New Zealand recently where in the major cities of Auckland and Wellington they all but ran out of rental properties causing mayhem for renters and predicted rental price hikes to crazy levels.
A Collaborative Solution
Our view is that the baby is currently being thrown out with the bathwater and we need a more collaborative solution to address the issue. The Home Office has been under mounting pressure from opposition parties for a considerable amount of time to do something about the housing crisis. However, their response has been to focus on housebuilding and restrict the landlord sector in a bid to clean up the few who give the majority a bad name or remove profit from the equation. Conversely it is the private residential sector that will provide the solution for today’s and tomorrow’s tenants. They could also be part of a progressive solution if innovative collaboration is handled effectively. What is needed is a holistic view that embraces and values landlords in order to create a more harmonious and symbiotic relationship including:
- The national mind-set – we have to work with the younger generation to give them permission to rent. It provides them with flexibility for their earlier careers allowing them to move through some of the most significant stages in their life with choice; from singles to couples to families and a variety of locations. If it’s true that a house is no longer the best way of creating wealth, they need alternative education to help them realise how else they can put their money to work.
- The landlord sector– there are groups and bodies already working hard to inject professionalism into the sector, and they need more support and public awareness including ARLA, Guild of Residential Landlords and National Landlords Association. The government would do well to listen to their views, advice and their foresight in a climate when positive change can be co-created through collaboration rather than imposed legislation and financial restrictions.
- Tenant Choice – by encouraging landlords and developers to deliver more housing stock, we create an environment where renters have more choice of larger, better located properties. A climate where tenants feel pride in their new home and a revised culture that is nurtured to reflect that of the European rental market could benefit everyone.
- Changing ways of working – we are in a changing world where ‘jobs for life’ are confined to the history books; a UK worker will change employer every five years on average according to LV. That’s potentially four to five different geographical locations - potentially including oversees in today’s global market. Renting provides greater flexibility and reduces the stress of having to cover a mortgage and other expenses if required. According to JLL, tenants have more flexibility around where and the type of property they rent, so if the shoe doesn’t fit, they can easily move.
- Keeping tenants in place - New ways of doing business are starting to change how landlords and tenants exist together in more harmonious circumstances driven largely by technology. For example, buy-to-let online marketplaces such as Vesta Property can provide landlords with a new way of property shedding that is designed to keep the tenants in place while making the selling and buying process cheaper, more streamlined and efficient. This enables longer-standing tenants to remain in their much-loved homes in the location they originally selected to suit their lifestyle.
Renting is here to stay and trying to artificially correct the home-buyers’ market by blindsiding landlords will not change this situation. Pursuing this route ignores the facts and the fundamentals of what’s happening in the growing private rented sector. Maybe it’s time to admit that times have changed and the ‘glory days’ of home ownership are a distorted memory. We would do well to learn from our European neighbours when it comes to the renting culture, and at a time when we are increasingly global as individuals and as a nation, broaden our horizons on how we create wealth for our future without relying on property to do this for us. It seems as though only a huge correction in the economy will sink house prices to a point where first-time buyers are able to flood the market. And disruption of this magnitude will ensure that we are all losers.
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