tain stoc - lse home

Taking stockKath Scanlon, Christine Whitehead and Peter Williams. LSE London.

Understanding the effects of recent policy measures on the private rented sector and Buy-to-Let

EXECUTIVE SUMMARY

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1. Thisreportclarifiestheroleoftheprivaterentedsector(PRS)intheUKandthecontributionmadetoitbytheBuy-to-Letsubsector.ItexploresrecentchangesingovernmentpolicyandhowtheymightaffectthePRS,andmakessuggestionsabouttherolethesectormightbeexpectedtoplayinthefuture.

The Private Rented Sector now 2. The size of the PRS hasmore than doubled in the last 15 years and now accounts for almost one-fifth of all

dwellingsintheUK.Despitepolicyinitiativestoencourageinstitutionalinvestmentthebulkoflandlordsareprivateindividuals,manyowningjustoneunit.Dataaboutlandlordsandtheirfinancialmodelsarepatchyandcontradictory,althoughit isclearthatthosewhomakeaconsciousdecisiontoinvest(andnotalldo)oftendosoasaformof pensionprovision.

3. ThelargestnumbersandhighestproportionsofPRShousingarefoundincentralcitiesandespeciallyinLondon.Tenantsaremorelikelytobeyoung,workingand/ormigrants,althoughincreasingnumbersoffamilieswithchildrenareinthePRS.Largenumbersoflowincomehouseholdsliveinthesector,includingstudentsandhouseholdswhoareoutsidethelabourforceaswellaslowpaidworkers.OveraquarterofPRStenantsareinreceiptoftheLocalHousingAllowance.

4. Atthemomentlandlordsaretaxedattheirmarginaltaxrateontheirrentalincomenetofexpenses,whichincludesinterestpaidonBuy-to-Letloansaswellaswear-and-tearforfurnishedaccommodation.TheUKtreatslandlordsfortaxpurposesratherlessfavourablythanmanyotherdevelopedcountriesintwoways:itdoesnotallowdepreciationnorcanrental lossesbeoffsetagainstothertypesof income.However, therehavebeensignificanttaxchangesrecentlywhichmaymateriallyimpactinvestmentlevelsinthePRSinthefuture.

UK housing tenures 1980-2013

Private rented Social rentedOwner occupied

1981 2013201120092007200520032001199919971995199319911989198719851983

Source:DCLGLiveTable101

The PRS now accounts for almost one-fifth of all dwellings in the UK

Growth and change 5. ThePRShadbeenindeclinefornearlyacenturywhenitbegantogrowagainveryslowlyfromaround1990.The

necessarypreconditionwasthe1988HousingActwhichputinplacefullderegulationofrentsandtenancies.Thedownturninthehousingmarketandhomeownershiparound1990alsohadsomeeffect.

6. Significantexpansiondidnotoccuruntilthemid-1990sandcanbedatedtoaroundtheintroductionoftheBuy-to-Letmortgageinthemid-1990s.Supplygrewmainlythroughthetransferofdwellingsfrombothowner-occupationandsocialhousing(mainlyviaRighttoBuy),ratherthanthroughnewbuild.Some,althoughbynomeansalltheseadditionalPRSdwellings,werefundedbythenewmortgages.Noneofthegovernmentschemesintendedtoboostinstitutionalinvestmenthadamajorimpactonthesectorasawhole,despitepocketsofinterest.

7. Especiallysincetheturnofthecentury,demandhasgrownrapidly,reflectingtheincreaseinthe‘naturalmarket’forPRS (students,migrants, itinerantprofessionalsandyoungerpeoplemoregenerally).But increaseddemandhasalsocomefromreducedaccesstoowner-occupation(mainlyforaffordabilityanddepositreasons);increasedeconomicuncertainty,especiallyinthelabourmarket;higherdebtamongpotentialfirst-timebuyers;theimpactoftheglobalfinancialmarket;andworseningaccesstosocialrentingforhouseholdswhoarenotinpriorityneed.

8. GiventheincreasesinpopulationandhouseholdsthatareprojectedintheUK,itisalmostcertainthatthedemandforprivatelyrentedaccommodationwillcontinuetogrowoverthenextdecades.TomeetthisdemandthereneedstobecontinuedgrowthininvestmentinthePRS.Assessingtheeffectsofpolicychangerequiresanunderstandingnotjustofdemandbutalsoofthevarioustypesoflandlordinvolvedandtheirdifferentincentivestoinvestinthesector.Theevidencebase is thin. Itsuggeststhatamongprivate landlords,whileBuy-to-Let funding is themostcommonacquisitionmodel,asignificantproportionoflandlordsbuytheirpropertiesoutrightoruseothersourcesoffunding,sometimesinadditiontoBuy-to-Letmortgages.

9. Buy-to-Let lending increased rapidly from its introduction until the financial crisis of 2008/9. In the periodimmediatelybeforethatcrisistherewerelargeincreasesnotonlyintotallendingbutalsointheproportionofBuy-to-Letfinancewhichwasintheformofre-mortgaging.Thiswasalsothecaseformortgagesforhousepurchase.Afterthecrisismortgagecreditofalltypeswasinshortsupplyandotherformsoffinance-includinginparticularowners’equity-supportedtheexpansionofthesector.Buy-to-Letfundinghasnowrevived(althoughnotasmuchasthatforfirst-timebuyers)andre-mortgaginggrewrapidlyin2015,possiblyreflectingdebtmanagementwithin growingportfolios.

New UK Buy-to-Let loans for purchase and re-mortgaging and change in stock of PRS dwellings, 2002-2013

For purchase For re-mortgage Change in PRS stockTotal new loans

2002 2015201420132012201120102009200820072006200520042003

Source:CMLTableMM17andDCLGLiveTable101

Addressing the government’s concerns 10. Overthelastyearthegovernmenthasintroducedanumberofpolicychangesspecifictothesector.Theyinclude

anadditionalpropertyStampDuty(SDLT),areductioninthewearandtearallowancefor landlordsoffurnishedtenanciesandphasedchangesintherateatwhichtaxreliefcanbeclaimedonmortgageinterest,plusamodificationinhowtaxliabilityisassessedandwhencapitalgainsmustbepaid.

11. ThegovernmenthasassertedthatBuy-to-Letinvestorscompeteunfairlywithfirst-timebuyers.Therehasalsobeenalong-termpreferenceamongpolicymakersforarentedsectorownedandmanagedbyinstitutionsratherthanprivateindividualsasameansofbothprovidingfinanceandofprofessionalisingthesector.

12. TheauthoritiesareconcernedaboutthestronggrowthoftheBuy-to-Letmarket,whichisnotregulatedbytheFCA,althoughthedataonthismarketarelimited.Theworrythatlandlordsmightsellpropertiesduringacrisisdoesnotreflecttheexperiencetodateoflandlords’behaviour–duringthelastfinancialcrisiswedidnotseeamasssell-offofproperty.TheconcernsoftheBankofEngland,whowillverylikelybegrantedpowersovertheBuy-to-Letmarket,seemoverdone.

13. WhilethereisclearlysomecompetitionbetweendemandfromBuy-to-Letlandlordsandfirst-timebuyers,theextentofsuchcompetitionvariesenormouslyacross thecountryaswellasbetweenproperty types.The (very limited)researchintodirectcompetitionbetweeninvestorsandputativeowner-occupiershasfoundthatnationwideonlyaminorityofsalesto landlords involvedbidsfrombothtypesofbuyer. Inmanymarketsthere isnomeaningfulcompetition and first-time buyers on modest incomes can readily afford homes. In others—mainly in centralcityareasand innerLondon inparticular—there isstrongdemandfromboth landlordsandprospectiveowner-occupiersespeciallyforoneandtwo-bedflats;elsewherethereislittleevidenceofdirectcompetitionbetweenthesetwoformsofhousingtenure.

14. EveryyearsinceBuy-to-Letmortgageswereintroducedmoreloanshavegonetofirst-timebuyersthanBuy-to-Letinvestorsinallregions,includingLondon.Landlordscanaccessinterest-onlymortgageswhicharemoredifficultforowner-occupierstoobtain.LTVsforinvestorsarelowerthanforfirst-timebuyersandthetermsforwhichtheyareissuedareshorter.Moreover,higherLTVloansforfirst-timebuyersarenowmorecommonandthereisamodestrevivalintheinterest-onlyloanmarket,aswellasafairlysignificantincreaseindemandforlong-termmortgageswhich,inpartseektocreateasyntheticinterest-onlyrepaymentprofile.

15. Theargumentsaboutlandlordbehaviourinadownturnhavebeenbasedonlimitedsurveyevidenceandapparentlywithoutlookingbackatpreviousevents.TheNMGsurveyusedbytheBankofEnglandisageneralhouseholdsurveywhichappearstoincludeadisproportionatenumberofyoungerlandlords.Inmoretargetedsurveyslandlordstendtosaytheyaremorelikelytobuythantosell,whateverthestateofthemarket.InthatsensewejudgethelikelylandlordcontributiontofinancialinstabilityinadownturntobelessthansuggestedbytheBankandthegovernment.Similarly, although institutional investment will help boost the sector and potentially assist professionalisationandhigherstandards, it is importantnottooverstatethecontribution itmightmakerelativetothescaleof the sectoroverall.

The worry that landlords might sell properties during a crisis does not reflect the experience to date of landlords’ behaviour – during the last financial crisis we did not see a mass sell-off of property. The concerns of the Bank of England, who will very likely be granted powers over the Buy-to-Let market, seem overdone.

Changing the landscape for Buy-to-Let 16. IncreasesinSDLTcanbeexpectedtoreducelandlordpurchasesandturnover.Mortgagetaxchangeswillreduce

returnsformanylandlordsbutarenotexpectedtocausethemtosellupenmasse.Decisionsabouttheroleofresidentialpropertyinoverallportfolioswilldependonreturnsonotherassetclasses,andanyrebalancingwilltakeplaceoveranumberofyears.

17. ThefutureofthePRSwillbedeterminednotjustbyfiscalandregulatorymeasuresbutratherbymanyotherfactors,includingthepromotionofhomeownership(drawinginsomepotentialtenants)andtherelativereturnsfromotherinvestmentsaswellasincreasingpopulationandrealincomegrowth.

18. ThemortgagetaxchangesannouncedwillmostlyimpactprivateindividualinvestorswithsmallportfoliosandBuy-to-Letloans.Thosewhocurrentlypayhigheroradditionalratetaxwillclearlybeaffected.Thewaythatthetaxiscalculatedalsomeanssomelandlordswillbepushedintohighertaxratesand/orloseincome-relatedbenefits.

19. Together thechanges tomortgagetaxreliefandSDLT (andthereduction incapitalgains tax forother typesofinvestmentannouncedintheBudget)willmodifytheincentivestructureforlandlordsbutthescaleoftheimpactonlandlordbehaviourisunclear.Theevidencesuggeststhat,inadditiontonormalturnover,somewillsellanumberorevenalloftheirproperties;somewillreducegearing;somewillpostponeorforegofurtherinvestmentinthesector.Butothersmayfeel it isagoodtimetoenterthemarketorexpandportfoliosasotherlandlordssell.Sothemagnitudeandtimingoftheseimpacts isunknown.Moreover,theeffectonsupplywilldependasmuchonwidermarketandeconomicconditions,includingreturnsavailableelsewhere,asonspecificchangestothetaxation oflandlords.

20. OnthenearhorizonarefurtherregulatorychangessuchasincreasedcontrolsonBuy-to-Letlendingandperhapsthestabilisationofrentincreases,at leastinsomecitiesalongwithanewcapitalweightingsregimeunderBasel3.On29MarchthePrudentialRegulationAuthorityreleasedaconsultationpaperonunderwritingstandardsforBuy-to-Letmortgages.ThiswasimmediatelywelcomedbytheFinancialPolicyCommittee(FPC)whichismonitoringdevelopments in thismarket. The industry still awaits theoutcomeof thecurrentHMTreasuryconsultationonpowersofdeterminationoverbuyto-letmortgagelendingthoughitisassumedthesewillcomeintobeing.TheFPCwillprepareastatementofitspolicyfortheuseofpowersofdirectionaheadofanysuchpowersbeingapproved byParliament.

21. MostimmediatelythereisthefouryearfreezeontheLocalHousingAllowance(27%ofprivatetenantsclaimLHA);theintroductionofacaponwhatcanbepaidoutwhichisnowbitingininnerLondon;andmeasurestoreducethesupplyofsocialhousingatleastintheshortterm.

22. Effortstoencourageinstitutionalinvestmentarebearingfruitand,subjecttothefinalisationofforthcomingchangesin regulationsand taxation,willprobablynotaffect largecompanyorcorporate landlords.At themoment theirincentivetoexpandisthereforeunchanged.However,evenifthissubsectorweretogrowasrapidlyasoptimistssuggest,itwouldstillaccountforonlyasmallproportionofthePRSstock.Ontheotherhandtherewillbesignificantincentives to reduce investment among Buy-to-Let landlords. Given the potential increases in demand forprivatelyrentedhousingfromcontinuedin-migrationandpopulationgrowththiswillfurtherincreasepressuresin themarket.

23. Government initiatives to facilitateowner-occupationcould inprincipleadduptoasmanyas100,000unitsperannumtothestockinthattenure.Notallwillbegenuinely‘additional’,assomeofthehouseholdswhobenefitwouldhaveboughtanyway,butevensotherewillbeanimpactondemandforrentedproperty.Thevariousmeasures,togetherwithwidereconomicanddemographictrends,canbeexpectedtoslowtherateofgrowthofthePRSbutnottoreversetheupwardtrend.

Renting, owning and policy 24. Willprivaterentingcontinuetogrowatasimilarpaceoverthenextdecades?Thisdependsnotonlyontheeffectsof

fiscalmeasuresandgovernmentpolicytowardsthePRSmoregenerallybutondevelopmentsinothertenuresandinwiderinvestmentmarkets.

25. Private individualsareandwill continue tobe thebulkof landlords,even if institutionsmassively increase theirinvolvement.Theexamplesetbyinstitutions,coupledwithlargerindividualportfoliosandtenantdemand,willtendtoresultinincreasedprofessionalismmoregenerally.

Portfolio size by type of landlord

1 2 - 4 5 - 9 10 - 24 25 - 100 100+

Private individuals Companies Other organisations

Source:PrivateLandlordsSurvey2010

26. Whiletherearereasonstoexpectowner-occupationtogrowat leastamongmaturetraditionalhouseholds it isourviewthatitishighlyunlikelythatyoungerhouseholdswillenterowner-occupationtotheextentthattheydidinearlierdecades.Suchascenarioimpliesthattheproportionofowner-occupationinEnglandcouldgrowtobetween64%and66%ofthetotalstockoverthenextfewyearsandstabiliseataroundthatlevel.

27. Equally, socialhousingmightundersome,perhapsunlikely, circumstances remainat roughly its currentsizeashousingassociationsrespondtothechallengetoexpandwithoutdirectsubsidy.However,itisfarmoreprobablethat itwill decline, especially ifpartialownership starts to takea larger role inaffordablehousingprovision.Anestimatemightbethatitwouldfalloverthenextfewyearstounder15%ofthetotalstock.Indeed,overtime,unlessthere isapolicyreversal, forexample,asaresultofachangeingovernment, itcoulddeclinefurther,toas little as10%.

28. Taken together, these scenarioswould suggest aPRS in the rangeof 20%and22%within thisparliament andperhaps25%asthelongertermequilibriumlevel.Thesearesignificantincreasesespeciallyinabsoluteterms,eventhoughtheyarelowerthanmanyotherprojections.Theyreflectcurrentgovernmentpolicyandanassumptionthattheeconomycontinuestoimprove.Iftheoutlookismorenegative,theproportioninprivaterentingwillbehigher.Butifrealhouseholdincomesrisemorerapidlytheproportioninowneroccupationcouldbehigher,moreinlinewithmatureNorthernEuropeanmarketsthatstillfavourthatsector.Ifso,manyyoungerhouseholdswillcontinuetorent,butthevastmajorityofstableworkinghouseholdswillbeowner-occupiers.

Conclusions 29. Insummary,privaterentingplaysandwillplayakeyroleintheUK’shousingsystem.Itkeepspressureoffthehome

ownershipsectorbyofferinghouseholdsaclearalternativewhetherfortheshortorlongterm.Italsoplaysaroleasanalternativetotheprovisionofsocialhousing.

30. ThecontinuingflowofregulatoryandtaxationchangesbeingintroducedandconsideredwillslowtheexpansionofthePRSatatimewhentherearelimitedalternatives.However,oncurrenttrendsdemandforprivaterentingisalmostcertainlygoingtocontinuetoriseinbothabsoluteandproportionalterms.Thekeyconcerniswhethertherewillbesufficientlandlordstocontinuetomeetthecontinuinggrowthintenantdemand.Anyslowdownintheexpansioninsupplyofprivatelyrentedhousingarisingfromchangesintaxationandregulationwillputpressureonrentsandhouseholdbudgets.

31. Evenifinstitutionalinvestorsenthusiasticallyenterthemarket,individuallandlordswillremaindominant–astheyareacrossEurope.Shrinkingthesectorthereforedoesnotseemasensiblewayforwardgivenwhatweknowaboutunmetdemandandneed.

32. Inanidealworldwecouldidentifythegoalsofpolicychanges,establishabaselineandmonitoroutcomestoseeifthesegoalsweremet.Inthiscasehowever,thegovernment’sgoalsaremultipleandsometimesinconsistentandpoordatamakehighqualitymonitoringdifficultifnotimpossible.Ifwearetounderstandandmanagethesectorbetter,weneedtoimprovethedataasquicklyaspossible.

Chapter 1: Introduction PAGE10

Chapter 2: The private rented sector today PAGE 12

Chapter 3: Growth and change in the private rented sector PAGE 32

Chapter 4: Addressing the government’s concerns PAGE 42

Chapter 5: Changing the landscape for Buy-to-Let? PAGE52

Chapter 6: Where are we going: renting, owning and policy PAGE60

References PAGE 64

Annex 1: How many landlords are there in the UK? PAGE70

Annex 2: Comparing renting and owning PAGE 72

CONTENTS

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CHAP

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1INTRODUCTION

This report clarifies the role of the private rented sector (PRS) in the UK and the contribution to it through the Buy-to-Let subsector. It explores recent changes in government policy and how they will affect the PRS, and makes suggestions about how the sector can play an effective role in the UK housing system. This chapter clarifies the objectives of the research, the reasons for addressing these issues and the position of the Buy-to-Let market within the overall total rented sector.

InJanuary2016,ParagonGroupcommissionedtheauthorstowriteanindependentreviewofpolicydevelopmentsintheprivaterentedsector(PRS)ingeneralandtheBuy-to-Letmarketinparticular.Theobjectivesofthisstudy,undertakenfrommid-Januarytotheend-February,were:

• first, to clarify the roleplayedby thePRS in theUK (notably England) andhow that rolehasevolvedsincethePRSstartedtogrowinthe1990s;

• second, to identify to the extent possible theBuy-to-Let segmentwithin the broader privaterentalmarket;

• third,tounderstandthedirectandindirectimpactsofgovernmentpolicyinitiativesonthehealthoftheBuy-to-LetmarketandthesustainabilityofthePRSasawhole;

• fourth, tosuggestwhat the implicationsof thesepoliciesare for the futureofBuy-to-Letandprivaterentingmoregenerally;and

• finally, to draw conclusions about what is necessary for the PRS to play an effective role in housingprovision.

The backgroundTheimmediatereasonsforundertakingthisstudyarethechangesintaxationandregulationthatthegovernmenthasannouncedoverthe lastyearandthechangingattitudestoprivaterenting,particularly with respect to Buy-to-Let among policy makers and those responsible for macro-stabilisationandregulation.

AmorefundamentalreasonlieswiththerapidgrowthofthePRSacrosstheUKwhichhasmorethandoubledsincetheturnofthecenturysupportedbytheexpansionoftheBuy-to-Letmarket.MuchofourunderstandingofhowthesectoroperatesisbasedondataandanalysiswhichrefersbacktoearlierinthecenturyandevenfurtherandthesectorhasnotbeenfullytestedinthenewpostGlobalFinancialCrisisenvironment.Thisresearchaimstobringtogetherthebestavailabledatatoclarifyboththecurrentpositionofprivaterenting;itsroleintheoverallhousingmarket;andwhereitmightbeheading.

Defining private renting and Buy-to-Let Itisimportanttobeclearaboutdefinitionsandtoclarifytheterminologyusedinthisreport.MostpeoplebelievetheyunderstandwhatthePRSis,butforstatisticalpurposesitisoftensimplydefinedasallhousingthatisnotowner-occupiedorsocialrented.Thetermcancoverontheonehandveryshort-termletsandroomslettolodgers,andontheother,propertiesinwhichthesamehouseholdshavelivedfordecadesundercontrolledconditions.SomewoulddefinethePRSasdwellingsletatmarketrents,butthesectorincludesmanypropertieswhererentsarenowherenearmarketlevels--indeedsomePRShousingisrent-free(propertiesprovidedbyparentsfortheirchildren,forexample).Moreover,whilethevastmajorityoflandlordsareindividuals,corporateentities,localcouncilsandhousingassociationsmayalsoownprivaterentedproperty.Thatsaid,themajorityofPRSlandlordsandtenantsarewillingbuyersandsellerswhocontractonthebasisofAssuredShortholdTenancyarrangementswithaminimumsecurityofsixmonths.

TheideaofBuy-to-Letmaysimplybeaboutmotivationamongindividualsandsmallcompanies.Butinpracticethetermcanbedefinedinanumberofdifferentways.Buy-to-Letisoftenusedtorefertoallpropertiespurchasedtoletoutonthemarketbyindividuallandlords,whetherusingequityordebt.Thisdefinitionincludesowner-occupierswho(re)mortgagetheirprincipalhomestobuyarentalproperty,aswellasthosewhohavepaidofftheirmortgage(whateverformittook).Butinthefinancialcontext,andinthecontextoftheissuesgovernmentiscurrentlyconcernedabout,Buy-to-Letreferstoaparticularformofmortgageintroducedinthemid-1990sandbasedonrentalreturns,whichmaybetakenupbyindividualsorcompanies.Inthemainpolicysectionsofthisreport,‘Buy-to-Let’referstothatpartofthemarketcurrentlyfinancedbysuchmortgagesandtothosebuyingandsellingpropertieswithinthissubsector.Originallyabrandname,thetermisnowusedgenerically.

THEPRIVATERENTEDSECTORTODAY

This chapter profiles the private rented sector (PRS) in the UK. Its size has more than doubled in the last 25 years and the sector now accounts for about one-fifth of all dwellings. Despite policy initiatives to encourage corporate investment the bulk of landlords are private individuals, many owning just one unit. Data about landlords and their financial models are patchy and contradictory, though it is clear that those who deliberately invested (and not all did) often did so as a form of pension provision.

The highest proportions of PRS housing are found in cities, especially London. Tenants are more likely to be young, working and/or migrants, though increasing numbers of families with children are in the PRS. The decline in the number of social rented units means many low-income households live in the sector, and about a quarter of PRS tenants receive housing benefit.

Landlords are taxed at their marginal rate on their rental income net of expenses, which at the moment includes interest paid on Buy-to-let Loans. The UK treats landlords for tax purposes rather less favourably than many developed countries in two ways: it does not allow depreciation nor can rental losses be offset against other types of income.

CHAP

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2

What is private renting?Theprivate rented sector (PRS) is defined inUK statistics as all renteddwellings not ownedbylocalauthoritiesorhousingassociations.Thusitcomprisesdwellingsownedbyprivateindividualsorcompaniesandrented,generallyatmarketrents,tootherhouseholds.Accordingtothelatestfigures,thePRSmakesup19.6%ofdwellingsinEngland(DCLGLiveTable104).ThePRShouses19%ofhouseholds(DCLG:EnglishHousingSurvey2014/15).ThismakesEnglandbroadlytypicalofEuropeannations(Table2.1)althoughthereisawidespreadoftenurepatterns:GermanyandSwitzerlandhavemuchlargerprivaterentedsectors,whileinSpainandtheNetherlandsthesectorsaremuchsmaller2.

Table 2.1: Private rented sector as proportion of dwelling stock in European countries

Country % of stock Year

Germany 49 2010

France 21 2011

Ireland 19 2011

England 18 2011

Denmark 17 2011

Austria 16 2012

Scotland 12 2011

Spain 11 2011

Netherlands 9 2010

Source:SocialHousinginEurope(Scanlon,WhiteheadandFernandez,eds)

1 Whererelevantinthisdiscussionweexcluderesidentlandlords,asresearchhasfoundthattheydiffersignificantlyintermsofmotivationandbusinessmodelfromotherlandlords(CrookandKemp,2011).

2HoweveritshouldbenotedthatthedefinitionofthePRSvariesconsiderablybetweencountriesanditisoftenaresidualfigure.

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Who is housed in the PRS?Onthewhole,householdsinthePRSaremorelikelytobe

• Young–35%areaged25to34

• Singlesorcouples(althoughtheproportionoffamilieswithchildrenisgrowing)

• Onlower-than-averageincomes

• Migrantsfromothercountries.

Table2.2summarisessomeofthemoreimportantattributesofthesector.Inparticular,itshowsthatprivaterentingis for thoseofworkingageandmainly for thosewhoare inwork. Itplaysa key role inaccommodatinghouseholdscoming into the country from abroad and thosemoving around the country, particularly for job-related purposes.The vast majority of international migrants entering the country move into privately rented accommodation: 74%of thosewhohavebeen in thecountry for less thanfiveyears live in thePRS.Thisonlydrops tobelow50%amongthose who have been here for more than ten years. Overall, 39% of foreign born households are private tenants (Vargas-Silva,2015).

ThePRSalsoplaysanimportantroleinaccommodatingthose,includinghomelessfamilies,whoareunabletoaccesssocialhousing.Suchhouseholdsarenormallyoutsidethelabourforceanddependonhousingbenefittopaytheirrent(Wilcoxetal,2015).

Table 2.2: Characteristics of private tenants in England, 2014/15

Private tenants

Social tenants

Owner occupiers

% % %

Gross weekly household income under £300* 30 58 18

Economic status of head of household

fullorpart-timework 71 38 61 otherinactive 9 22 3 retired 9 30 35 full-timeeducation 5 9 1 unemployed 7 1 0

Household type

couple,nodependentchild(ren) 23 16 44 couplewithdependentchild(ren) 23 16 23 onepersonunder60 20 17 9 othermulti-personhouseholds 14 11 6 loneparentwithdependentchild(ren) 13 17 2 onepersonaged60orover 7 24 16

Ethnicity: Head of household not British or Irish* 23 7 3

Source:EnglishHousingSurvey2013/14;EnglishHousingSurveyHeadlineReport2014/15.*latestavailabledata2013/14.

Withrespecttotheroleofprivaterentinginmobilitymoregenerally,theEnglishHousingSurveyshowsthataroundone-thirdofprivatetenantshavemovedinthepastyearasagainst11%ofallhouseholds,whiletwo-thirdsofprivatetenantshavebeen in their currentaccommodation for fewer than threeyears. In2014-15,57%ofprivate tenantssaid theyexpectedtobuy—afallfrom61%theyearbefore.However,overthelongertermtheratewasnotsignificantlydifferentfromthe59%ofprivaterenterswhoexpectedtobuyin2008-09(DCLG,2016).

What do they pay?LikesomuchoftheinformationaboutthePRS,thedataaboutprivaterentsareincomplete.Oneofficialsourcegivesanaverage(mean)privaterentinEnglandin2014/15of£775(EnglishHousingSurvey,2014/15).Anothersays£625wasthemedianprivaterentforthesameyear(ValuationOfficeAgency),suggestingthattheaveragefiguresintheEnglishHousingSurveyarepulledupbysomeveryhighrents.

TheEnglishHousingSurveygivesdistributionofrentsbyhouseholdtype.In2013/14(themostrecentyearforwhichthisbreakdownwasavailable)theaveragePRSmonthlyrentforallhouseholdtypesinEnglandwas£763(Table2.3).Multi-personhouseholds(generallysinglepeoplesharing)paidthemost,atanaverageof£1135,whilesinglepersonspaidonaverageabouthalfthat(£563).

Table 2.3: Average monthly rents by household type, all England

2013 / 14 2014 / 15

£ £

Household type

othermulti-personhouseholds 1135

couplewithdependentchild(ren) 797

couple,nodependentchild(ren) 719

loneparentwithdependentchild(ren) 715

one person 563

All private renters 763 775

Source:EnglishHousingSurvey2013/14AnnexTable4.3;2014/15AnnexTable

Thereislargeregionalvariationinrents.ThehighestlevelsarefoundininnerLondon,andthelowestinthenorthofEngland. Table2.4presentsdata forEngland from theValuationOfficeAgency, and forEnglandandWales fromanestate-agencysurveybasedon20,000properties.

Table 2.4: Median and lower-quartile monthly rents by English region

VOA Oct 2014 – Sept 2015

Your Move/Reed Rains December 2015

Area Lower Quartile Median Average

£ £ £

ENGLAND 625

ENGLAND AND WALES 1135 794

London 1,100 1,400 1,251

Inner London 1,300 1,625 -

OuterLondon 995 1,250 -

SouthEast 650 800 766

East 550 656 831

SouthWest 545 650 669

West Midlands 450 550 593

NorthWest 425 525 599

East Midlands 430 525 608

YorkshireandtheHumber 425 498 556

NorthEast 400 475 517

Wales - - 560

Source:ValuationOfficeAgencyPrivateRentalMarketSummaryStatistics2014-15;YourMove/ReedsRainsBuy-to-LetIndexDecember2015

Some27%ofprivatetenantsreceivehousingbenefitandafurther10-15%arethoughttobeeligibleforsmallamountsofallowancebutdonotclaim.Figure2.1showshowhousingbenefitandallowanceforthePRShavegrownsincethe1990s,withprojectionsto2018(asat2013).Sincethenprojectedfigureshavebeenheldroughlyconstantbyadditionalpolicyconstraintsonpaymentsandbytheriseinthenumberofworkinghouseholds.However,overthenextfiveyears,benefitspaidtoPRStenantsareexpectedtocontinuetoriseasaproportionofthetotal,accountingforaprojected39%ofthetotalhousingbenefitbillofover£24bnin2020/21(UKGovernment,2015).Thisishigherthanpaymentstothehousingassociationsector.

Figure 2.1: Housing benefit expenditure by tenure, Great Britain, 1994/95–2018/19

2015 / 16

2013 / 14

2011 / 12

2009 / 10

2007 / 08

2005 / 06

2003 / 04

2001 / 02

1999 / 00

1997 / 98

1995 / 96

2017 / 18

Local housing allowanceHousing association tenants Private rented sector tenantsLocal authority tenants

Source:OutturnandForecast,AutumnStatement2013,HousingBenefithttps://www.gov.uk/government/publications/benefit-expenditure-and-caseload-tables-2013

The stock of homes in the PRS Privaterentedhousingisconcentratedincities(especiallyLondon).IntheUKmostrentalhousing,likemosthousinggenerally,isintheformofhouses,eveninareaswithahighproportionofrenting.However,flatsareover-representedinthePRSstockandthe‘typical’PRSunitisconsideredtobeatwo-bedroomflat.Accordingtothe2013/14EnglishHousingSurvey,21%ofEngland’sdwellingstockwasflatsbuttheyaccountedfor35%ofprivaterentedhousing.InLondon,whereoverall49%ofdwellingsareflats,theyaccountfor57%ofprivaterentedhousing(Table2.5).

Table 2.5: Private rented stock by type of area and dwelling, 2013/14

Area Houses Flats Other types of dwelling

% % %

London 37 57 6Urbanother 65 33 2Rural 88 12 0.3All private rented dwellings 62 35 3

Source:EnglishHousingSurvey,2013-14,AnnexTable4.8

AccordingtothePrivateLandlordsSurveyaboutthree-fifthsofthedwellingsownedbyprivateindividuallandlordsarehouses(59%)andjustoveraquarterarepurpose-builtflats(Table2.6).Companylandlordsownahigherproportionofflatsbutevenso,overhalftheirdwellingsarehouses.(Itshouldbenotedhoweverthatthesamplesizesforcompaniesandotherorganisationsweresmall—136and131respondentsrespectively.)

Table 2.6: Types of private rented dwelling owned by landlord type (dwelling weighted)

Types of landlord

Dwelling type Private individuals Companies Other organisations

% % %

Terracedhouse 35 23 19

Semi-detachedhouse 14 17 25

Detachedhouse 10 11 28

Purpose-builtflat 27 32 18

Convertedflat 14 17 10

Total 100 100 100

Source:PrivateLandlordsSurvey2010,AnnexTable3.2

Newerunits,especiallyinLondon,areofteninhigh-riseblocks,buttheseareoutnumberedbyconversionsofVictorianhouses.Overall32%ofthePRSinEnglandwasbuiltbefore1919ascomparedto20%ofthetotalstock.EvensotheproportionofPRSunitswhichwerebuiltin1990orlaterishigherthanaverage;theserecentlybuilthomesaccountfor18%ofPRSunitsascomparedto15%oftheoverallstock.Importantlynearly50%ofhousinginEnglishcentralcityareasisprivatelyrented,asis31%ofthestockinthesecentralareastogetherwithotherurbancentres.Thusprivaterentingisfarmoreconcentratedthanothertenuresinareasthatareeasilyaccessibletoworkandleisureactivities.Intheseareasprivaterentingmakesupasignificantproportion,sometimesthemajority,oftransactionsinnewlybuiltstock(ScanlonandWalmsley,2016).

IntheUK,dwellingsaregenerallyownedbyindividualsandsmallcompanieswithasmallnumberofunits,sothateveninahigh-riseblockthatismostlyrentedtherewillbemanydifferentlandlords.Thispresentsaclearcontrasttoothercountries(e.g.,USAandDenmark)wherethetypicaltransactionunitistheentirebuilding.

Who are the landlords?Ingeneralthereisnorequirementforpermissiontobecomealandlord,or(inmostofEngland)toregisteradwellingasrented.Thismeansthatourunderstandingaboutthecharacteristicsoflandlords,orevenhowmanythereare,isrelativelypoor.Extrapolatingfromthe2010privatelandlordssurvey(seebelow)andotherevidencesuggeststhatthemostlikelyfigureisbetween1.5and2million–seeAnnex1.

Thereareanumberofsourcesofdatathatdoprovideindicationsoflandlords’characteristics,attitudesandbusinessmodels,butthedataarefarfromcomprehensive.ThewidelycitedPrivateLandlordsSurveycommissionedbyDCLGeveryfewyearsisinprinciplearepresentativesurvey,butcoversEnglandonly,andlasttime(2010)thesamplesizewaslessthan600.Mostoftheothersurveys(whichoftenemploysimpleonlinesurveytechniques)areconductedbyassociationsoflandlordsoragentsorbylenders,sothereareclearissuesofsamplebias.Table2.7describesthemajorrecentsurveysofEnglishorUKlandlords.

Table 2.7: Characteristics of surveys of landlords

NameDate of

most recent

Frequency Method Coverage Carried out by

Number of responents Comments Regional

breakdown

CouncilofMortgageLenders Buy-to-Letsurvey

2004 One-off Papersurveydistributedtocustomersof12buy-to-letlenders

UK Industrybody 1340 Coveredonlythoselandlordswithamortgage

•

DCLGPrivateLandlords Survey

2010 Periodically(aboutevery4or5years)

Face-to-faceand telephone interviewswithlandlordsandagentsoftenantsfromEHS

England Commissioned bygovernmentdepartment

1051overallo/w599landlords (remainderagents)

Designedtoberepresentativeandstatisticallyvalid,butsmallsample size

BDRCContinental /NLA

December2015–January2016

Quarterly OnlinesurveyofNLAmembers+telephone interviewsofclientcustomers

UK Marketresearchfirm

1364 Contains usefuldetailonbusinessmodels and portfolios

•

ARLA SurveyofResidential Landlords

Autumn2014

Quarterlyfrom2004butnowceased

OnlinesurveyofvisitorstoARLAwebsite

UK Trade association

1016 Canbeusedtotrackmarketsentiment 2004-2014

•

HomeLet October2015

Notstated Notstated UK Onlineestateagency

1882 Focusesonlandlords’relationship withtenants

PropertyAcademyLandlord and Tenants

2015 Annual OnlinesurveyofvisitorstoPropertyAcademywebsite

Notstated Trainingandeventorganisersforpropertyindustry

2313 Focusesonlandlord/agentrelationship

YourMove/Reed Rains

September2015

Quarterly Notstated Estateagencygroup

1192

Mintel Buy-to-LetMortgages2015*

Annual n/a n/a Marketresearchfirm

Cost£1750

*Notpubliclyavailable--forpurchase

AsTable2.7suggests,mostsurveysoflandlordsarenotstatisticallyrobust.Theonlyauthoritative,statisticallyrigorousandrepresentativesurveyoflandlordsistheDCLGPrivateLandlordsSurveyalreadyreferredto.Thishasusefulinformationaboutwholandlordsareintermsofwhethertheyareindividualsorcompaniesandthecharacteristicsoftheirportfolios.However,itwaslastcarriedoutin2010soisnowoutofdate(thesectorinEnglandhasgrownby17%between2010and2014).Thesamplesizewassmall(only599landlords,asopposedtoagents)anditcoversEnglandonly,soitcannotbeusedforanalysisataUKlevelorforregionalbreakdowns.Finally,itcoversahugerangeoftopicsofinteresttothegovernment(e.g.willingnesstolettotenantsonHousingBenefit;useofEnergyPerformanceCertificates)butcontainsrelativelylittleaboutlandlords’financialmodels—therewereonlytwoquestionsaboutmortgages,andBuy-to-Letmortgagesarenotspecificallyidentified.

Theothersurveysmostlyrelyonself-selectionbylandlordswhovisitaparticularwebsiteorusetheservicesofanagencyorassociation,andtheirsamplesarethereforealmostcertainlybiased.TheBDRCsurveysmembersoftheNationalLandlordsAssociationthroughitsso-called‘LandlordPanel’,althoughitisnotclearfromthepublishedmethodologywhetherthisisagenuinepanel(i.e.thesameindividualsquestionedeverytime).

Thebestsourceofdetailedinformationaboutlandlords’financialmodelsandspecificallytheiruseofbuy-to-letmortgagesremainsthe2004CMLstudy(ScanlonandWhitehead,2005).ThiscoversEngland,WalesandScotland.However,itisnowverymuchoutofdate.Itfocusesonthemotivations,businessmodelsandfinancialarrangementsofbuy-to-letlandlords.Welookatthemostrelevantfindingsbelow.Butthisresearchalsohadshortcomings:forinstance,thewordingofthequestionnairedidnotallowusaccuratelytodeterminewhatproportionofeachlandlord’sportfoliowasbackedbyamortgage.

Table 2.8: Findings from surveys of landlords

Name/Date

% owning a single

property

Business modelAverage portfolio (number of units)

Funding method for

next property purchase

% of properties

backed by a mortgage

Reaction to mortgage tax

changes

Main business

(%)

Investment but not

main business

(%)

CML/2004 27 11 89 4 Atleast25%ownedsomeproperties outrightandothersbackedbyamortgage.

DCLGPrivateLandlords Survey/2010

78 56%ofpropertypurchasedbackedbymortgage

ARLA SurveyofResidential Landlords/4Q2014

18

BDRCContinental/NLA/late2015

14 26 57 8.2 BTLmortgage60%Buyoutright29%Releaseequity24%

BTL44%Ownedoutright30%PartBTL/partoutright26%

5%ofrespondentswillreduceportfolio;28%notincrease.Thosewithbiggestportfoliosmostlikelytosell

HomeLet/Oct2015

55 56.5%havemortgagedproperty;43.5%unmortgaged

PropertyAcademy/2015

58 7 52

YourMove/ReedRains/Sept2015

4.5%ofrespondents said decrease inmortgagetaxreliefwouldbeareason to sell

Sources:pertable

Type of ownerMostprivatelandlordsinEnglandareprivateindividualsorcouples.TheDCLGPrivateLandlordsSurveyisoneofthefewsourcesthatcoverstheentiresectorratherthanfocusingonprivateindividuals.Itshowedthat89%oflandlordswereprivateindividuals,5%companiesand6%otherorganisations(PrivateLandlordsSurvey,2010).

TheWealthandAssetsSurvey (WAS)providesdetailsofhouseholdassets, includingprivaterentalproperty, inGreatBritain.Thesurveyisrunintwo-yearwaves;themostrecent(Wave4)coveredtheperiod2012-2014,andpreliminaryresultswerereleasedinDecember2015(ONS,2015).However,thisgeneralpublicationcontainslittleinformationaboutlandlords,sayingonlythat4%ofthe20,000householdssurveyedownedaBuy-to-Letproperty.

Thereissomeusefulinformationina2013reportbasedonthesecondwave(2008-2010),althoughinevitablyitisnowsomewhatoutofdate(Lordetal,2013).Therewere1274privatelandlordsamongsttheWave2respondents.Thisreportfoundthat72%ofthemownedasingleproperty.HouseholdswithPRSlandlordshadgreaterfinancialwealththanthegeneralpopulationevenexcludingthevalueoftheirrentedproperties,tendedtoliveinlarger-than-averagehomes,andweremorepositiveabouttheiroverallfinancialsituations.Threeinfivethoughtinvestinginpropertywasthesafestwaytomakemoney,andabouthalfthoughtitwasthebestwaytosaveforretirement.Mostlandlords(about60%)saidtheyearnedmoremoneyfromtheirjobsthanfromrentalincome.TheWASquestionnaireasksonlyaboutmortgagesonthehousehold’sprincipalresidence,sothesurveyprovidesnoinformationaboutrespondents’useofBuy-to-Letmortgages.

Companyandorganisationallandlordstendtohavelargerportfolios(Figure2.2),andtogetherown29%ofthestock.Still,thevastmajorityofthestock,71%,isownedbyprivateindividuallandlords.ThePrivateLandlordsSurveyfoundthatthegreatmajorityofprivateindividuallandlordsownedonlyasingleproperty,and97%ownedfewerthanfivedwellings(Figure2.3).Othersurveysshowed lowerproportionsof landlordsowningasingledwelling (Table2.8), ranging from18%to58%,whichmayreflectthegrowthofthesectoroverthelastfewyears.Thisrangeoffiguresdemonstratestheunreliableandpatchynatureofthedataaboutprivatelandlords.

Figure 2.2: Type of landlord by portfolio size


10 - 24 Dwellings 25 - 100 Dwellings 100+ Dwellings2 - 4 Dwellings 5 - 9 Dwellings1 Dwelling


Figure 2.3: Types of landlord by portfolio size

1 2 - 4 5 - 9 10 - 24 25 - 100 100+



It is difficult to determine howmany large corporate landlords are in the sector, because the statistics are brokendownonlybyprivateindividualsandcompanies,anditisrelativelycommonforevensmalllandlordstoownpropertiesthroughacompany.Thebreakdownoftypesoflandlordbyportfoliosize(Figure2.2)showsthatcompaniesandotherorganisationsaremuchmorelikelythanprivateindividualstohaveportfoliosofmorethan100units.However,itisclearthattherearefewerlargecorporatelandlordsinEnglandthaninsomecountries(USA,Germany).GraingeristhelargestPRSspecialistfirmintheUK,managingabout3600units.

InLondoninparticulartherearemanyforeign,non-residentlandlords.Thenew-buildblocksalongtheThamesinLondonandinlocationslikeGreenwichandCroydonhaveprovedattractivetooverseasbuyers,particularlyfromtheFarEast3. Theytypicallybuyoneormoreunitswithintheblockoff-planthenrentthemoutoncompletion,usinglocalagentstomanagethem.

Formany yearsgovernmentpolicyhasbeen toattract institutional investors to the sector, theargumentbeing thattheywouldprovidemoreefficientandprofessionalmanagementandbetter-qualityaccommodationthaneithersmallerlandlords or professional agents. A small number of institutions have entered themarket,mainly in London. TheseincludeinvestorsfromothercountriessuchasGermanyandtheUSA(e.g.theWashingtonStatePensionFund)morefamiliarwithpurpose-builtrentaldevelopments(knownintheUKas‘buildtorent’).Increasingly,domesticinstitutionsareenteringthemarket(AddleshawGoddardandBPF,2016);MandGforexampleisworkinginpartnershipwithbuildersCrestNicholson,providingupfrontfinancinginreturnforbuild-to-rentproduct.Someanalystssaythat‘awallofmoney’iswaitingto invest inpurpose-builtprivaterentedhousingonceriskandviability issuescanbesorted.However, it isacceptedthatmostwillonlywishtopurchasewholecompletedbuildingsandthereisashortageofsuchinvestmentsavailableespeciallygivenpre-sales.

3Thepreponderanceofforeignbuyersinthesedevelopmentshasgeneratedpoliticalcontroversy,andsomedevelopersnowmarketproductsfirstintheUK.Howeverthelengthoftimebetweenagreeinganoff-planpurchaseandreceivingkeystothedwellingcanbeproblematicforUKbuyerswhorequireamortgage,asmortgageoffersforowneroccupierslastamaximumofsixmonthsbeforetheyrequirereconsideration.OverseascashbuyersdonothavethisproblemnordoUKcashbuyers!

Age of individual private landlordsLandlords tend tobemiddle-agedandolder,although thesourcesgivedifferentfiguresas to thedistribution;ARLAsurveyfoundveryfewundertheageof35,whiletheWealthandAssetsSurveyshowed16%oflandlordstobeintheyoungercohorts(Table2.9).TheNMGConsultinghouseholdsurveyfortheBankofEngland(seeChapter4)containedresponsesfor342landlords.Theirageprofilewasstrikinglydifferent,with37%oflandlordsagedunder35.Thisseemsimplausibleasarepresentativesampleofthesector,apointwereturntointhatchapter.

Table 2.9: Percentages of individual landlord by age category

ARLA4Q2014

(964 responses)

Wealth and Assets Survey Wave 22008-10

(1274 landlord responses)

NMG household survey for Bank of England

September 2015(342 landlord responses)

Under 26 0.4 1 (18-24yearsold)18

26to35 2.4 15 (25-34)19

36to45 11.7 24 (35-44)18

46to55 27.9 27 (45-54)13

56to65 34.8 22 (55-64)14

Over65 22.8 12 (65orover)18

Source:CareyJones2014;Lordetal2013;NMG2015

Landlord business models

The degree of ‘professionalism’ amongst small private landlords is a topic of some interest given that one of thegovernment’slong-standinggoalsistoincreaseprofessionalisminthesector.TheforthcomingchangestoStampDutyLandTax(seeChapter4)wereoriginallyexpectednottoapplytocompanylandlordswithportfoliosofatleast15units,implicitlysuggestingadefinitionofprofessionalism(althoughintheeventitwasdecidedthatalllandlords,eventhosewithlargeportfolios,wouldpaytheadditionaltax).Butalthoughseveralofthesurveysaddressthisquestiontheyalluseslightlydifferentconcepts:someaskwhetherlandlordsthemselvesconsiderthemselvestobeprofessionals;someaskwhetherbeingalandlordisapart-timeorfull-timejob;someaskhowmuchresidentialrentcontributestolandlords’householdincome;andsomeaskwhatthelandlord’smotivationforbeinginthesectoris.TheARLAsurveyfoundthat70%ofrespondentsconsideredthemselves‘professional’landlords(CareyJones,2014).ScanlonandWhiteheaddefinedprofessionalsasthosewhoreceivedrentalincomeequaltoatleastthenationalaverageincomeandcouldliveofftheirincomewithoutsellingproperties to realisecapitalgains.Applying thismethod to theCMLsurveydata theydefined20.5%ofrespondentsasprofessionals(ScanlonandWhitehead,2005).

Asnoted,landlordshavemanydifferentreasonsforbeinginthesector.Althoughinvestmentreasonsdominatebynomeansallofthesereasonsrelatetofinancialgain(Figure2.4).

Figure 2.4: Purpose of owning rented dwellings by landlord type

An investment pension

Future home for self / family

Future home for relative / friend

A property I'd like to sell but can't

Other

Incidental to another activity

My current home

Somewhere to housean employee

Somewhere to housepeople in need

Other organisations Companies Private individuals

% of dwellings owned by each landlord type


Some21%ofthedwellingsownedbyindividuallandlordsarepropertieswherethelandlordthemselvesusedtolive,andthelandlordstill lives in2%of individual-ownedPRSdwellings(PrivateLandlordsSurvey2010).Althoughgovernmentpolicyseemstobepredicatedontheideathatcorporatelandlordsaremorebusiness-likethanindividuals,companiesandotherorganisationsoftendidnotconsidertheirPRSholdingstobeabusinessandhadothermotivationsforbeinginthesector,inparticulartohouseemployees(Figure2.4).Smallprivatelandlordsaremostlikelytoviewtheirdwellingsasinvestmentsorcontributionstopensionprovision.

‘Other organisation’ landlords were more likely to be interested in taking an income out of their properties, whilecompaniesandprivateindividualswerelookingforacombinationofincomeandcapitalgrowth.Thoseinterestedonlyincapitalgrowthweremuchmorelikelytobeprivateindividualsthanothertypesoflandlord(Figure2.5).TheARLAsurveysuggestedthatalmostallrespondentshadfinancialmotivationsforbeingalandlord.Some45%wereseekingcombinedrentalincomeandcapitalappreciationfromtheirresidentialinvestments,32%wereseekinglong-termcapitalgainsand13%werelookingmainlyforarentalyield.

Figure 2.5: Type of return sought by landlord type

Both

Income only

Capital appreciation only

Other organisations Companies Private individuals

% of dwellings owned by each landlord type


Figure 2.6: Will be in the sector in…


Two years’ time Five years’ time Ten years’ time


Privatelandlordsinthemainhavearelativelylong-termcommitmenttothesector(Figure2.6).Aboutfouroutoffivecompaniesandotherorganisationsexpecttobe inthesector intenyears’ time,andevenforprivate individualsthefigurewascloseto60%.Thisisnodoubtdueinparttotheilliquidnatureofpropertyinvestments,andtothehigh(andincreasing)transactionscostsassociatedwithsale.Arguably,however,itisbecauseformanythereasonforinvolvementinproperty(usuallyinadditiontoowner-occupation)isthattheyarelookingtohelppayfortheiroldage.

There isevidencethatahighproportionofprivate landlords invest inrentedpropertypartlyorentirelyasa formofpensionprovision—eithertoprovideanincomestreaminretirementorwiththeintentionof ‘cashingin’ theunitstoprovideacapitalsum.Suchinvestmentreflectstheperceivedsafetyandhighreturnsfrompropertyinvestmentand(inrecentyears)thefreeingupofpensionsavingsforinvestmentandthereductioninthecaponstandardpensionsavings.

Reasons for investing in property as pension

TheWealthandAssetssurveyhasconsistentlyshownthatrespondentsviewpropertyinvestmentasthesecondsafestwaytosaveforretirement,afteremployerpensions.In2014/15about40%ofrespondentsthoughtemployerpensionswere safest, while 27% chose property (Figure 2.7). The shares for other asset classes including stocks and shares,personalpensionsandISAswerewellunderhalfthefigureforproperty.

Figure 2.7: Which option do you think would be the safest way to save for retirement? Great Britain, 2010 to 2015

Employer pension

Personal pension

Stocks and shares

Property Savings account

ISA Premium bonds

Other

July 2008 to June 2010 July 2010 to June 2012 July 2012 to Dec 2012 Jan 2013 to June 2013

July 2013 to Dec 2013 Jan 2014 to June 2014 July 2012 to June 2014

Source:WealthandAssetsSurvey,OfficeforNationalStatistics

Whilerespondentsthoughtemployerpensionswerethesafestwaytosaveforretirement,theyexpectedthehighestreturnsfromproperty.In2014/15nearly45%ofrespondentsexpectedthatpropertyinvestmentwouldmakethemostoftheirmoney,comparedto25%foremployerpensions.Fewerthan10%ofrespondentsthoughtotherassetclasseswouldprovidethebestreturns(Figure2.8).

Figure 2.8: Which do you think would make the most of your money? Great Britain, 2010 to 2015

Employer pension

Personal pension

Stocks and shares

Property Savings account

ISA Premium bonds

Other

July 2008 to June 2010 July 2010 to June 2012 July 2012 to Dec 2012 Jan 2013 to June 2013

July 2013 to Dec 2013 Jan 2014 to June 2014 July 2012 to June 2014

Source:WealthandAssetsSurvey,OfficeforNationalStatistics

Recentchangesinthepensionsystemitselfhaveresultedinincreasedopportunitiesforover-55stoinvestinproperty,aswellascreatingincentivesformiddle-tohigher-incomeindividualsofallagestodoso.TheApril2015changesthatallowedsaversaged55oroverfullaccesstotheirpensionspermittedthere-allocationofthesesavingstoproperty.Itwaswidelyforecastatthetimethatthiswouldresultinamini-boomofBuy-to-Letinvestmentbypensioners,althoughwelackthedatatodeterminetheextentofthis.Inaddition,thereductioninthelifetimecaponoverallpensionsavingsto£1millionfrom2016willaffectnotonlyhighearnersbutalsomanyindividualsonrelativelymodestincomes.Propertyinvestmentisoneofthetwomainalternativesforthosewhowanttoincreasetheirpensionprovisionbutareaffectedbythecap(theotherbeingstocksandshares,whetherheldinISAsornot).

Extent of investment in property as pension

RhodesandBevanfoundin2002and2003thatalmostallpart-timelandlordsinterviewedregardedtheirpropertiesasaformofretirementplanning(RhodesandBevan,2003).Theysawrentalpropertyassuperiortotraditionalpensionsbecauseitwasmoreflexibleanddidnotrelyonstock-marketperformance.‘Whilstasmallnumberoflandlordssawthevalueinhavingaspreadofdifferenttypesofinvestment,mostweredisillusionedwithstocksandsharestotheextentthattheyhadeithercompletelydivestedthemselvesofsuchinvestments,orregardedthemasbeinginconsequentialtotheirfutureplans’(RhodesandBevan,2003,p.37).

AccordingtothePrivateLandlordsSurvey2010(p.14),80%ofindividualprivatelandlordsseetheirpropertiesas ‘aninvestment/pension’. This figure was not broken down further, but other surveys have attempted to tease out thedifferences.Theygivewidelyvaryingresults,probablybecauseofthedifficultyofseparatingmoregeneralinvestmentmotivesfromspecificpensionmotives,bothinthewordingofsurveyquestionnairesbutalsoconceptually.The2004CMLsurveyfoundthatthesecondmostcommonmotivationforinvestinginpropertywasasacontributiontopensionprovision,withaboutaquarterofrespondentscitingthisastheirreason.Afurther52%listedmoregeneralinvestmentmotives,whichwouldnotbe inconsistentwith futureuse forpension (ScanlonandWhitehead2005).AndaccordingtotheBDRCLandlordsPanelin2012,81%ofrespondentssaidtheirpropertiesweretheirpensions.Three-fifthssaidtheyplannedtoliveofftherentalincome,whileaquarterplannedtosellsomeoralloftheirpropertiesaspartoftheirretirementplan(Long,undated).

Anumberofone-off surveyshavebeen commissionedon this issuebynewsmediaand rental-property specialists.Theseprovidesomeusefulindicators,althoughtheyshouldbeinterpretedwithcaution.Theevidencetheyprovideismixed:a2015surveybyHomeLet,forexample,foundthat‘pensioninvestment’wasamotiveforonly5%ofrespondents,whileapollcommissionedbyTheObserverreportedin2013thatonepersoninthreeplannedtoreceiveretirementincomefromoneormorebuy-to-letproperties(Wright2013).A2014surveyof500Buy-to-LetinvestorsbyPlatinumPropertyPartnersfoundthatonaveragetheyexpectedayearlyincomeof£19,785fromtheirrentalproperties,whichwouldmakeupmorethanhalfoftheiroverallretirementincome(PlatinumPropertyPartners,2014).

Private landlords: taxation, regulation and supportPrivatelandlordsaresubjecttoincometaxontheirrentalincome,StampDutyLandTaxwhentheypurchaseapropertyandcapitalgainstaxwhentheysell.Theproposedchangesinarrangementsfortwoofthese—incometaxandStampDutyLandTax—aredealtwithinsomedetaillaterinthisreport.

Income tax

Currently,privatelandlordsaretaxedattheirmarginaltaxrateontheirrentalincomenetofanyrelatedexpenses.Eligibleexpensesincluderepairandmaintenance,agencyfeesandmortgageinterestpayments.Incontrasttomanycountriesthereisnodepreciationofrentalproperty,althoughlandlordswhorentfurnishedpropertiesarecurrentlypermittedtodeduct10%oftheannualrentasa ‘wearandtear’allowance,withouthavingtodemonstrateanyexpenditureonrenewals—ineffecta formofdepreciation.Rental lossescanbesetagainstotherrental income,butnotagainst thelandlord’sincomefromothersources.

There are three ratesof income tax: 20% (on taxable incomeup to£31,785 in 2015/16), 40% (on incomebetween£31,786and£150,000)and45%(onincomeover£150,000).Rentalincomeisaddedtolandlord’sincomefromothersources,suchassalariedemployment,toarriveatafigurefortotalincome.Thegovernmenthasannouncedplanstolimitthedeductibilityofmortgageinterestpayments,whichwillhavetheeffectofincreasingtheincome-taxliabilityofBuy-to-Letlandlordswhopayhigheroradditional-ratetax,andofsomebasic-ratetaxpayers.Thewear-and-tearallowancewillalsobelimitedtoreceiptedexpenditures.ThesechangesarediscussedindetailinChapter4.

Table2.10comparesincometaxtreatmentofresidentialrentalincomeintheUKandothermajorcountries.Itshowsthatevenbeforetheforthcomingchanges,landlordsaretreatedlessfavourablyfortaxpurposesintheUK.Themaindifferencesarethat‘negativegearing’(offsettingofrentalincomeagainstincomefromothersources)isnotpermittedintheUK,andthatthereisnoformaldepreciationallowance.

Table 2.10: Income tax treatment of residential rental income in various countries

Mortgage interest

deductible

Lower tax on rental income

Costs deductible

Depreciation allowance

Rental losses offset against other types of

income

UK • * ••

***(wearandtearfurnishedonly)

Australia • ••

newpropertiesonly

•

Belgium • • • •

Denmark • • institutionsonly • •

France•

butcannotlead to loss

• • uptolimit

Germany • • • •

Ireland • 75% • •

NetherlandsBusiness • • • • •Non-business **

Spain • • • •

Switzerland • • • •

USA • • • • withlimits

Colourkey:

TaxtreatmentsimilartoUK

LandlordstreatedmorefavourablythaninUK

LandlordstreatedlessfavourablythaninUK

*Exceptfor‘rent-a-room’allowance **Animputedreturnof4%ofnetwealthistaxedatarateof30%--i.e.effectiveincometaxrateof1.2%ofequity

***Wearandtearallowanceof10%ofnetrentforfullyfurnishedaccommodation

Source:DerivedandupdatedfromKochanandScanlon,2011Table4

Stamp Duty Land Tax

LandlordspurchasingpropertyhaveuntilrecentlypaidthesameStampDutyLandTax(SDLT)asanyotherbuyer;withnodistinctionmadebetweentypesofowner.RatesofSDLTdependedonthevalueofthedwelling.For‘bulk’purchases(say,100unitsinasinglebuilding)thetaxiscalculatedbasedonthemedianpriceperunitratherthanthetotaltransactionvalue(whichwouldsubjectsuchbuyerstothehighesttaxrate).Thegovernmenthasannouncedthatthosepurchasingapropertythatisnotforuseastheirprincipalresidence(thatis,landlordsandsecond-homebuyers)willpayanadditional3%inSDLTfromApril2016.ThisisdiscussedinChapter4.

Capital gains tax

Whenalandlordsellsapropertytheymustpaycapitalgainstaxof28%onthedifferencebetweenthesalevalueandtheoriginalpurchasevalue,adjustedforinflation.Theratedoesnotdependonhowlongthepropertywasheld.

Subsidy

There are no subsidies or incentives offered to small private landlords for investment in or improvement in theirproperties,apartfromthoseavailabletoallpropertyowners(e.g.theutilitycompanies’greencommitment,providingfreeinsulation).Institutionalinvestorshavebeenabletoavailthemselvesofthegovernment’sBuildtoRentfundandtheBuildtoRentguaranteescheme(seeChapter3),designedtosupportthedevelopmentoflarge-scalepurpose-builtrental-onlyblocksinsingleownership.

Rental support

Privatelandlordsreceive£9bnplusofindirectgovernmentsupportthroughLocalHousingAllowance(LHA),thesubsidyforlow-incometenantslivinginthePRS.Thisiscommonlyknownashousingbenefit(HB),althoughstrictlyspeakingHBisthesubsidyforsocialtenants.)LHAsubsidiesarebasedon30thpercentilerentsinthelocalarea,andaresubjecttoanationwidecapthatdependsonthesizeofthedwelling.

Regulation

There isno regulationof rent levelsor rent increases, except indirectly through theoperationof theLocalHousingAllowance.ThestandardformoftenancyisanAssuredShortholdTenancy,whichusuallylastssixortwelvemonths.Thelandlordcanrequirethetenanttoleavewithtwomonths’noticeattheendofthetenancy,oratanytimethereafter,withoutgivingareason.ThereareotherformsoftenancythatgivetenantsmoresecuritybutsomeBuy-to-Letlenderswillnotpermittheirborrowerstousethem—thoughthisischangingundergovernmentandmarketpressure.

OwnersofHouses inMultipleOccupation(generallythreeormoreunrelatedadults living inahouse—althoughlocaldefinitionsvary)mustregisterwiththeirlocalauthorities.ScotlandandWalesrequirealllandlordstoregister,asdoanincreasingnumberoflocalauthoritiesinEngland.ExceptforHMOs,propertiesarenotroutinelyinspectedevenifthereisaregistrationscheme.

Landlordsareobligedtocomplywithanumberofsafetystandardstodowithfireprevention,gassafety,etc.Alsofromthisyearlandlordswillberequiredtoverifytenants’eligibilitytoliveintheUK.

ConclusionsThischapterhasgivenanoverviewofthecurrentpositionofthePRSintermsofwholivesinthesector;whoinvests;howgovernmenttreatshouseholdsandlandlordsinthesectorandtheoutcomesintermsoftypesandlocationsofpropertiesandtherentscharged.Itpointsouthowmuchofthispicturedependsonsurveyswithdifferentpurposesandsamplesizes.Theresultisajigsawwhichsuggestsclearvariationsbetweengroupsinthesector,bothlandlordsandtenants,andbetweenthoseinthePRSascomparedtoothertenures.However,itcanonlybeindicativeofdetailsparticularlyabouthowthesectorischangingasitbecomesthesecondlargesttenure.Inparticulardatarelatingtotherapidriseinthesectoroverthelastfewyearsispatchyatbest,asisdetailedevidenceonlandlordportfolios,indebtednessandlongertermobjectives.

GROWTHANDCHANGEINTHEPRIVATERENTEDSECTOR

The private rented sector (PRS) had been in decline for nearly a century when it began to grow again in the mid-1990s. The necessary precondition was the 1988 deregulation of tenancies and rents, but the turnaround can be dated to the introduction of the Buy-to-Let mortgage in the mid-1990s. Supply grew mainly through the transfer of dwellings from both owner-occupation and social housing (via Right to Buy), rather than through new build. Some though by no means all PRS dwellings were funded by the new mortgages. None of the government schemes intended to boost institutional investment had a major effect on the sector as a whole, despite pockets of interest.

Demand has grown, reflecting the increase in the ‘natural market’ for PRS (students, migrants, itinerant young professionals) but also reduced access to owner occupation (mainly for affordability reasons) and social housing. Given the increases in population and households that are projected in the UK, it is almost certain the demand for privately rented accommodation will continue to grow over the next decades. To meet this demand there needs to be continued investment in the PRS

Assessing the expected effects of policy changes requires an understanding of the various types of landlord. The evidence base is thin. It appears that while Buy-to-Let funding is the most common acquisition model, a significant proportion of landlords (around one third) own their properties outright or use a mix of funding.

One reason given for policy changes is to reduce the competition between Buy-to-Let landlords and first-time buyers. The nature and extent of such competition varies enormously across the country. In some markets there is no meaningful competition and first-time buyers on modest incomes can easily afford homes while in others—London particularly—there is strong demand from both landlords and prospective owner-occupiers for particular types of dwelling, especially two-bed flats and houses.

CHAP

TER

3

ThischapterexploresthegrowthofthePRSsincethe1990sandthereasonsforthatgrowth.Itsetstheexpansionofthesectorwithinthecontextofothertenuresandconsidershowthesectorhasrespondedtorisingdemandandstaticsupplyinmanyareas.Itconsidershowvariousfactorshaveshapedthecurrenttenuremixandprovidesindicationsofhowthatmixmightdevelopinfuture,particularlyinlightofgovernmentpolicyinitiatives(towhichweturninChapters5and6).

Startingin1945whenthesectoraccountedformorethan50%ofdwellings,thesizeofthePRSstockintheUKfellconsistentlytoaround8%inthelatterpartofthe1980s.Thesectoratfirstgrewslowlytoaround9%attheturnofthecentury,thenitsexpansionaccelerated.By2013itaccountedfor18.5%ofalldwellings in theUK,2.2 times theproportion in2000andalmost2.5 times theproportionin2008.

Conditions for growthWecanidentifyfourprincipalsupply-sidedriversofthegrowthofthePRSfromthe1980s.ThefirsttwoweretodowiththePRSitself:theremovalofrentcontrolandlong-termtenuresecurityinthe1980sandthecreation,withtheBuy-to-Letmortgage,ofadedicatedfinancechannelforsmallinvestorsinthelate1990s.Thethirdwasthelong-termimpactoftheRighttoBuyforcounciltenants.Thetransferofdwellingsfromsocialtoprivateownershipreducedthesupplyofcouncilhousingastherateofreplacementdidnotkeepplacewithsales, leadingtoanincreaseindemandforPRShousing.Also,ahighproportionofdwellingssoldundertheRighttoBuyeventuallyendedupinthePRSastheoriginalownerseithermovedelsewhereandrentedthemout,orsoldtoinvestors(Murie2015).Thefourthsourceofsupplyhasthemoveofunitsfromowner-occupationtoprivaterental,insomecasesbecauseowner-occupiersmovedonandkeptthepropertytorentout,andinothersbecauselandlordsoutbidotherpurchasersforexistingdwellings.Sincetheturnofthecenturythenumberofowner-occupiedunitshasincreasedslightly,butasaproportionofdwellingsowner-occupationhasdeclinedfrom69%in2000to63%in2013.Inthesocialsector,absolutenumbersfellbymorethan400,000unitsoverthesameperiodandfrom22%to18%ofthetotalstock(DCLGLiveTable101).

Increased demand for PRS housing has come both from positive reasons (desire for easy-access, short-termaccommodation) andnegativeones (problemsofaffordability andaccess tofinance forowner-occupation, and longwaitinglists,allocationrulesthatfavourprioritygroupsandlackofsupplyinthesocialsector).Figure3.1showsthatinEnglandthenumberofdwellingsinprivaterentaloutstrippedthoseinsocialrentalfromaround2011.InAnnex2FiguresA.2.1andA.2.2givesimilarinformationforhouseholds.

Figure 3.1: UK housing tenures 1980-2013

Private rented Social rentedOwner occupied

1981 2013201120092007200520032001199919971995199319911989198719851983

Source:DCLGLiveTable101

The1988HousingActmarkedarealstepchangethatprovidedthenecessaryconditionsforgrowth.Themainprovisionswere to introduceanalternative to the indefinite tenancy, and to removeboth controlson initial rents andon rentincreases for existing tenants. The 1988 Act also completely deregulated the PRS in terms of rents and security. Itabolishedrentregulationfornewleasessignedfrom1January1989.Landlordswerepermittedtochargefullmarketrentandtoincreaserentsassetoutintenancyagreementsratherthanbyanamountspecifiedbystatute.However,tenantscouldapplytotheRentAssessmentCommitteeiftheyfeltincreasesweretoohigh.Existingtenanciesbegunbefore15January1989werestill‘regulatedtenancies’(subjectto‘fairrents’).The1988Actalsointroducedtheassuredshortholdtenancy (aminimumsix-month tenancywithno further securityof tenure) and required landlords togive tenantsaminimumoftwomonths’notice.

The government introduced an important short-term tax advantage to the PRS in 1988. It extended the BusinessExpansionScheme,whichgaveincentivestosmallinvestorstogetinvolvedinmoreriskybusinessstart-ups,tolandlordsofnewlyconstructeddwellings letonassuredtenanciesfortheperiod1988-1993.Duringthatperiodsome81,000dwellingswereaddedtothePRSstock,althoughahighproportionoftheunitsprovidedwereonlyavailabletostudents(Crooketal,1995;Hughes,1995).

In1997theassuredshortholdtenancy(AST)becamethedefaultformoftenancyinthePRS.TheASTpermitsthelandlordtoregainthepropertyfromtenantswithtwomonths’noticeattheendofthelease(usually6or12months)oratanytimethereafterwithoutrequiringareason.Nowlandlordshadcertaintythattheycouldchargeamarketrentandgetpropertybackfromtenants,whichsignificantlyreducedtheriskofletting.

TheverylimitedsecurityoftenureintroducedbytheASTtogetherwithincreasingcompetitionamongmortgagelenderscreated theconditions for themortgage industry to lendmoreeasily toprivate landlords.Followinga1994 initiativeby theAssociationofResidentialLettingAgents, theBuy-to-Letmortgagebecameavailable from July1996 toprivatelandlordstopurchasepropertytolet.Theloanswereusuallyinterest-only,basedonprojectedrentalincome,withloan-to-valueratiosofupto85%andinterestrateslittleabovethoseforowner-occupiers(Rhodes,2006;Ball,2004).

In1980thePRSconsistedofsome2.1millionunits,somewhatlessthan12%ofthetotalstock.In1996thenumberofunitswasalmostexactlythesame,butmadeuponlyjustover10%ofthestock.However,intheinterimtherehadbeenfurtherdecline,toaslowas1.8mhomesinthemid-1980s,andthis losswasonlyslowlyoffsetfromtheearly1990s.Eventhen,CrookandKemp(1996)pointedoutthathalfoftheexpansionduringtheearly1990scouldbeexplainedby ‘property slump landlords’ whowere unable or unwilling to sell at that time because of the state of the owner-occupiedhousingmarket.Thusthelargegrowthinthesectorcomesafterthemid-1990swhenBuy-to-Letmortgages becameavailable.

Importantly,anincreaseofonlysome300,000unitsfromthelate1980stotheturnofthecenturydoesnotsuggestthatthesystemwasfunctioningwell.Afterthe1989/90housingcrisisnearlytwomillionhomeownerswereinnegativeequity;owner-occupationratesamonghouseholds intheirtwentiesweredroppingrapidly;andthePRS increasinglyhousedthosewhowouldtraditionallyhavebeeninthesocialsector.ThesefactorsallcontributedtothegrowthofthePRSduringthattime.Butalthoughthetrendshadbecomeclear,theadjustmentprocesswasslow.

Policies to stimulate institutional investmentSincederegulation,amajorfocusofgovernmentpolicyhasbeentostimulatethesupplyofprivaterentaldwellingsbyinstitutionsratherthanindividual investors,eventhoughthelatterdominated–andcontinuetodominate–thePRS.InadditiontotheBESschemementionedabove,HousingInvestmentTrusts(HITs)wereintroducedin1996inordertobringpensionandother long-termfunds intoprivatelyrentedhousing, includingexisting lettings (Crook,etal.,1998;CrookandKemp,2002).However,majorinvestorsdidnotseethemasworthwhileandnoHITshadbeensetupby2010.

Theintroductionin2005oflegislationtoallowUKRealEstateInvestmentTrusts(REITs)basedontheUSmodelmadeitpossibletocreateliquidandpubliclyavailablepropertyinvestmentvehiclesforsaletoawiderangeofinvestors.Theaimwastoencourageinstitutionalandprofessionalinvestmentinbothcommercialrealestateandprivatelyrentedproperty(BallandGlascock,2005).UK-REITshavebeenallowedtooperatesinceJanuary2007.Mostinvest incommercialandretailproperty,althoughasmallnumberalsoinvestinrentalaccommodation.AsyetonlyaveryfewREITsinvestsolelyinresidentialproperty.

Thepolicygoalofattractinginstitutional investmentintoprivaterentalhousingonceagaincametotheforeafterthe2010changeofgovernment.TheMarch2011Budgetcontainedasetofmeasuresaimedatcreatingamoretax-efficientapproachtolargescaleinvestmentthroughREITs(StephensandWilliams,2012).However,ofthemselvesthesechangesdidnot stimulatean incrementalflowof institutional investment intonewhousingbuilt specifically for rent.Afteranindependentreviewofwaystoattractinstitutionalinvestmentintothesector(Montague,2012),thepolicypriorityshiftedtothedevelopmentofanew‘BuildtoRent’scheme.Thistermdescribeslarge-scalepurpose-builtrental-onlyblocksthatareinsingleownership,anindustrymodelcommoninmanyEuropeancountriesbutnotseenintheUKsincethe1930s(PawsonandWilcox,2013;Scanlonetal.,2013).ThefirstgroupofBuildtoRentprojects,announcedon16April2013,willcontainupto10,000newhomes.Inadditionthegovernmentannounceda£10billiondebt-guaranteeschemetosupportnewBuildtoRentdevelopmentsintheUK(Bate,2015).Overall,thesetwomeasuresaimedtoreducethecostsandriskoffinanceatdifferentstagesofdevelopmentandownershipofnewprivaterentaldwellings.

Despitetheseefforts,theroleofinstitutionalinvestorsinthePRSisstillnegligible.Mostoftheinstitutionalinvestmentsinlarge-scalerentedhousingareinLondon.ArecentsurveyofinstitutionalinvestorsbytheInvestmentPropertyForumsuggested that of a total £180 billion in property assets held by 42 institutions, only four per centwas invested inresidential,andofthatlessthanhalfwasinPRSassets(IPF2014).Thiswasanextremelysmallamountcomparedtothetotalestimated£2.7trillionundermanagementbyUKinstitutions(CBI,2013).

Anumberofstudieshave lookedatwhy institutional investorshavenotbecomesignificantplayers in theresidentialpropertymarketandhavegenerallyidentifiedacommonsetoffactors(Daly,2008;HMTreasury2010;Hulletal.,2011;Scanlonetal.,2013):

• thedifficultythatdevelopersofPRS-specificbuildingshavecompetingforlandagainstowner-occupation;

• ashortageofdevelopmentfinance;

• lowrisk-adjustedyields;

• lackofinvestorexperienceinthesectortogetherwithverylimitedperformancedataonwhichtobasedecisions;

• theneedforscale:Savills(2014)commentsthatthedearthoflarge-scalepurpose-builtprivaterentalstockandtheoperationalplatformstorunthemisthemainbarriertoinvestorsinPRS(seealsoMilliganetal.,2013);

• negativeinvestorandlocalgovernmentattitudestothesector:ithasbeensuggestedthatsomelocalauthoritieshavenotadoptedthepro-growthapproachoftheNationalPlanningPolicyFrameworkandhaveblockedthesupplyofnewhousingintheirareas(CBI,2013);

• poorqualityandexpensivemanagement;

• reputationalrisk;and

• uncertaintiesaroundtheregulatoryandtaxationregimes.

Continued increasing demand - and how it has been metSowherehasthegrowthfromthemid-1990scomefrom?

RuggandRhodes,ina2008reportforDCLG,identifiedthemostimportantfactorsgeneratingdemandforprivaterenting(RuggandRhodes,2008).Theywere:

• growthinstudentnumbers;

• increasedinwardmigration;

• higherlevelsofrelationshipbreakdown;

• increaseddemandthatwouldotherwisehavebeencateredforinthesocialrentedsector;

• growthinthenumbersofyoungertenantsrentingfor‘lifestyle’reasons;and

• increasingaffordabilityproblemsforthosewantingtoaccesshomeownership.

Someoftheseelementsofdemandarisefromchoicewhileotherareclearlyconstraintsstoppingpeoplechoosingamore favouredtenure (seeAnnex2 formoredetail)butall leadtohigherdemandforprivaterental.This increasingdemandwasmetinpartfromnewlyconstructeddwellings,butmostlyfromthetransferintoprivaterentalofexistingunitsthathadbeeninthesocialandowner-occupiedsectors.Althoughsome220,000dwellingswerebuiltforthesocialsectorovertheperiod1997-2010,thenumberofunitsinthatsectorfellbynearly500,000astenantsexercisedtheirRighttoBuyandotherunitswerelosttodemolitionandsale.Subsequentstudieshaveshownthatasignificantminorityofunitstransferredintoowner-occupationlatermovedintothePRS(InsideHousing,August2015).

Equally,1.6millionprivateunitswerebuiltbutowner-occupationroseonlybyaroundamillion.InpartthisadjustmentreflectedthegrowingnumberofRighttoBuydwellingsthatmovedintoprivaterenting—itiscurrentlyestimatedthat40%ofallRighttoBuypropertiesarenowletprivately(HouseofCommons2016).Inpart,especiallyaftertheglobalfinancialcrisis,unitsthatcouldnotbesoldbyowner-occupiersinsteadwererentedout.Someproportionoftheincreasecomesfromlandlordswhodonotwishtobeinthesectorforthelongerterm,butmuchreflectsthefactthatexpectedreturnsfromresidentialpropertyexceedthosefromalternativeinvestmentsinaperiodoflowinterestratesandincreasedrisk.Itisalsoclearthatfordevelopers,thereturnsfrombuildingprivaterentedstockusuallycannotcompetewiththereturnsofsaleintoowner-occupation.ThemainsourceofnewPRSsupplyisnotnew-buildbuttheexistingstock.

Overallintheperiod1997-2010thenumberofprivaterentedhomesincreasedbysome85%,andasaproportionofthestockgrewfromjustover10%toabout17%.By2010thereweresome3.9millionprivatelyrentedhomes–afigurelastseeninthemid-1960s.Farmoreoftheseadditionswerenewlybuilthomesthanhadbeenthecasesincethe1930s.Althoughexactnumbersarenotknown,agovernmentanalysis(HMTreasury,2010)basedonasampleofBuy-to-Letmortgages takenoutbetween2004and2007suggested thatBuy-to-Letmighthavecontributed to thepurchaseof35,000unitsayear,oraroundafifthofallnewcompletionsatthattime.However,CMLdatasuggestthatin2015onlyaround6%ofallBuy-to-Letmortgagesweresecuredonnewproperty.Thisimpliesthattheysupportedthepurchaseofjust7,000units,lessthanathirdtheTreasuryestimate(CMLestimate,basedonBuy-to-LetMortgageSurvey).

ThenumberofBuy-to-Letmortgagesincreasedstronglyfromthelate1990s.Figure3.2showsnewloanssince1999,givingthetotalnumber(left-handscale)andvaluein£millions(right-handscale).Thisshowsthedramaticgrowthinthemarket:in1999therewerefewerthan50,000newloansbutby2007thishadgrownbyafactorofsevento346,000.Theincreaseinvalueswasevengreater,withgrossadvancesof£27.4billionin2014–almostninetimesthelevelof1999.

Figure 3.2: Number and value of new Buy-to-Let mortgages, 1999-2014

Value of new loans (£m)Number of new loans

2000 20152011 2012 2013 20142009 20102007 20082005 20062003 20042001 2002

Source:CMLTableMM17

Therewasaverysharpdropinthewakeoftheglobalfinancialcrisis.Recoveryfromthislowbasebeganin2009andhasbeenacceleratingsince2012,butthenumberandvalueofnewloanshaveyettoregainthelevelsseenin2007 (Figure3.3).

Figure 3.3: Number and value of new Buy-to-Let mortgages, 2007-Q3, 2015

Value of new loans (£m)Number of new loans

20152011 2012 2013 20142009 20102007

Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3

2008

Source:CMLTableMM17

Loan-to-valueratiosforBuy-to-Letloanshavebeenonadownwardtrendsincethefinancialcrisis,accordingtosurveys,andlandlordsreportedin2014thattheyborrowonaverageabout60%ofthepurchasepriceofproperties.TheaverageLTVofentireportfolioswaslower,asmanylandlordshavesomeun-mortgagedproperties,andhasalsofallensince2007(Carey-Jones2015).

TheDCLGPrivateLandlordsSurvey2010showsthatthevastmajorityofallpropertieswerepurchasedinthemarketplace(Figure3.4).Theproportionsofpropertiesinherited,receivedasgiftsoracquiredinotherwayswhichprobablydidnotinvolvedebtfinanceareallrelativelysmall.Buildingthepropertymighthaveinvolvedexternalfunding,butofadifferentsort.Sothestartingpointisthatperhaps70%ofnewacquisitionsinvolvedamarketpurchase.

Figure 3.4: Method of acquisition by landlord type


Bought Inherited Built it Received as a gift Other Acquiried the organisation that owned it


Figure 3.5: Sources of finance for acquisition by landlord type


Mortgage Personal savings Commercial loan Other Other loan Income from other business Income from other rented properties


Amongprivateindividualsmorethan60%usedamortgagetopurchase(Figure3.5).NotallofthesewouldhavebeenBuy-to-Let,andindeedmanywouldhavebeenacquiredbeforethattypeofmortgageexisted.Afurther10%orsousedother loans.Butthisdoes implythatsome75%ofthestockof investmentproperties in2010hadbeenboughtwith debtfinance.

Among companies theproportion involvingdebt financewasmuch less. Theproportionof companyborrowinghasprobably increased since this survey, because a higher proportion of Buy-to-Let purchasers are now constituted ascompanies.OtherorganisationswouldgenerallynotbeintheBuy-to-Letmarket.

LookingatthetrendsinthenumbersofBuy-to-Letmortgagesweseethatsince2007thenumbersperannumhaverangedfromashighasnearly350,000toalowofunder100,000(Table3.1).

Table 3.1 New Buy-to-Let mortgages (1999-2015) and split between purchase and re-mortgage (2002-2015)

£ millions gross advances Percent for re-mortgageYear Number of loans Total For purchase For re-mortgage

1999 44,400 3,100

2000 48,400 3,900

2001 72,200 6,900

2002 130,000 12,900 8,030 4,130 32

2003 187,600 20,300 11,600 7,460 37

2004 226,000 24,100 14,060 8,490 35

2005 223,100 25,600 12,630 11,670 46

2006 319,200 38,000 19,590 17,120 45

2007 346,000 44,600 23,100 20,640 46

2008 225,300 27,600 12,210 14,610 53

2009 88,400 8,200 4,530 3,390 41

2010 85,200 8,700 4,650 3,960 46

2011 114,900 12,600 6,200 6,400 51

2012 130,200 15,200 7,400 7,600 50

2013 161,000 20,800 9,300 10,700 51

2014 197,700 27,200 12,400 14,500 53

2015 252,200 37,900 15,600 21,900 58

Source:CMLTableMM17

In the period before 2008 the number ofmortgages exceeded the net additions in the final couple of years by aconsiderableamount–in2007by55%(Figure3.6).From2008thenetincreaseinthePRSbegantoexceedthenumberofnewmortgages,initiallybyincreasingamountsandthenasthenumbersofmortgagesgrewagaincamebackcloserto thenet increase.By2013netadditionswerestillabovethenumberofnewmortgagesbyaround30%.However,in2014andparticularlyin2015thegrowthinBuy-to-Letmortgagesjumped–by23%in2014and28%in2015,with re-mortgagingincreasingby28%and38%respectively.Thustosomeextentthepicturepriorto2008isbeingrepeated.

Figure 3.6: New UK Buy-to-Let loans for purchase and re-mortgaging and change in stock of PRS dwellings, 2002-2013

For purchase For re-mortgage Change in PRS stockTotal new loans

2002 2015201420132012201120102009200820072006200520042003

Source:CMLTableMM17andDCLGLiveTable101

Thisdemonstrates thatnotall thegrowth in thePRS isattributable toadditionalBuy-to-Letmortgages. Householdscanletoutpreviouslyowner-occupiedproperties(so-called‘lettobuy’)orfundpurchasesbyincreasingindebtednessontheirowner-occupiedhome. It isalsoclear thata largeproportionofBuy-to-Letmortgages,especiallybefore thecrisis,werere-mortgageswherethemoneywasperhapsusedforotherpurposes.NewBuy-to-LetmortgagesdonotnecessarilygeneratenetadditionalPRSstock;equally,additionalstockcanbegeneratedwithouttheuseofBuy-to-Letmortgages,notonlybecauseasignificantnumberoflandlordsarecashpurchasersbutalsobecausethereareothersourcesofdebtfinance.Whatisalsoclearisthatinstitutionalinvestmenthasremainednegligiblethroughouttheperiodalthoughtherearenowclearsignsofpotentialinterest.

TheBDRCsurveysuggeststhattheroleofBuy-to-Letinfuturepurchasesisexpectedtobeverysimilartothepast-over60%ofthosewithfourpropertiesorfewerexpecttouseaBuy-to-Letmortgage,whileaquarterofalltypesoflandlordexpecttoreleaseequityfromotherpropertiestoenablethenextpurchase.Thesemethodsposeverydifferentrisksandarenotmutuallyexclusive.However,betweenaquarterandathirdofthoselookingtobuyanotherpropertyareexpectingtodosowithoutrecoursetoanyformofdebtfinance.

Locating Buy-to-Let within the PRSAsnotedabove,privatelandlordscanacquiretheirpropertiesinavarietyofways.Manyowndwellingsoutright,havinginheritedthemorpurchasedwithoutusingdebtfinance.Therearethenthosewhoborrowedinitially,eitherwithaBuy-to-Letmortgageorsomeothersource,buthavesincepaidofftheirdebt.Weknownexttonothingaboutthisgroup.ThentherearethosewhocurrentlyhaveoneormoreBuy-to-Letmortgagesandthosewhointendtobuypropertiesusingsuchamortgageinfuture.Itisatthisgroupthatgovernmentpolicyappearstobedirected.

ThetermBuy-to-Letalsohasmanymeaningsintheliterature.InthegeneralPRScontextittendstorefertoanyonewhopurchasedapropertywiththeintentionoflettingitout.ThisbroaderuseofthetermcoversthoseusingaBuy-to-Letmortgagebutalsoincludesmanylandlordswhousedothersourcesoffunds.Howeveritexcludeswhatisnowseentobeanimportant(ifrelativelysmall)groupknownas‘lettobuy’–i.e.,thoselettingoutapropertytheyalreadyownandusingtherentalincometopurchaseanotherinwhichtheymayliveasowner-occupiers(orindeedalsoletout).

InthecurrentpolicycontexttheinterestismainlyonBuy-to-Letmortgagorsstrictlydefined.Evenwithinthisgrouptherearethosewhohavepaidofftheiroriginalmortgage(s);thosewhoarestillmortgagorsbutonlyonpartoftheirportfolio(andmayuseadditionalmortgagefinanceonexistingpropertiestofundnewacquisitions);andthosewhohaveaBuy-to-Letmortgageoneachpropertywhethertheyownonlyoneorhavemultipleholdings.Inorderproperlytoassessthelevelsofindebtednessandrisksinvolved,eachcategoryshouldbeconsideredseparately.However,thereisverylittleevidenceaboutthedistributionsofportfoliosizes,overalldebt,andtheproportionsofpropertiescoveredbyBuy-to-Letmortgages.Ontheevidenceofonesurvey(BDRC),30%owntheirproperty(ies)outright;thisisgenerallycorroboratedbyothersurveys.Some44%ofBDRCrespondentsownwiththehelpofaBuy-to-Letmortgage(by implicationonallpropertiesintheirportfolios)and26%ownsomeunitsoutrightandsomewithaBuy-to-Letmortgage.Thisappearstobeconsistentingeneraltermswithotherdatasources.

Itisveryclearthatre-mortgagingisanimportantfactordeterminingtherisksinvolved,butweknowlittleaboutpatternsofre-mortgagingamongindividuallandlords.Table3.1suggeststhatmorethanhalfofBuy-to-Letlendingin2015wasre-mortgaging,butinportfoliotermstheCMLsurveyonlyprovidesdataofotherborrowingfromthesameorganisationandthesequestionsareansweredbylessthan50%ofrespondents.Othersourcesareverylimited.This,andthegeneralpaucity of data about landlords’ financial and investmentmodels, means it is difficult to formulate evidence-basedassessmentsoftherisksorlevelsofdebtassociatedwithlandlords’eventualdecisions.

ItisquiteclearthatthereareanumberofdifferentBuy-to-Letmarketsandthisiskeytounderstandinglandlordbehaviourbothintheupturnandthedownturn.Inareaswithhighandsustainedhouse-priceappreciation, landlordsaremorelikelytoseetheirpropertiesasequityinvestmentswithclearresaleprospects,althoughtheyrequirerentalincometocovermortgagecostsandproduceanannualreturn.Elsewhere,notablyinmarketswherehouse-pricegrowthisslower,property ispurchasedfortherentalreturnwiththequestionofcapitaluplift (orresale)beingmuchmoreuncertain.Thesedifferingmarketcircumstancesaffectthepricepointswherelandlordsfeelabletobidintothemarket.Inlower-growthmarketslandlordsarelesslikelytobebiddingagainstfirst-timebuyers,whoaremorelikelytobetryingtoenterstableandgrowingmarkets.Inthesestrongermarketsthecompetitionbetweenfirst-timebuyersandlandlordsisclearerduetotheoverallpressureonprices.Landlordsareawareofthis,andknowthatsuchpressurehelpsensureareadydemandforrentingaswellaspotentialbuyerswhentheycometosell.SoinLondonandothervibrantmarketsthereisstrongercompetitionaroundsometypesofhomes,inparticulartwo-bedroomflatsandhouses.

Bracke(2015)arguesthatBuy-to-Letinvestorstargetareaswherethereisalreadyastrongprivatemarket.HecomparedthepercentageofLandRegistrytransactionsclassifiedasBuy-to-LetagainstthepercentageofPRSstockbyregion,andfoundaclearrelationship:Buy-to-LetactivitywasmorecommoninLondonthanelsewhere,andPRSdwellingsformeda higher proportionof the stock. Looking at dwelling type, he found that flatsweremore likely thanother types ofdwellingstobeboughtbyBuy-to-Letinvestors,thoughinsomeregionsterracedhousesareprobablyequallyimportant. The recentBDRCsurveyshows that terracedhomesdominateportfolios in theNorth,MidlandsandWales,while inLondonandScotlandflatsaremostcommon.

ConclusionsThischapterhasshownhowderegulationinthe1980spreparedthewayforpotentialgrowthinthePRSbutdidnotofitselfgeneratethatgrowth.Rentderegulationandverylimitedsecurityoftenuretogetherwithspecificgovernmentinitiativeswerenotenoughtoleadtonetnewinvestmenteitherfrominstitutionalorindividualinvestors.Yetasearlyasthelate1980sthereweresignsofincreasingdemandforprivatelyrentedaccommodation,particularlyfromyoungerhouseholdsandthoseunabletogainaccesstosocialhousing.Thislackofsupplyresponsewasduetoacomplexmixofconstraints,incentivesandchangingrequirements,includingthefactthatinthe1980sthereweremanylandlordswhowantedtoleavethesector.

ItwasonlywiththeintroductionofBuy-to-Letmortgagesinthemid-1990sthatnetnewinvestmentinprivaterentingcouldbeobserved.The introductionof theBuy-to-Letmortgagewasclearlyenablingandchangedthenatureof themarket.Butmorefundamentalissuesarounddemographicchange,affordability,accesstomortgagecredit,risksbothforworking households and investors, the available returns on other investment and the outcomes of governmentmacroeconomicpolicylieattheheartofthegrowthofthesector.

Evenso,muchofthegrowth inPRSstockhascomefromothertenureswithonlyperhaps15–20%ofthe increasecomingfromnewlybuiltdwellings.Importantlyinstitutionallandlordsstilldonotseetheconditionsnecessaryforlargescaleinvestmentinthesector–instead,debtfreeindividualpurchasersandthoseusingBuy-to-Letmortgageshavebeenpreparedtoinvest.

ADDRESSINGTHEGOVERNMENT’SCONCERNS

The government and the Bank of England have asserted that Buy-to-Let investors compete unfairly with first-time buyers and that in a downturn they might sell properties into a falling market, exacerbating the situation. There is also a long-term preference for a rented sector owned and managed by institutions rather than private individuals. These concerns seem to lie behind the various proposals to curb the sector.

Every year since 1999 more loans went to first-time buyers than Buy-to-Let investors in all regions, including London. Landlords can access interest-only mortgages, now almost unavailable to owner-occupiers, but on the other hand LTVs for investors are generally lower. The (limited) research into direct competition between investors and putative owner-occupiers has found that nationwide, only a minority of sales to landlords involved bids from both types of buyer.

The forthcoming changes in regulations will not affect large company or corporate landlords. However, even if this subsector were to grow very rapidly it would still account for only a small proportion of the PRS stock.

The Bank has based comments about landlord behaviour on results from a general household survey. In more targeted surveys landlords tend to say they are more likely to buy than to sell, whatever the state of the market. Increases in Stamp Duty Land Tax (SDLT) can be expected to reduce landlord purchases, and mortgage tax changes will reduce returns for many landlords but will not cause them to sell up en masse. Decisions about the role of residential property in overall portfolios will depend on returns to other asset classes, and any rebalancing will take place over a number of years. The evidence from previous downturns does not support the official view.

CHAP

TER

4

IntroductionWehavesetout in somedetail theevolutionof theprivate rentedsector (PRS)andwithin thattheBuy-to-Letmortgagesector.Wehavehighlightedsomeof the terminologicaldifficulties thatexist indeveloping tightandshareddefinitionsof the twosectors.Wehavealsoflaggedup thesignificant data gapswhich limit a full understandingof thePRS as awhole and theBuy-to-Letmarketinparticular.WhentheBankofEnglandwasbeforetheTreasurySelectCommitteeandthediscussionturnedtoBuy-to-Let,MartinTaylor,externalmember,FinancialPolicyCommittee,BoEsaidinresponsetoaquestionfromChrisPhilp,MP,

We are expressing mild concern about Buy-to-Let. We note that it has different characteristics from owner-occupied. We do not understand its characteristics quite so well, because it has not been going so long. We do not have historical data.

(HouseofCommons,26thJanuary,2016)

In this chapter we examine the arguments put forward over recent months about policydevelopmentsincluding:

• TheSummerBudgetannouncementsonreducinglandlords’entitlementtomortgageinterestreliefandthewearandtearallowance;

(https://www.gov.uk/government/publications/restricting-finance-cost-relief-for-individual landlords/restricting-finance-cost-relief-for-individual-landlords and https://www.gov.uk government/uploads/system/uploads/attachment_data/file/447461/150715_Wear_and_tear_condoc.pdf)

• TheAutumnStatementannouncementthatlandlordswouldbeliableforhigherratesofStampDutyLandTax

(https://www.gov.uk/government/consultations/consultation-on-higher-rates-of-stamp-duty-land-tax-sdlt-on-purchases-of-additional-residential-properties/higher-rates-of-stamp-duty-land-tax-sdlt-on-purchases-of-additional-residential-properties)

• ConsultationonthepowersofdirectionfortheFinancialPolicyCommittee

(https://www.gov.uk/government/consultations/consultation-on-financial-policy-committee-powers-of-direction-in-the-buy-to-let-market/financial-policy-committee-powers-of-direction-in-the-buy-to-let-market)

Arguments in favour of curbs on the Buy-to-Let sectorReasonsforcurbingBuy-to-Let,accordingtovariouspolicyannouncements,includethefollowing:

• Buy-to-Letinvestorshavecrowdedoutfirst-timebuyers;

• asustainable,high-qualityPRSshouldbedominatedbyprofessionallandlordswithlargeholdings;and

• theBuy-to-Letsectorisapotentialcauseofeconomicinstabilityaslandlordstendtoinvestintheupturnandsellinthedownturn,thusputtingundesirablepressureonprices(upordown).

Weexploreeachoftheseassertionsinturn.Asaprelude,wereflectonwhythegovernmenthasmadewhatmanyseeasasudden‘u-turn’. IncoalitionhousingministerGrantShappsMPespousedtenureneutrality,whileaJanuary2015consultationpaperprovidedevidenceofthegovernment’spositivestanceonBuy-to-Let:

….buy-to-let borrowers tend to be acting as a business. The government is committed to introducing FCAregulationonlywherethereisaclearcasefordoingso,inordertoavoidputtingadditionalcostsonfirmsthatwouldultimatelyleadtohighercostsforborrowers.

…. the directive does recognise that buy-to-let lending is not the same as lending to individuals who arebuyingtheirownhome,andprovidesmemberstateswiththeoptiontoexemptbuy-to-letfromthedetailedrequirement….ThegovernmentisproposingtousethisoptiontoputinplacetheminimumrequirementstomeettheUK’slegalobligations,asitisnotpersuadedofthecasefortheconductregulationofbuy-to-let.

(consultationpaperontheImplementationoftheEUMortgageCreditDirective,issuedJanuary2015)

Yetinthefollowing12monthstherehavebeenseveralmajorinterventions.Itisclearthatthecontinuedshrinkageoftheowner-occupiedsectorhasbeenthedrivingfactorandalongwithitgrowingpoliticalpressureforaresponseonthehomeownershipside.ThegovernmentseemstohavetakentheviewthatthisdeclinewastoanimportantdegreecausedbytheriseofthePRS/Buy-to-Letsector,thusjustifyingtheimpositionofnewconstraints.

TheargumentsbeingadvancedbyboththegovernmentandtheBankofEnglandhavestrongechoesofthesustainedcommentaryemanatingfromtheReserveBankofAustraliaandothersaroundtheworld(seeReserveBankofAustralia,2015).TheReserveBankofNewZealandhasbeenmakingsimilarremarksandindeedhasmadeapolicyinterventionintheAucklandhousingmarket(ReserveBankofNewZealand,2015).TheseexamplesplusrecentmovesbytheBaselCommitteeoftheBankforInternationalSettlementsdosuggestagrowingfocusonthisarea.TheglobalFinancialStabilityBoardissueditspaperonPrinciplesforSoundResidentialMortgageUnderwritingPracticesin2012andhasmaintainedaninterestintheBuy-to-Letarea,thoughhasnotpublishedanywarningsignals.TheBankofEnglandstanceisthereforeinlinewiththepositionofothercentralbanksandregulators.

IntherecentTreasurySelectCommitteereferredtoabove,theBanksoughttoofferabalancedcommentaryinresponsetoquestionsabouttheaccessofBuy-to-Letinvestorstointerest-onlyloansandthefactthattheyarenotsubjecttoapersonalincometest.IthighlightedthefactthatBuy-to-Letinvestorsmustputdownbiggerdepositsthanprospectiveowner occupiers. However, Martin Taylor did conclude ‘I would agree the Buy-to-Let buyer does seem to have anadvantageinexecutingthetransaction.’

OnereasonwhyBuy-to-Letmortgagorsmayanywaybeseentohaveanadvantageoverfirst-timebuyersoutwiththeissuesoftaxationandregulationisthatBuy-to-Letmortgagorsareinasimilarpositiontoexistingownersinhavingareasonableamountofequityinplacesuchthattheloantovalueratiosareoftenwellbelowthe75%usuallyregardedasthenorm.Likeexistingowner-occupierstheyareinapositiontooutbidfirst-timebuyers.Moreoverwheretheinvestorusescashtheyareabletoofferaspeediertransactionthanonewhereapprovalforamortgageloanmustbesecured.

First-time buyers (FTBs) v Buy-to-Let purchasers

Theextent towhichBuy-to-Letpurchasersmightactually crowdoutfirst timebuyershasbeen thesubjectofmuchcommentbutlittleseriousanalysis.Thereareanumberofaspectstotheissue.First,thereistherelativescaleofthetwomarkets–onthebasisofboththenumberandvalueofloans(onemeasureforwhichtherearedata)wecanseethatthefirst-timebuyermarketismuchbiggerthantheBuy-to-Letmarketandindeedhasrecoveredmorestrongly(Table4.1).

Table 4.1: Market for first-time-buyer mortgages and Buy-to-Let loans, 1999 to 2015

1999 2005 2010 2015

First-time-buyer mortgages

Number 592,400 363,800 199,400 311,700

Value(£m) 34,009 39,880 24,100 45,000

Buy-to-Letmortgages

Number N/A 120,460 49,420 100,300

Value(£m) N/A 12,630 4,650 12,200

Source:CML

Itishoweverself-evidentthattherewillbemarketswherethetwogroupscompete.AsnotedinChapter2,privaterentingismuchmorespatiallyconcentratedthanowner-occupationandPRSdwellingsaremorelikelytobeflats,eitherpurposebuiltorconverted.Thusinsomelocations-notablycentralurbanareas-andforsometypesofproperty,Buy-to-Letwillsettheprice,especiallygiventheabilityofprospectiveowner-occupierpurchaserstogotootherareasandhousetypeswhicharetraditionallymoresuitedtothatsector.Thisisasegmentedmarketwhichrequiresdetailedanalysistounpick.

ArecentCountrywide/SundayTimesanalysis(31/1/16)lookedat210,000offersmadefor61,000propertiessoldoverthepast12monthstodeterminewhetherlandlordshadoutbidfirst-timebuyers.CompetitionwasmostintenseinLondon(Table4.2),where46%ofsalestoinvestorswereattheexpenseofprospectiveowneroccupiers(thefigureswere37%intheSouthEast,25%intheWestMidlands–theUKaveragewas36%).Thissuggeststhatinonlyathirdofsalestoinvestorswasthereacompetingbidfromaprospectiveowneroccupier.Ofcoursesomeofthelattermayhavedecidedtherewasnopointinattemptingtocompete,butitcertainlysuggeststherearemarketswheretheoverlapisnotgreatandotherswherelandlordsarethemainmarketplayers.

InaBankofEnglandpaper,Bracke (2015a)finds thatover theperiod2009-2014,Buy-to-Let investors in theUKonaveragepaidaround1% less thanotherbuyersand thatwhere the rentalmarketsweresmallerand lessactive thediscountrose(alsothatthescaleofdiscountwasdirectlyrelatedtooverallmarketconditions–thestrongertherentalmarketthelowerthediscount).

4SeeFSBsummary;http://www.fsb.org/wp-content/uploads/Annex-VI-Summary-of-additional-questions-on-recommendation-12.pdf

Table 4.2: Prices paid by investors and first-time buyers

Proportion of investor purchases without counter-offer from owner

occupier

Average investor purchase price

Difference between investor offer and highest owner occupier

offer

Proportion of sales to investors

West Midlands 75% £114,773 1.3% 16.7%

North East 71% £111,890 2.8% 13.9%

Wales 71% £133,008 3.4% 15.5%

Yorkshire and Humber 67% £112,321 2.8% 12.7%

North West 67% £102,056 3.2% 12.4%

South West 66% £170,869 1.7% 14.9%

East Midlands 66% £108,850 2.3% 16.0%

East of England 64% £165,025 2.2% 12.7%

South East 63% £214,904 1.7% 15.7%

London 54% £436,103 1.8% 13.2%

UK 65% £191,982 2.3% 14.9%

Source:Countrywide

Table4.3looksinmoredetailattheoverlapsbetweentheFTBandBuy-to-Letmarketsinsofarasthedataallow.Giventhedifferentspatialconcentrationsofdemandinthetwosectorsitisapitythatnomoredetailedcomparisonispossible.Thesedataforthethirdquarterof2015giveafairlytypicalbreakdowncomparisonbetweenthetwosectors.Buy-to-LetlendingisroughlyathirdofthesizeofFTBlending(bynumberofloans)thoughitisclearthatthisvariesbycountryandregion.InLondontherearenearlyhalfasmanyBuy-to-LetloansasFTBloans,whereasinmuchlesspressuredmarketsthisproportionisaround20%.

Thisagainsuggeststhatcompetitionbetweensectorsismoreintenseinsomemarketsthanothers.Buy-to-LetloanshavelowerLTVs(typically75%)thanFTBloansreflectingtherestrictionsimposedbylenders.IndeedrecentindustrydataforNovember2015showthat21%ofloansforBuy-to-LetpurchasewereatLTVsof65%orbelow,26%atbetween65and75%,14%at75and39%atLTVsover75%-almostallinthe75-80%category.Thusoverthree-fifthsofBuy-to-LetloanshadLTVsof75%orlower.HoweverBuy-to-Letinvestorscanaccessinterest-onlyloansinwaysmostFTBscannotthoughthismarketisslowlyre-opening.Inadditionquitelargenumbersofinvestorsusecashtomaketheirpurchases-Bracke (2015b)estimates thisat50%although it is clear it variesover time -and thisof itselfadvantages investors overFTBs.

Insummarywhilecompetitionbetweenthesetwosectorsundoubtedlyexists,especiallyincentralurbanareas,itisnotauniversalproblem.ConstrainingtheBuy-to-LetsectorwillnotinitselfsolvetheproblemofdeclininghomeownershipandindeedmaymeanthattheshrinkageofthePRSforceserstwhileFTBstolivewithfamilyandfriendsforlongerinsteadofestablishingindependenthouseholds.

Table 4.3: Competition between investors and first-time buyers

UK England Greater London

South East

West Midlands

North East Scotland Wales N.

Ireland

First-time buyer loans

Number 84,200 70,400 12,400 16,400 6,900 3,000 8,200 3,600 2,000

Value(£m) 12,900 11,420 3,280 3,100 850 370 890 390 180

Average(£) 153,206 162,215 264,516 189,024 123,188 123,333 108,536 108,333 90,000

Buy-to-Let loans

Number 27,693 24,778 6,061 4,818 2,243 904 1,618 837 407

Value(£m) 3,733 3,544 1,493 729 204 61 128 69 26

Average(£) 134,799 143,030 246,329 151,307 90,949 67,478 79,110 82,437 63,882

Buy-to-letas%ofFirst-timebuyerloans(number)

33% 35% 49% 29% 33% 30% 19% 23% 20%

Source:Paragon/CML

‘Amateur’ vs ‘professional’ landlordsAs discussed earlier, the government has put considerable emphasis on its wish to see the development of aninstitutionally fundedandhighlyprofessionalisedprivaterentalsector.By implicationtheargumentseemstobethatamateurlandlordsarelesslikelytoofferhighqualityservicesandthatinstitutionalinvestorswillnotonlyoffernewlybuilthomesbutalsoprofessionalmanagement.Thisisquiteadifficultargumenttochallengebecauseeventhoughitmightbetrueofinstitutionalinvestorswehaveyettoseethescaleofinvestmenttoallowustoevidencethecase.Itmakessensethatsuchinvestorswilldothisastheirfocusisontherentalreturn–arunningyield–thatcansupportthepensionliabilitiesthatoftenunderpintheirinvestments.

Manyexpertssuggestthatagoodwaytospeedupnewresidentialconstructionistoincreasetheproportionsgoingintotherentalmarket(andimplicitlyintoinstitutionalhands).Butevenifthisdoeshappen,newbuildwillcompriseonlysmallproportionoftheoverallmarketfortheforeseeablefuture.Moreoverinstitutionalinvestorsarguethattheycannotoutbidowner-occupiersiftheyaretoachievetherateofreturnrequired(IPF,2014;LSELondon,2015;IPF,2016).

Ofthenewinterventions,thecurbingoftaxreliefappliestoindividuallandlordsonly,whilethenewstampdutywillapplytoindividuallandlordsandcompanylandlordsalike.

Atpresentonly5%of landlords appear tobeoperating as limited companies. The recentBDRC reportprovides anindicationoflandlords’likelyresponsetothesechanges.Some60%oflandlordsinterviewed—and69%ofthoseinthehigherratetaxband--saidtheywouldincreaserentsasaresultofthetaxchanges,whileaquartersaidthepolicywouldleadthemtosellproperty.Forlandlordswithlargerportfolios(thosewithovertwentyproperties)theproportionwashigher,withoneinthreesayingtheywoulddivestwithinthenexttwelvemonths.Accordingtothesurveyreport,

…professional’landlordsappeartobemostdisgruntledofall.Whilstalltheindicatorssuggestcontinuedstrongrentalgrowthinthesector,recentchangestolegislationandcompliancerequirementsaremakinglandlords’operationsandobligationsmoredifficulttomanageandsqueezingprofitability.Landlordstellusthechangeswilldeterthemfrominvestingfurtherinthefutureandinmanycasestheywillvotewiththeirfeetbyleavingtherentalsectororsignificantlyreducingtheirportfolios(BDRCContinentalandAllsop,2015p.3).

5SeeSavills(2016)foradiscussionofthegrowthofthissector

Allofthisisafarcryfromthegovernment’sownstanceoverrecentyears.Inits2010reviewofthePRStheTreasurycommented,

In the UK, small individual landlords, not institutions, dominate PRS supply. It is estimated that in Englandindividualsorcouplesown74percentofthePRSstock,andwithovertwothirdsofthoseowningfiveorfewerproperties.However,therehavebeenimportantnicherolesforlargerlandlords,whohavetendedtospecialise,cateringforstudents,theretired,oremployerprovidedaccommodation.Andinmanycasestheseportfolioshavebeenacquiredthroughacquisitionsofexistingstock,ratherthaninvestmentinnew-build….

TheUKisnotanoutlierintermsofthisdominantroleforindividual,privatelandlords.Thepictureisthesamein the majority of high-income countries, although variations result from historical, policy and institutionalfeaturesofrentalmarketsinindividualcountries.InFrance,forexample,ahigherproportionoftherentalstockisownedbyindividualsandcouplesthanintheUK.InGermanyindividualsandcoupleslandlordsstillaccountforovertwothirdsofthePRSstock.AndwhileGermanyhassomeexamplesofverylargeresidentialinvestmentcompanies(e.g.DeutschAnningtonownsover200,000properties),theseholdingsarepredominantlytheresultofprivatisationsofpreviouslystate-ownedoremployer-providedaccommodation(HMTreasury,2010).

Whiletherhetoricmayfavourprofessionalmanagementoflargeportfoliositisworthnotingthatonesurveyshowsover20%of landlordsuseprofessionalagentstomanageat leastpartsoftheirportfoliosandanother38%useagentstosecurelettings(BDRC,2016).Othersurveysshowtheproportionstobehigher.

Insummary, thedistinctionsbetweenamateurandprofessional, largeandsmall,and institutionaland individualandcompany landlordsare largely artificial.Globallyprivate landlordism is a ‘small business’ business. Even inGermany,notedforinstitutionalinvestment,only15%ofthePRSisownedbyinstitutionsandthemarketisdominatedbyindividuallandlords(Whiteheadetal,forthcoming).Whilethereisclearlyacaseforbringingininstitutionalfundingthiswillprobablyonlyeversupportrelativelysmallpartsofthemarket.So‘takingsides’inthewaythegovernmentseemstohavedoneislikelytoproducedistortionsthatwillnotbehelpfultothemarketineithertheshortorthelongrun.

Behaviour of landlords in a downturnIntheHMTreasuryConsultationPaperonpowersofdirectionfortheFinancialPolicyCommittee(2015a),muchismadeofthepotentialforBuy-to-Letlendingtoamplifyhousingmarketcycles,bothintheupturnandinthedownturn.It isarguedthat inanupturn,Buy-to-Let investorshave incentivestocomeintothemarketandputupwardpressureonhousepricesforbothowner-occupiersandotherlandlords.Thismayinturnincreasefinancialriskasborrowerstakeonmoredebt.Inadownturnandwithrisinginterestratestowhichinvestorswereparticularlyexposed,theargumentwasthatBuy-to-Letinvestorsmightexitthemarketaddingtodownwardpressureonprices.TherecentsurveycarriedoutfortheBankbyNMGConsultingiscitedasgivingtheevidenceforthis.

TheNMGsurveyhasbeenundertakensince2010.ItcoversGreatBritainandisnowoperatedasanonlinesurveyof6007households.Inthelatestresults,publishedinDecemberfortheSeptember2015survey,342respondents(5.6%)declared that theyownedoneormoreBuy-to-Letproperties (mainlyasinglepropertybutsomeover four–the totalnumberofpropertiescoveredisinexcessof600).Some123ofthelandlordrespondentsindicatedtheyhadaninterest-onlymortgagewhile122hadnomortgageand73hadacapitalrepaymentmortgage.Theageprofileoftheselandlordswasstrikinglydifferentfromthatshowninothersurveys(seeTable2.9).Whileothersurveysshowlandlordstobelargelymiddle-agedandolder,theNMGsamplewasroughlyevenlydistributedacrossagebandsfromage16andup,whichseemsimplausible.Byregion,19%ofrespondentslivedinLondon,11%intheSE,8%intheSWand11%inEastAnglia,9%wereintheWestMidlands,9%intheEastMidlands,12%wereintheNorthWest,11%inYorkshireand2%intheNorth.SoroughlyhalfwereinSouthernEngland(49%),43%intheNorthplus3%inWalesand7%inScotland.Againthisisnotreplicatedinothersurveys.

Thesurveyposedtwoquestionsaboutwhattherespondentsmightdoifthecurrentsituationchanged.

• (Question1)‘Wouldyousellone(ormore)ofyourbuy-to-letpropertiesifinterestratesweretorisesuchthatrentalincomewerenotenoughtocovermortgagerepaymentsandexpenses?’

• (Question2,askedofthosewhodidnotanswerdefinitelytothefirstquestion)‘Wouldyousellyourbuy-to-letpropertyifrentalincomedidn’tcovercostsANDpropertypriceswerealsoexpectedtofall?’

Table 4.4: Would interest-rate rises cause you to sell?

Yes Probably Maybe Don’t know Refused Total

Q1 2015 40(21%) 73(38%) 73(38%) 6 2 194

Q2 2015 23(15%) 131(80%) 0 12 1 167

Source:BoE/NMG

Therewere194responsestoQ1(Table4.4),withaclearmajoritysayingthataninterest-raterisewouldcausethemtosell-thoughthescaleofthesell-offisunknown.Withrespecttothesecondquestion,15%ofthoserespondingsaidtheywoulddefinitelyselland85%saidprobably.Therewerealso12whodidn’tknow(and1whorefused).TheFSRcommentsthatthesurveysuggeststhataround15%ofBuy-to-Letinvestorswouldconsidersellingtheirpropertiesiftheirinterestpaymentswereno longercoveredby rental income.A further45%wouldbe inclined tosell ifpropertypriceswereexpectedtofallbymorethan10%.TheBankisusingweighteddataintheFSRsoourresultsarenotstrictlycomparable.

Thesurveyalsoaskstwofurtherquestionswhichgiveinsightintothesamplecaptured.Thesewere

• ‘AreyouawareoftheproposedreductioninmortgagefinancetaxreliefforBuy-to-LetinvestorspayinghigherrateincometaxannouncedintheSummerBudget2015?’[146saidno(43%),143saidyes(42%),45didn’tknowand8refused(total342)]and

• ‘WhichofthefollowingbestdescribestheeffectthereductioninmortgagefinancetaxreliefwillhaveonyourBuy-to-Letinvestments?’

o Intendtoincreaserents(36saidnoand15saidyes);

o Morelikelytosell(31saidnoand20saidyes);

o LesslikelytoinvestinadditionalBuy-to-Lets(36saidnoand15saidyes),

o Other;notplanningtotakeanyaction;don’tknow;prefernottostate

Both theseanswers give a senseof thepopulationof landlords in this sample.By a smallmargin thereweremorelandlords unaware of the tax changes than aware and in terms of actions thatmight followwe have contradictoryevidence.ItcertainlysuggeststhatthepictureisrathermorecomplexthanassetoutbytheBank.ItiscleartheNMGsurveycoverageoftheBuy-to-Letsectorhas its limitations,as it isageneralhouseholdsurveywithnoweightingstosecurelargernumberofsuchrespondents(seeChapter2wherewediscussdetailsofrecentsurveys).

TherecentCMLYouGovsurveypublishedon6thJanuary2016(Pannell,2016)covered1000landlords.Respondentswereaskedhowtheywouldcopewitha1.5%rise inmortgageratesoverthenextthreeyears,whichwasseenasaplausiblescenario.TheYouGovsurveyindicatedthat75%oflandlordsforesawnoproblemsinmeetingtheirmortgagepaymentsandonly13%ofrespondentsindicatedtheywoulddothisbyraisingtheirrents.Thesurveyalsoaskedabouttheimpactofthetaxmeasuresannouncedinrecentmonths.Figure4.1givesthedetailsanditsuggestslandlordswillbeabletodealwiththefinancialimpactsofthesechangesinanumberofways.CertainlyitdoesnotsuggestthatthebiggestimpactwillbetoreducetheavailabilityofhomesinthePRS.TheCMLsuggeststhattheseincombinationwiththeSDLTchanges‘riskshavingasignificantindirecteffectoninvestorsentiment,alteringthedirectionoftravelforBuy-to-LetlendingandthefurtherexpansionofthePRS’.

Thoselandlordswhoexpecttodependontheirrentalinvestmentsasapensionareunlikelytorespondtochangesunlesstheyaffectreturnstosuchanextentthatotherlong-terminvestmentsareclearlypreferable.Recentdevelopmentsinglobalstockmarketsmayrepresentabuyingopportunityforthebrave,butalsoemphasisethefactthatthevalueofstockportfolioscangodownaswellasup.

Figure 4.1: Likely impact of tax relief changes on portfolios

I will slow down the rate at which I add properties to my portfolio

I will stop adding

properties to my portfolio altogether

I will review the mix of

properties that I own

How will the upcoming tax changes impact the growth of your rental business?

I will reduce my portfolio – i.e. I will sell some property, but

not all

I will sell all my rental property

Other None of these – I won’t take

any action

Don’t know

% p

erce

nt o

f lan

dlor

ds

Source:CMLYouGovsurveyoflandlords

Evidence from previous downturnsThe Buy-to-Letmarket was established in 1996, just after the 1990s recession and well before the 2007/08 crisis. Anumberof researchassessmentshavebeenundertakenover the last20years thathaverelevanceto thecurrentdebate.In2005ScanlonandWhiteheadpublishedadetailedstudyoftheBuy-to-LetsectorfortheCML.Asdiscussedearlier,thereportdistinguishesbetweenprofessionalandnon-professionalorso-called‘amateur’landlords,suggestingthatprofessionallandlordsaccountedfor20.5%ofrespondentsandmostofthemdidnotworkfull-time-only31%werefull-timelandlords(14%half-timers).Ofrelevancetoday,only21%oftheseprofessionalsconductedtheirbusinessascompaniesorpartnerships.Professionallandlordstendedtobeyoungerthannon-professionals-two-thirdswereagedbetween35and54,while86%ofnon-professionalswereover45andmorethanhalfwereover55.Onlyatinyminorityofprofessionallandlordswereofretirementage,comparedto20%ofnon-professionalsinthisgroup.

Thereportalsoidentifiedthoselandlordswhowouldbemostvulnerabletofutureinterest-raterises--thosewithhighLTVs.Itshowedthatonly105(7.8%)hadLTVsofover80%ontheirresidentialrentalportfolioandafteradjustingfordouble counting this reduced to69%. In termsof future intentions, a small percentageof landlords surveyed - lessthan6%-indicatedtheyplannedtoreducetheirportfolioorleavethemarketoverthenext12months.About50%oflandlordsplannedtokeeptheirportfoliothesamesize,and38%plannedtoincreaseit.

ScanlonandWhiteheaddevelopthismorefully intheir laterarticleontheeconomicrationalityof landlords(ScanlonandWhitehead,2010).Theynotedthatwhile48%oflandlordssaidthatstableorrisingpropertypriceswereareasontoincreasetheirportfolio,only16%supportedtheconverse,i.e.,thatfallingorstagnatingpropertypriceswereareasonto sell. They suggest that the weak response to falling property pricesmight reflect the significant financial hurdlerepresentedbytransactionscostsforrealproperty,andarguedthatverylargepricemovements(forstocksorproperty)couldberequiredtooffsetthetransactionscostsinvolvedinmakingchangestoportfoliosofrentalproperty(itshouldbenotedthatthesecostshaverisensharplysincethatstudywasundertaken).Theauthorsconclude‘thatindividualprivatelandlordsdogenerallyrespondtoeconomicstimuliinrationalways.Whileprofessionallandlordsaremoreresponsivetosomestimuli—particularlyinterest-ratechanges—thannon-professionals,thedifferenceisnotenormous.’

The literaturesuggests that landlord intentionsvaryover time.CrookandKemp (1996) found that24%of landlordsplannedtodecreasetheirholdings inthefollowingtwoyears.Theirsurveywasundertakenduringaperiodof fallingpropertyprices,whereasthe2004CMLsurveyfollowedalongperiodofresidentialpricerises.CrookandKempfoundthat 38%of landlordsplanned to increase their holdings in thenext 12months. The2001ODPMsurveyof privatelandlordsfoundthat21%expectedtoacquiremorepropertiesinthenexttwoyears,sosince2001therehadbeenasubstantialriseinthepercentageoflandlordsintendingtoexpandtheirportfolios.Weconcludethat,takentogether,thefindingsofCrookandKemp,ODPMandCMLsuggest that landlords’behaviourwascyclical rather thancounter-cyclical–thatis,manylandlordsacquiredpropertyinarisingmarketwhileaminoritysaidtheywoulddisposeofitina fallingmarket.

Inthatregardtheresultsofthesurveysundertakenintheaftermathofthe2007/8downturnbecomeimportant.ShelterwiththeMoneyAdviceTrustpublishedadetailedstudyoftenantsandlandlordsin2010,whichincludedresultsfromaJuly2009surveyof440membersoftheNationalLandlordsAssociation(whowereprobablyconcentratedatthemore‘professional’endofthespectrum).Thisshowedthat60%oflandlordsweremanagingfinanciallyduringtherecessionwithoutanydifficulty. Justoverone in tenwereconstantlystrugglingor fallingbehind,withone-thirdstruggling fromtimetotime.Overall,48%oflandlordshadfinancialcommitmentsoutstandingonallthepropertiesintheirportfolio,withafurtherthirdhavingfinanceonsomeormostoftheirproperties.Strugglinglandlordsweremorelikelytohavefinancecommitmentsona largerproportionof theirportfolios (56%).49%of landlordsagreedthatbeinga landlordduringtherecessionwasstressful;one-thirddisagreed.Agreementwiththisstatementwashighestamongstruggling landlords(78%).

Sevenper centagreedwith thestatement ‘I can’t seemyselfbeinga landlord in2010’. This reached9%among thelandlordswhowerestrugglingfinancially.Thereportsuggeststhat if thisfigureweresimilar fornon-NLAmembers itwouldimplythataround100,000landlordsdoubtedthattheyhadafutureinthebusinessin2010(thoughwewouldnotetherewaslittletosuggestanexitofthisscaletookplace).InterestinglyincontrasttotheargumentsputforwardbyScanlonandWhitehead,52%ofrespondentsagreedthatarecessionaryenvironment(2009)wasareallygoodtimetogrowtheirportfolioandtheyoutnumberedthosewhodisagreedbytwotoone.Landlordslettinginthehousingbenefitmarketweremostlikelytoagreestronglythattherecessionpresentedanopportunityforexpansion.

In2014McCannreportedonastudyofmodelledUKmortgagedefaultusingdatafromthreeIrish-basedbanksoperatingintheUK.ThisreporthasbeencitedasevidencethatBuy-to-Letlandlordsaremorelikelytodefaultthanowner-occupiers.Thereportstates;

ThelendingpatternsoftheIrishbanksarenotnecessarilyperfectlyrepresentativeofactivityintheUKmortgagemarketasawhole.…since2007(thedateatwhichCMLdataonlendingbyLTVcategorybegins),IrishbankshavesystematicallylentathigherLTVsthantheUKmarketinitstotality.Since2009,thevolumeoflendingataboveanLTVof90hasbeenaround2percentintheUKmarket,whilethepercentageofIrishbanks’mortgagesin thiscategoryhasbeenbetween10and20percent.Thepatternpresentedsuggests that the loanbookanalysedhereisoriginatedwithmorerelaxedcreditstandardsthanthepopulationofUKmortgages.(McCann,2014p.7)

ThisisanimportantcaveatgiventhatthemodelpredictedthatBuy-to-Letmortgageswouldbemorelikelytodefaultandlesslikelytocurethanmortgagesonowner-occupiedproperties.McCannsaidtherewaslittleevidenceof‘strategic’defaultsbyowner-occupiers,

which is likely explainedby the full recoursenatureof theUK’spersonal bankruptcy code. The converse istrueamongBuy-to-Letinvestors,whereimprovementsinequity,independentofchangesinaffordability,haveamuch stronger relationshipwithProbability ofCure. The fact thatBuy-to-Letmortgagesmove readily outofdefault in response to changes in equityprovides suggestiveevidence thatmanyof thesedefaultswere“strategic”innature.

Settingthespecificsofdefaultaside,Bracke(2015b)foundthatbuy-to-letlandlordsre-selltheirpropertiesatabouthalftherateofowner-occupiers.

Insummary,theevidencefrompastdownturnsisnotasnegativeasthegovernmentandtheBankmightargue.Clearlythepastisnoguidetothefuturebutacarefulexplorationofthisissueisanessentialprerequisitetoapolicyintervention.TheBuy-to-Letsectorhasdisplayedconsiderableresilienceovertimeandthoughthereclearlyarerisksmostlandlordsseemableandwillingtomanagethem.Indeedgiventheirmotivationsforbeinginthismarkettheyhaveagoodreasontodoso.Ifandwhensavingsratesriseandthestockmarketrecovers,landlordswillhaveawiderrangeofchoicesandtheremaybemoreexits.Ashasalwaysbeenthecasetherewillbesometurnover.However,inourview,themajoritywillremain.

ConclusionsThischapterhassoughttobringtogetherthecorehousing-marketargumentsabouttheroleoftheBuy-to-Let(mortgage)sectorandsubjectthemtocriticalandevidence-basedreview.ThestancesadoptedbytheGovernmentandtheBankparticularlyoncompetitionbetweenBuy-to-Letandfirst-timebuyersandonhowBuy-to-Letmortgagorsmightbehaveinadownturndonotappeartobewellsupportedbytheevidence.PolicymakersandthemediahavechosentoignorethesubstantialresearchliteratureonboththePRSandBuy-to-Letmarketswhichhastrackeddevelopmentsovertimeandwhichisinthepublicdomain,choosinginsteadtoputforwardpoliciesthatchimewithmacroconcernsaswellaspopulardebatesandperceptions.Whilecompetitionwithfirst-timebuyersclearlyexistsitisnotuniversalparticularlybecausethetwosectorstendtobelookingfordifferentlocationalattributes.WithrespecttotherathernegativecommentsfromtheBankandtheGovernmentaboutthebehaviouroflandlordsindownturns,theevidencesuggeststheyhavebeenmorelikelytoholdthansellinearlierperiodsofuncertainty.Inparticularthosewhoarelookingtosupplementtheirpensionintothelongertermwillbemorefocussedonthelongertermpotentialparticularlywithrespecttorentalincome.

CHANGINGTHELANDSCAPEFORBUY-TO-LET?

The future of the private rented sector (PRS) will be determined not only by fiscal measures but by many other factors - particularly the promotion of home ownership (which will draw away some potential tenants) and the relative returns from other investments.

The mortgage interest tax changes announced will mostly impact private individual investors with small portfolios and Buy-to-Let loans. Those who already pay higher or additional rate tax will clearly be affected; in addition, the way the tax is calculated means some landlords will be pushed into higher tax rates and/or lose income-related benefits.

Together the changes to mortgage tax relief and Stamp Duty Land Tax (SDLT) will change the incentive structure for landlords. It is clear that some will sell a portion or all of their properties; some will reduce gearing; some will postpone or forego further investment in the sector. What is not clear is the magnitude and timing of these impacts. This will depend as much on wider market and economic conditions as on specific changes in the taxation of landlords.

Potentially on the horizon are future regulatory changes, including increased controls on Buy-to-Let lending and control of rent increases, at least in some cities. Of more immediate import is the cap on Local Housing Allowance (27% of private tenants claim LHA) and new measures that will reduce the supply of social housing in the short term.

Efforts to encourage institutional investment are bearing fruit but even if it grew rapidly, the segment would make up only a small portion of the PRS.

Government initiatives to facilitate owner-occupation together might add up to 100,000 units per annum to the stock. Not all will be genuinely ‘additional’, as some of the households who benefit would have bought anyway, but even so the marginal demand for rented property will fall. Taken together the various measures, together with wider economic and demographic trends, can be expected to slow the rate of growth of the PRS but not to reverse the upward trend.

CHAP

TER5

ManycommentatorsseemtoassumethatgrowthinthePRSisalmostinevitable,justastheyusedtoassumethatgrowthinowner-occupationwasinevitable.Inrealitythereareanumberofdrivers,bothpolicy andeconomic, that could change significantly andmodify the termsand conditionswithinthesector.Equally,changesaffectingtheothermaintenurescouldaffecttenurechoiceforinvestorsandconsumers.

Atleastfourareasofpotentialpolicychangecouldimpactontheincentivesandrisksfacedbyprivatelandlordsandtheopportunitiesavailabletopotentialtenants.Therearealsomorefundamentalissuesaroundtheoperationofthehousingmarketandthewidereconomythatcouldinfluencetheappetiteofinvestorsandhouseholdstobeintheprivaterentedsector.

Theareasofpolicymostlikelytoaffectthesectorinclude:

1. The taxation of Buy-to-Let landlords compared to other purchasers/owners and rentalpropertycomparedtootherinvestmentsandassets;

2. Regulatory change particularly with respect to rents and security, but also mortgagemarketcontrolswhetherdirectlybytheFinancialConductAuthority(FCA),thePrudentialRegulationAuthority(PRA)oronthedirectionoftheFinancialPolicyCommittee(FPC)aswellasviathecapitalrequirementsregimethroughtheBankforInternationalSettlementsBaselCommitee;

3. Theroleofinstitutionalinvestorsespeciallyinthenewbuildmarket;

4. Theavailabilityofsocialrentedhousingandlocalhousingallowance;

5. Initiativestosupportowner-occupation.

Intermsofthehousingmarketandthemoregeneraleconomicenvironmentthemajorissuesarearoundhouseprices,inflation,interestratesandcurrencyfluctuationsaswellastheprospectsforinternationalin-migration.

The impacts of taxation changesThisistheareaofmostimmediateconcernbecauseoftheinitiativesincludedintheBudgetandAutumnStatementin2015.

First,thegovernmentisintroducingnewStampDutyLandTax(SDLT)ondwellingsthatarenotprincipalresidencesfrom1stApril2016.AsannouncedintheMarch2016Budgetthiswillnowincludeallprivatelandlords.

Second,infutureprivateindividuallandlordswillbeunabletodeductalloftheirfinancecostsfromtheirpropertyincometoarriveattheirpropertyprofits.Theywillinsteadreceiveabasic-ratereductionfromtheirincometaxliabilityfortheirfinancecosts.Thiswillbephasedinasfollows:

• inthe2017/18taxyearthedeductionfrompropertyincome(ascurrentlyallowed)willberestrictedto75%offinancecosts,withtheremaining25%takenasabasicratetaxreduction

• in2018/19,50%finance-costdeductionand50%basicratetaxreduction

• in2019/20,25%finance-costsdeductionand75%basicratetaxreduction

• from2020/21,allfinancingcostsincurredbyalandlordwillbeoffsetbybasicratetaxreductiononly.

Thesechangeswillnotapplytocorporatelandlordsbuttheirimpactonindividuallandlordswillbeconsiderable.Thereducedallowancesmeanindividuallandlordswillhavehighertaxableincomesfromtheirproperties,willpaymoretaxandpotentiallyreceivefewerbenefits.Somelandlordswillchangetaxbandsasaconsequenceofthewaythecalculationsaremade,thusbecomingsubjecttohigherratesoftax.TheTreasuryhasforecasttheadditionaltaxtakeas£215millionin2018/19risingto£665millionin2020/21,andsaysoneinfiveindividuallandlordswillbeaffected.

Third,thegovernmentisreformingthewearandtearallowance.Landlordsrentingfurnishedaccommodationcurrentlycandeduct10%oftheirrentalincometocoverwearandtear.FromApril2016,thegovernmentwillreplacethiswithanewreliefthatisbasedontheactualcostsofreplacingfurnishings.Theestimatedimpactofthismeasureisaround£150-£250mperannumintheperiodupto2020/216.

Fullevaluationoftheimpactofthesechangesisdifficultespeciallygivenwehavelittleinformationonthetaxstatusoflandlords.TheIFSrecentlypublishedanassessmentoftheeffectivetaxrate(ETR)generatedbythechangestomortgageinterestdeductibility(AdamandShaw,2016).Forlandlordswhowereandwillremainbasic-ratetaxpayersthereislittlechange.HowevertheETRforhigher-ratetaxpayerswillincreasefrom47%to76%forpropertiesthatare50%fundedwithamortgage.However,theauthorsgoontonote,

Underthenewregime,mortgageinterestwillreduceincometaxliabilitydirectlyratherthanviaareductionintaxableincome.Thishasimportantimplications.Landlordswhosetaxableincomeiscurrentlykeptbelowthehigher-ratethresholdbymortgageinterestdeductionswillfindthat,whilereceivingataxcredit,theycannolongerdeductthemortgageinterestfromtheirtaxableincomeandarethereforeliableforhigher-ratetax.Thereformwillthuspushmanylandlordsintohigher-ratetax–and,moregenerally,intohighertaxbrackets.

(AdamandShaw,2016p.55)

6InadditionintheMarch2016budgettheChancellorintroducedalowercapitalgainsrateforallinvestmentsotherthanthoseinresidentialproperty. 7Seehttp://www.landlords.org.uk/news-campaigns/news/incorporating-%E2%80%98doesn%E2%80%99t-stack-up%E2%80%99-majority-landlords

TheIFSarguesthattheimpactonsavingsincentivesforsomelandlordswillbeveryconsiderable.ForcertainindividualsETRswillbeashighas117%asaconsequenceofthelossofpersonalallowances/childbenefit/taxcreditstriggeredbytheincreaseintaxableincome.AstheIFSnotes‘Asaresult,theeffectivetaxrateonmortgage-financedinvestmentinrentalpropertyincreasesfarmoreforthosefacingwithdrawalofthesekindsthanforotherhigher-ratetaxpayers’.

TheIFSisveryclearthathomeownershipistreatedfarmoregenerouslyintaxtermsthanrentingandthatthesereformshaveaddedtothat,saying ‘rentalhousing looksset tobecomeeasily themosttax-disadvantagedof themajorassetclassesweconsiderinthisreport’.Whilelandlordscanavoidsomeofthisbybecomingcompanies,thiswouldmakethemliableforcorporationtax,dividendtaxandCGTequivalenttothatforhigherratetaxpayers,sothedecision(toswitch)isacomplexone.

TheNLA’sview,basedonsurveysoftheirmembers,isthatthetaxchangeswillaffectover200,000landlordswithBuy-to-Letmortgages,whowilllosepost-taxincomeinexcessof£858millionperyearfrom20207(assumingtypicalhouseprices,gearingandinterestrates).Thisequatestoalossforeachlandlordofaround£840peryearor8percentofthenationalaverageannualrentinthePRS.

InarecentNLAsurvey26percentofrespondentsindicatedtheywouldhavetosellsomepropertiesand5percentplannedtoexitthesectorcompletely.IfthisweretooccurnationallyitwouldreducethePRSbysome615,000unitsofaccommodation.Around58percentofthosewhowouldbeaffectedbythechangeandplannedtostayinthemarketsaidtheywouldneedtoincreaserents,andafurther14percentrefusedtoruleitout.

Ananalysisby taxexpertsatParagonGroupprovidesmoredetail.Calculationsbasedon thenotionalexampleofamedium-gearedproperty(60%LTV)andalandlordwithsalaryincomeof£50,000(Table5.1)showthatafterthetransitionperiodtheeffectivetaxraterisesfrom40%to56.8%-anincreaseof42%.Table5.2providescalculationsforportfoliosofdifferentsizesandalandlordonasalaryof£28,000.Theincreasesineffectivetaxratesaredueonlypartlytothereductioninmortgageinterestdeductibility;moreimportantly,thewaythetaxnewcalculationsareperformedwilltakesomelandlordsintohighertaxbracketsandaffecteligibilityforotherincome-relatedallowancessuchasChildBenefit.

Table 5.1: Illustrative effects of proposed tax changes

Assumptions:medium-gearedlandlord,salaryof£50,000

Current position Position after tax changes

£/annum £

Salary 50,000 50,000

Rental profits 6,600 12,000

Statutory total income (STI) 56,660 62,000

Personal allowance (10,600) (10,600)

Taxable income 46,060 51,400

Tax at 20% 6,357 6,357

Tax at 40% 5,686 7,846

Credit for interest (1,080)

Tax liability 12,043 13,123

Marginal tax on rental income 2,640 3,720

Effective tax rate 40% 56.8%

Source:Paragonanalysis

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Table 5.2: Illustrative effects of proposed tax changes by portfolio size

Assumptions:medium-gearedlandlordwithtwochildrenand£28,000salary

Number of properties

1 2 3 4

Salary 28,000 28,000 28,000 28,000

Rental profits 12,000 24,000 36,000 84,000

Statutory total income (STI) 40,000 52,000 64,000 112,000

Personal allowance (10,600) (10,600) (10,600) (10,600)

Taxable income 29,400 41,400 52,400 107,400

Tax at 20% 5,880 6,357 6,357 6,357

Tax at 40% 3,846 8,646 30,246

Reduction in Child Benefit 364 1,823 1,823

Credit for interest (1,080) (2,160) (3,240) (7,560)

Tax liability 4,800 8,407 13,586 30,866

Marginal tax on rental income 1,320 4,927 10,106 27,386

Effective tax rate 20% 37.3% 51% 59.3%

Source:Paragonanalysis

More-highly-gearedlandlordswillbemostaffected,sointimewecanexpecttoseethelevelofgearingreduce.Atthesametimethegovernment isproposingchangestopensionswhichwillmakeinvestinginthemlessattractive,whichraisesthequestionofwhetherequity-financedBuy-to-Letmightbeabetteroption.Alongwithproductdevelopmenttofacilitatetherapidrepaymentof loanswearelikelytoseemorecorporatestructuresandpossiblymorecollectiveinvestmentschemessuchasresidentialREITs.

Itcanalsobearguedthatthechangesdeepenthetaxdisadvantageslandlordsfaceincomparisontohomeowners,whodonotpaycapitalgainstaxontheirprincipalhome.However,thisisnotapositionallwouldagreewith.Forinstance,GenerationRenthasargued thatprivate landlords receivemore than£26bnplusof supportand relief,madeupof£9.3bnofhousingbenefitpaidonbehalfoflow-incometenantsvialocalhousingallowances(LHA),£1.69bnthroughthe‘wear-and-tear’allowance,£6.63bnoftaxthatlandlordsdonothavetopayonmortgageinterestpaymentsand£9.06bnoftaxlandlordsdonotpayontheirannualaveragecapitalgains(Guardian,9/2/2015).

Thispresentsaratherbiasedviewofwhatconstitutessupport(e.g.landlordspaycapitalgainstaxwhentheirinvestmentsarerealised,andinteresttaxreliefandwearandteararenormalcostsofinvestment).ItisthecasethattheLHAsupportsrentsintheprivaterentedsectorespeciallyinthelowerendthemarketandprobablyaccountsforsome5%ofoverallrentalincome.Bentley(2015)hasalsohighlightedtherisingbenefitcostsandaskswhetherabetterdealcanbedone.

Overall,HMTreasuryestimates that restricting themortgage interest taxdeduction to thebasic ratewill raise£665millioninitsfirstfullyearofimplementationin2020-21.The3%StampDutysurchargeisexpectedtoraise£625millionin2016-17,mostlypaidbylandlords.Inadditionareducedwindowforpaymentofcapitalgainsonresidentialpropertyisexpectedtobringin£230millionin2020-21andthereformofthewearandtearallowanceisexpectedtoraise£205millioninitsfirstyear,2017-18.Addingtogetherthesemeasures,theexchequerwillreceiveadditionalrevenuesofabout£1.7billionayear(HMTreasury,2015b).

8Thegovernmenthasannouncedthattherewillbenoexemptionforlargelandlords,ashadbeenexpected.

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ThemostrecentBDRCsurveyindicatesthatoneinfivelandlordswillsellorputoffbuyinghomes,with75%oftheseattributingthistotheJulyannouncements.TheSDLTproposalsareseenashavingaparticularlysignificantimpactonlargerlandlords(20homesormore)thoughmuchdependsonthefinalstructureofthescheme8.Clearlysomelandlordscouldincorporatethemselvesintocompaniesandmanywillchoosetodoso.However,basedonthissurveytheNLAhavearguedthatupto500,000homesmightbesoldin2016/17asaconsequenceofthemeasuresand100,000perannumineachsubsequentyearto2021.Overall, though,theNLAsaysthatthePRSwillshrinkby136,000homes,arelativelysmallproportionofthetotal.

Inarecentevaluation,theIntermediaryMortgageLendersAssociation(2016)suggestedthattheadditionalincometaxburdenonlandlordsofaround£870million(fromtherestrictionofthemortgageinterestdeductionandtheendofthewearandtearallowance)isequivalentto1.8%ofthe£50billionestimatedrevenuesofthePRSasawhole.IMLAarguedthiswasunlikelyonitsowntoseriouslydentlandlordambitionsatatimewhentenantdemandandrentswererising,althoughsomehighlyleveragedlandlordswouldfacemuchhighertaxbills.Averagedoverthelifeofatypicalbuy-to-letinvestment(whichtheAssociationofResidentialLettingAgent’slandlordsurveyestimatestobe20years)the3%stampdutysurchargecostsamodest0.15%ayear,andmaynotbeappliedtolandlordswithlargerportfolios.Whilethis isafairlysanguineviewoftheaggregateeffect,theimpactsoncertainindividualswillbesignificantandthepolicieswillintroduceimportantdistortions.Perhapsmostimportantlytheywillshakeconfidence(indeed,havealreadydoneso)andchangetheincentivesfornewentrantstocomeintothemarket.

Regulatory changeNewrulesaroundBuy-to-Letmortgages tookeffect inMarchandmoremaybe imposed.Regulatorsareparticularlyconcernedabout theprevalenceof interest-onlymortgages in the sector, especially if there ishouseprice volatility. So-called‘consumerBuy-to-Let’isnowregulatedviatheMortgageCreditDirectivefromMarch21st2016.NotalllenderswillofferconsumerBuy-to-Let,butanyadditionalconstraintsontotallendingvolumeswillberelativelyminor.MoreseriousarethelikelypowersofdirectiontobegrantedtotheFinancialPolicyCommitteewhocanthenimposerequirementsonlendersinthissectorviatheFCAandthePRA.Thesearelikelytoincludeproposalsaroundaminimuminterestcoverageratio(ICR)andaforwardassessmentofaffordability.ThefactthatthePRAisnowconsultingonunderwritingstandardsforBuy–to–Letisnocoincidence(PRA,2016).TheconsultationpaperexploresanICRrequirementof125%at5.5%,morerobustapproachestoassessinglandlordcostsandtheimpactoftaxonrentalincomeaswellastheuseofatestoffutureaffordabilityreferencedtomarketratesandanadditional2%stressedrate.

TheproposalsfromtheBaselCommitteeonBankingSupervision(2015)toreworkthestandardisedapproachtocreditriskaremuchmoreserious(plusresettingthefloorsforlendersusingtheinternalratingsbasedapproach-andnotonlyfortheBuy-to-Letsector),buttheyarestillonlyproposalsandimplementationwouldbesomeyearsaway.However,allofthisgivesasenseoftheprevailingmoodandpointtoageneraltighteningofregulationaroundrevenue-producingrealestate.Intheshorttermlandlordswillbemoreaffectedbytheeconomicenvironment,particularlyinterestratesandhouseprices,aswellastaxation(allofwhichimpactonexpectedtotalreturns)butoverthelongertermthesenewrequirementscouldbesignificant.

Withregardtorentsandsecurityoftenure,acrossEuropethereisdiscussionofimposingortighteningrentstabilisation,andadditionalconstraintsonrentincreaseshavebeenputinplaceinIreland,France,GermanyandtheNetherlands,andlegislationisunderconsiderationintheScottishparliamentthatwillenablelocalauthoritiestolimitrentincreasesinhigh-demandareas(Whiteheadetal,2016forthcoming). IntheEnglishcontextmostoftheemphasishasbeenonenablinglongertermtenancieswithintheASTframeworkandworkingwithmortgagelenderstotakeoutrestrictions.OnlyinLondonisthereanysignificantdebateaboutrentstabilisation.TheLondonAssembly’slatestreportsuggeststhat‘anewdefaultrentalcontractofthreeyears,withinitialrentssetbythemarket,andincreaseslimitedtotheconsumerprice index’shouldbeput inplaceasstandard’ (GLA,2016,p.7),whileanumberofmayoralcandidateshavemadesuggestionsabouthow tomakeprivate rentingmoreaffordable in the capital (InsideHousing, 2October2014and2March2016). Theseare relatively landlord-friendlyproposalsbut couldaffect landlordswithmortgage restrictionsandwouldlimittheircapacitytorespondtochangesincostanddemand.TheScottishchangesarenotyetlawsonoconclusionscanbedrawn,althoughtheNLA,otherlandlordbodiesandinstitutionalinvestorshaveraisedconcerns.

Institutional investmentAreportbyDTZlastyearsuggestedthatthePRSisnowworthanestimated£839billion.Theyestimatedthatinstitutionalinvestorsaccountedforjust2%ofthistotalwithprivatelandlordscontinuingtodominatethemarket(DTZ,2015).MoreevidenceofthescaleofinstitutionalinvestmentcomesfromtheInvestmentPropertyForum,whichrecentlysurveyedrespondentsholdingormanagingover£3 trillionof investments.Of this, realestate comprisedapproximately£220billion(about7.32%ofallassets).Almostfour-fifthsofrespondents(37outof48)hadexposuretoresidentialassetsintheirUKportfolios.Around80%preferreddirectownership,andtheirholdingsmadeupabout66%ofresidentialassetsin thesample,but investment indevelopmentwasalsoattractingsome.Themainattractionsof residentialpropertywereseentobeitsreturnsprofileanditsdevelopmentpotential.TheInvestmentPropertyForumestimatedpotentialnewinvestmentatcloseto£6.5billion,subjecttotheavailabilityofsuitablestockacrossalltypesofresidentialassets (IPF,2015).

Thesetwoassessmentspointtotherelatively limitedrolecurrentlyplayedby institutional investors,andtheirstrongpreferenceforpurpose-builtrentalstock.Thegovernment’scommercialBuildtoRentloanprogrammeisonlynowgettingunderway,withfewerthantencompleteddevelopmentsandperhapstentimesasmanywithplanningpermission.Intothemediumtermmaybe10,000unitsayearmightbeaddedthroughthisinitiative.Separately,housingassociationsaredevelopingnewmarket-rentaccommodationwiththesupportofinstitutionalequity(seebelow).Whiletheseinvestmentsareclearlyvaluable,thelevelofoutputmeanstheyshouldberegardedasasmallcomplementtoBuy-to-Letatleastoverthenextdecade.

Social housing and the Local Housing AllowanceGovernmenthasindicatedthatsocialhousingproviderswillnolongerreceivedirectpublicgrant.Housingassociationswillhavetofundnewsocialandaffordablehousingthroughcross-subsidyfromreservesandmarket-sectoractivityaswellass106(totheextentthatthisremainsviableaftertheStarterHomeselementisprovided).Withthesupportofinstitutionalinvestors,someassociationsarelookingtoprovidemarket-rentedhousingaspartofmixed-tenuredevelopments.Moregenerally,housingassociationsintendtoincreaseoutputoverallinthenextfewyears(HouseofLordsEconomicAffairsCommittee,2016),butexpecttoprovidealowerproportionofunitsassocialhousingwiththemajoritybeingforfullorpartialsaletohomeowners.Manyarealsokeentogetinvolvedwithprivaterentalonthemanagementside.

TheHousing and Planning Bill currentlymaking its way through Parliament, together with the adoption by housingassociationsoftheVoluntaryRighttoBuy,willaffecttheoperationofsocialhousingintothefuture.Themainuncertaintiesarewith respect to the existing social housing stock and the replacement of that stock. TheVoluntary Right toBuyAgreement,underwhichhousingassociationtenantswillgettherighttobuytheirunitsonthesametermsas local-authoritytenants,callsfor1:1replacement(theaspirationisforthistobe2:1inLondon,reflectinghighervaluecentrallylocatedhomesbeingreplacedbycheaperlesswelllocatedhomesincheaperareas)althoughnotalwaysinthesamelocationsorthesametenure.Accessfor lower-incomehouseholdsintosocialhousingis likelytodeclinesignificantly,especiallyinLondon.Thistendencywillbereinforcedbythelossofcouncilstock,aslocalauthoritieswillberequiredtoconsidersellinghigh-valueunitswhentheybecomeempty(andwillhavetoremitpaymenttogovernmentasiftheyhaddoneso).Thehighestvalueunitsareincentralareas,whileanyreplacementswillbemainlyconcentratedinouterareas.Sowhileinthemediumtermatleastsomeunitswillbereplaced,overallthechangeswillleavemorehouseholdsdependentontheprivaterentedsector.

WhathappenstothesocialhousingsectoraffectsthePRSinseveralways.Thetwomarketsoverlap,andviatheRighttoBuymanyformerlysocialhomeshavefoundtheirwayintothePRS.GivenresalerestrictionsitwillbesomeyearsbeforeVoluntaryRighttoBuypropertiestransfertothePRS,andthestockprofilewilldifferfromearlierRighttoBuysales.TherewillalsobeanincreaseinRighttoBuyamongcounciltenants,thoughagaintheunitswillnotenterthePRSforsomeyears.

PrivatelandlordsareperhapsmostconcernedaboutthefutureofLocalHousingAllowance(LHA).Thesummer2015budgetintroducedafour-yearfreezeonLHAandthistogetherwithotherwelfareconstraintswillmakeitmoredifficultforthoseonbenefittopayanyincreasesinmarketrents.Thisislikelytoleadtosomestickinessinrentsas27%ofprivatetenantsreceiveatleastsomehelpandmaybe10%moreareeligibleforassistance.WhilemostBuy-to-Letlandlordssaytheydonotlettohousingbenefittenants,therealityisthatfewwouldevictatenantsimplybecausetheybecameeligiblefortheLHAduetoadropinincome.

Government initiatives to promote owner-occupationAsuiteofrecentpoliciesdemonstratesthegovernment’sstrongsupportforowner-occupation.Higher-incomesocialtenants are being helped to change tenure through Right to Buy;Help to Buy has been continued to at least until2020,andtherateinLondonextendedto40%;andtheStarterHomesinitiativewillinmanyareastakethetopsliceofaffordablehousingprovisionfromSection106agreements.

Therehavebeensomeoffsettingchangeswithrespecttomortgages,includingtheremovalofthemortgageguaranteefrom2016(onthebasisthatthemarketforhighloan-to-valueloanshasrecovered)andthelimitontheproportionofnewloansatover4.5timesincome.AdditionallythegovernmentareconsultingonwhethertheFinancialPolicyCommitteeshouldhavepowerofdirectionoverloan-to-valueandloan-to-incomelimitsifmacro-stabilityconditionsrequired.Thesewouldreinforceunderwritingstandardsandmightexcludesomemarginalpurchasersorslowturnoverinthemarketforexistinghomes.

Theproportionof new-build units that couldbe includedwithin government-sponsoredowner-occupation schemescouldbehigh:

• 25,000perannumcouldbecoveredbyHelptoBuyanditsextension;

• developers canbeexpected tobuild30 -40,000StarterHomesperannum, if current teethingproblemscanbeovercome;

• thereisacommitmentto135,000sharedownershiphomesoverthisParliament(thoughthiswillinpartoverlapwiththemainstreamStarterHomesprogramme);and

• therewillbeashifttosharedownershipwithinS106affordablehousingallocations.

Thesegovernmentinitiativescouldproduceupto100,000newowner-occupationunitsperyear,thoughmuchwouldnotbegenuinelyadditionalbecausebeneficiarieswould includethosewhowouldhaveboughtanyway.Sucha largeprogrammeofsupportedhomeownershipcouldbeexpectedtoincreasethenumberoffirst-timebuyersenteringthemarket.Itmightbeenoughtostopthedeclineinowner-occupationinproportionalaswellasabsolutetermsandthustoslowthegrowthofprivaterenting.

Theoverall impacton tenuremixdependsonwhether there is a continuingflow from thesocial rentedsectorandwhetherexisting(oftenex-council)housingcontinuestotransfertothePRS,aswellastheextenttowhichnewbuildgoesdirectlyintothePRS.ItisalmostcertainthattherateofgrowthofthePRSwillslow,butitisunlikelythatthechangeswouldbeenoughtoreversethegrowthunlesstheeconomy,incomesandconfidencepickedupverysignificantlytoallowunsubsidisedhomeownershiptoexpandmorerapidly.

Wider economic changeThedriversofchangeinthePRSareultimatelyaboutfundamentals.Forinvestors,thesearerentalandtotalreturnsinthesectorcomparedtoreturnsonotherinvestmentopportunities.Fortenants,thesearethecostsofprivaterentedhousingcomparedtoothertenures(includingtaxationandsubsidyalongwithaccesstocreditandotherhousingopportunities)(Whiteheadetal,forthcoming).

Themajorfactorslikelytoaffectthedemandforprivaterentingoverthenextfewyearsinclude:

(a) thenetflowofmigrantsintotheUK–ifthisfellsignificantlythendemandforprivaterentingwouldalsofall,asthosewhohavebeenintheUKforsometimemoveintoothertenures;

(b) thestateoftheeconomyincludingratesofemploymentandunemploymentandespeciallytheextentofrealincomegrowthanditsimpactonconfidence.EconomicuncertaintiesnormallyincreasethelengthoftimethatpeopleremaininthePRS;

(c) therateofincreaseinhousepricesanditsrelationshiptoincreasesinrealincomes.Thesebothimpactontheaffordabilityofhomeownershipandmostdirectlyonthenumbersoffirst-timebuyers;and

(d) exchangerates,whichaffect incentives for internationalbuyerstoenterandstay intheUKhousingmarket,includingasprivatelandlords.

Overall,thereisprobablysignificantpent-updemandforowner-occupationfrompotentialbuyersaffectedbyaffordabilityandcreditconstraints.Weretheeconomytogrowmorequicklythan inthepast, inmanypartsofthecountrytheseconstraintsmightbebetterovercome.Ontheotherhandinareasofhousingpressure,especiallyLondon,theimpactcouldbemoreonhouseprices.

Majorexternalshockstotheeconomyandconfidenceinthateconomycouldcausesomeinvestorstopulloutofthemarket,ascouldchangesinregulationandtaxation.However,thegeneralpressureswouldseemtobetowardsslowerbutcontinuedgrowthofthesector.

ConclusionsTheproposednewtaxtreatmentswillclearlydamagelandlords’returnsandconfidenceandcreatedisincentives.However,theyareunlikelytobeterminal.AstheIntermediaryMortgageLendersAssociation(IMLA)recentlycommented(2016);

Wedonotexpectthetaxincreasesaimedatbuy-to-letinvestorstoreversethegrowthoftheprivaterentedsector(PRS)orthebuy-to-letmortgagemarket,althoughtheycouldslowtherateofgrowthofbuy-to-lethousepurchaselending.Therestrictiononmortgageinteresttaxdeductibilitycanbeavoidedthroughtheuseofalimitedcompanyandforlongtermpropertyinvestorsthestampdutysurchargeof3%issmallonceamortisedoverthefullinvestmenthorizon.Weestimatethatthenewtaxesonlandlords’incomes(restrictionofmortgageinterestdeductionandlossofwearandtearallowance)representa1.8%riseintaxesonlandlords’aggregateestimatedrentsofaround£50billion.ThePRSwillremainthepressurevalvethataccommodatesmostoftheincrease in population expectedover thenext few years as landlords continue to respond to rising tenantdemand.(IMLA,2016p.3)

Wehavenotcoveredthemoregeneralmacro-stabilisationeconomicargumentsaboutborrowinglevelsandthestabilityoffinancemarkets.Theseformpartofthewiderdebatearoundmanagementofdemandandliquidity.Macro-stabilisationcantakeprecedenceoverhousingmarketimpactsincertaincircumstances–butunderstandinghowthehousingmarketmayfunctionifcurbsareputinplaceshouldstillbeanimportantpartofanysuchassessment.

Thevariouscurrentorproposedinitiativesaroundprivaterentingandtheothermajortenureswillcertainlyinfluencelandlordandtenantdecisions,andshift incentives.However, theyareunlikelyto leadtonetexit fromtheBuy-to-Letmarketintheshorttomediumterm.Thegrowthoflandlordismwhichthegovernmentnowwishestocurbis,significantly,aproductofthelowreturnsavailabletoinvestorselsewhereinthemarket.ThemeasurestakenaftertheGlobalFinancialCrisistostabilisetheUKeconomy(e.g.,FundingforLending)resultedinaneraoflowsavingsratesanddecliningpensionreturnsandopportunities.Thisinturnhasmadeitrelativelybeneficialforhouseholdstoturntopropertyinvestmentasasourceofincomeandcapitalgains(Lordetal,2013).Some77%oflandlordsintheBDRCsurveywereusingpropertyasapensionstrategy,anentirelyrationalandfairresponsetotheconditionsthathavebeencreated.OverallthereforeunlesspoliciesareintroducedeithertoexpandtheavailabilityofotherformsofinvestmentonsimilartermsorsignificantlytoworsenthereturnstoBuy-to-Letincurrenteconomicconditionsitislikelythatthesectorwillcontinuetogrow.

WHEREAREWEGOING?RENTING,OWNINGANDPOLICY

Will private renting continue to grow at a similar pace to the last 20 years? This depends not only on the effects of fiscal measures but on developments in other tenures and in wider investment markets.

Private individuals are and will continue to be the bulk of landlords, even if institutions massively increase their involvement. Their example, coupled with larger individual portfolios and tenant demand, will probably increase professionalism generally. The government’s determined efforts to boost owner-occupation will shift some households from renting to becoming first-time buyers. This will reduce but probably not eliminate growth in demand, which also comes from job movers, migrants, young people and low-income households who cannot access social housing. Demographic pressures, the country’s persistent shortfall of new homes and the probable loss of social housing will continue to underpin demand for private rented housing.

Various expert reports have forecast continued strong growth in the private rented sector (PRS), although the numbers depend on the assumptions used—and government policy announcements can invalidate assumptions from one day to the next. Our view is that government efforts to boost home ownership will be successful at least to some extent especially if real incomes rise consistently, but that neither the proportion nor the absolute quantum of private rented housing will fall. Taken together the scenarios would suggest a PRS in the range 20% and 22% within this parliament and perhaps 25% as the longer term equilibrium level. These are significant increases especially in absolute terms, even though they are lower than many other projections. They reflect current government policy and an assumption that the economy continues to improve. If the outlook is more negative, the proportion in private renting will be higher. But if real household incomes rise more rapidly the proportion in owner occupation could be higher.

The PRS plays an important role in the housing system. For many households it offers the best option for short- to medium-term accommodation; for some it is a good long-term option. Trying to shrink the sector is unwise given what we know about unmet demand and need.

CHAP

TER

6

Looking forward wemust ask whether the apparently relentless growth of private renting cancontinue,giventhatchangesinpolicyandtheeconomicenvironmentwillmodifybothoutputandtenuredecisions.InthischapterweclarifysomeoftheimplicationsarisingfromtheearlieranalysistogivesomeindicationofthelongertermpositionofbothprivaterentingandBuy-to-Letwithinthat sector.

RentingThestartingpointisthatBuy-to-Letmortgagorsareasignificantpartoftheprivate-individualandsmall-businesselementoftheprivaterentedsector(PRS);thattheBuy-to-Letsubsectoristhemostactivepartof themarket (i.e.,whereproperties arebeingbought and sold); and that individualportfolioshaveprobablyexpandedoverthelastfewyears,sotheproportionconsistingofmorethanonepropertyorindeedmorethanafewhasalmostcertainlygrown.

Secondly,whileanyincreaseininvestmentbyinstitutionsistobewelcomedandthereisevidenceof increasing appetite, even on themost optimistic outlook their activity will not be enough tomakesignificantinroadsintotheindividual-ownersegment.Reductionsintotalreturnswouldhitallsegmentsbutwouldalmostcertainlyaffectinstitutionalinvestorsmore,sincetheobjectivesofprivateindividuallandlordsaremorediverse.

Governmentiskeentoencourageprofessionalmanagement.Institutionalinvestorsdonothavetheskillsin-houseandareworriedaboutreputationalrisk;theyoftenemployspecialistmanagementorganisationsthatcanprovidehigh-endservices.Butasindividuallandlords’portfoliosgrowtheymayincreasinglyturntoprofessionalmanagerswhocanmatchtheadditionalservicesofferedbycorporatelandlords.Portfoliosizemaythereforebejustasimportantasownershipindetermining the levelofprofessionalization in thesector. Itseems likely that thequalityandrangeofserviceswillcontinuetoimproveacrossmuchofthesectoreventhoughinstitutionalinvestorswillconstitutearelativelysmallpartofthemarketand,atleastintheshorttomediumterm,willcomplementratherthancompetewithindividualinvestors.

InChapter5wearguedthatwecanexpecttoseeaslowdowningrowthofthesectorasaresultoftaxchangesandbecauseofthegovernment’semphasisonhomeownership.Theindustryiscurrentlyveryconcernedabouttheimpactofthetaxmeasures,particularlyonhigher-ratetaxpayersandthosewhowouldbemovedintohigherrates.However,experienceshowsthatactualoutcomesoftendifferfromthoseexpected.Landlords’long-termdecisionswilldependontheopportunitiesavailableforpropertypurchaseorsale(e.g.,toowner-occupiersorpossiblyinstitutionalinvestors)and,crucially,onthereturnsavailableelsewhere.Returnsonalternativeinvestmentsdonotseemtobegreatlyexpandingatthepresenttime,sothenumberoflandlordssellingallorpartoftheirportfolioswillprobablyturnouttobefewerthantheythemselvesexpectinthesurveysquotedabove—althoughinevitablytherewillbesomeadjustment.ThePRShasseenrapidgrowthoverthelastfewyearstogetherwithsignificantlevelsofnormalturnover.Policydirectionsuggeststhatgovernmentwouldliketoseeaslowdown,andthatisthemostlikelyoutcome.Absolutedeclineseemsmuchlesslikely.

Private renting and home ownershipThediscussionabouttheBuy-to-LetmarketandthePRSasawholeisoftenconductedasifthesewereentirelyseparatefrom,andcompetingwith,theowner-occupiedmarket.Itiseasytoforgetthatthereareimportantflowsbetweenthem.DatafromtheEnglishHousingSurvey2012-2013showthatinthatyear153,000householdslefthomeownershiptomoveintoprivaterenting,while152,000movedtheotherway.ThePRSprovidesanessentialeasilyaccessedmarketforhouseholdsthatneedtomove.Withamuchdiminishedsocialhousingsector, thePRS isusually theonlyoptionforownerhouseholdswhomove, iftheyareunableorunwillingtobuyatthatpoint intime.ThePRSisalsothefirstdestinationformostnewhouseholds,andwithmorehouseholdsbeingformeditclearlyhasacrucialroleinthehousingsystem(seealsoSavills,2016a).

EquallyimportantisthefactthattheUKisstillinrecoveryfromtheglobaleconomicdownturnandanumberofspecialmeasuresarestillinplace,includingverylowinterestrates;theinternationalcontextinbotheconomicandpoliticaltermsisveryunsettled;andthehousingmarketinparticularisoutofkilter.Itisthereforedifficulttopredictthefuturewithmuchcertainty.AfundamentalthatwedoknowisthatUKdemographicpressuresarebuildingwithpopulationgrowth,increasedlongevityandmoreinternationalin-migration.Inadditioniftheeconomystrengthens,incomegrowthwilladdtothesepressuresresultinginrisingdemandforhomes.Overall,housingsupplyisedgingup,buttheUKisstillalongwayfromproducingtheroughly250,000homesayearitneeds.Oneobviousimpactisthatasdemandoutstripssupplyhousepriceswillrise,affectingbothaccesstoowner-occupationandthetotalreturnonprivaterentalinvestment.

Several recent studies have forecast likely tenure developments over the next decade, but most are straight-lineprojections that rely heavily on past trends. In itsUK EconomicOutlook published inNovember 2015, PWC arguedthattheexpansionofthePRSwouldcontinuewithanadditional1.8millionhouseholdsinprivaterentalby2025.ThiswouldtakethenumberofhouseholdsinthePRSto7.2million–almostoneinfouroftheUKtotal.PWCnotedthatthetrendwasparticularlystronginthe20-39agegroup,wheremorethanhalfwouldberentingprivatelyby2025.Asnotedalready,thenumberofhouseholdswhoowntheirhomewithamortgagefellfromaround10millionin2001toaround8millionin2014.PWCprojectafurtherdeclineto7.2millionby2025aslimitedhousingsupply,affordabilityandmortgageavailabilitymakeitharderforfirst-timebuyerstogetonthehousingladder.

Savills,initsrecentResidentialPropertyFocusissueon‘ValuingBritain’(2016),notesthatEnglishHousingSurvey(EHS)figuresshowPRSgrowthof260,000householdsperannuminrecentyears.Thereportarguesthatevenifthegovernmentdeliversitstargetof400,000new‘affordablehomesforsale’overfiveyearsthiswouldonlyamountto80,000perannum.Savillsprojectsonthisbasisthatabout220,000newhouseholdsperyearwillbelookingtorentprivately. Inanotherreport(RentalBritain,2016)theysaygovernmentmeasureswillenablesomehouseholdstoenterhomeownershipbutthatneverthelessthePRSwillgrowbyover1millionto2021.TheJosephRowntreeFoundation,ina2014study,arguedthatthePRSwouldhouse20.5%ofthepopulationby2040withthesocialsectorshrinkingtoaccommodatearound11%(Stephens,Metal,2014).Homeownershipwasexpectedtodeclinefrom2020.Thisforecasthasalreadybeenovertakenbyeventswithprivaterentinggrowingmorequicklyandhomeownershipfallingrathermorerapidlythanexpected–butalsowithgovernmentincreasingtheemphasisonhomeownership.Mostofthesestudiesarefairlyshorttermandtakeunderlyingtrendsasgivenanddolittletotakeaccountofdynamics–buttheyallpointinthesamedirection.

Thequestionishowtheoverallmarketwilllookinadecadeorso.TheconsensusviewisthatthoughpolicychangeswillslowtheincreaseinthePRStheyareunlikelytoreverseit;thisissupportedbyestimatesofimpactintermsofsalesandabandonedexpansionplans.Similarly,thoughthedecade-longdeclineinhomeownershiphasslowedandtherehavebeenimprovementsinthenumbersoffirst-timebuyersandintheoverallconditionofthehousingmarket,transactionsremainlow,supplyisstillwellbelowmarketrequirementsandmortgagesupplyisnowpermanentlyconstrained.

ThegovernmentmademuchoftherecentEHSsurveydata:aDCLGpressreleaseissuedon16Februarywasheadlined‘We are turning around thehousingmarket’.Housingminister Brandon LewisMPwasquoted as saying the figuresshowedthedecade-longdeclineinhomeownershiphad‘beenturnedaroundwithmorethan14millionowner-occupiersinthecountrylastyear’.Oncloserexamination,especiallyinrelationtomortgagedbuyers,thepictureislessclearcut.Inparticular56%ofthoseaged24to34hadmortgagesin2003/04butthishadfallento34%by2013/14.Therewasanevenstrongerpercentagedeclineintheyoungestcohort,althoughthenumbersaremuchsmaller.Thissuggeststherehasbeenan‘emptyingout’ofhomeownership,especiallyatyoungeragelevels,whichmaypullhomeownershiplevelsdownasthesecohortsage.

Inthiscontext,anIFSstudy,coveringtheperiod1967-2007,suggestedthatbirthcohortswithdifferentownershipratesatage30 typically catchup (at least to80%of the rateofprecedingcohorts)by theageof40 (Bottazietal, 2012).However,morerecentworkbytheCML(2015),whichbuildsonanalysesbyAlanHolmans, indicatesthattherateofhomeownershipbyagecohorthasbeendecliningandthatwhilepreviouscohortshavecaughtup,therearegroundsforbelievingthatcurrentcohortsmightnot.Inparticularitshowsthatwhile71%ofthosebornin1960and1970werehomeownersbytheageof40,only47%ofthosebornin1990canexpecttobeinthesamepositionatthatage.TheCMLputforwardsomeplausiblepathways,shownintable6.2,whichsuggestthatcurrentyoungeragegroupsarelikelynottobeabletocatchup.CMLnotesthatnoneofthisiscastinstone,andwithastrongeconomicrecoveryandmoreinitiativesaimedatboostinghomeownershiprateswecouldseesomereversalofthesetrends.Butdecliningaccesstoowner-occupationdoesmeanmoreadultchildrenarereturningtoliveathomewiththeirparents(thefigurewasupanestimated800,000overtheperiod1996-2015(ONS,2015),andmoredemandforrenting.

Table 6.2: Plausible home ownership paths

Born in Current age Past / future age

20 25 30 35 40 45 50 55 60 65

%byage,byyearofbirth

1960 55 2 27 53 63 71 77 79 80 80 80

1970 45 2 21 50 65 71 73 75 76 77

1980 35 1 15 35 44 51 55 57

1990 25 0 8 26 39 47

Source:CML2015

AsHalifax (2016) pointed out in its latest Generation Rent report, there is now some evidence to suggest youngerhouseholds opting out of homeownership (reflecting choice aswell as constraint). Indeed for younger generationsrentingprivatelymightwellbecomethenorm,withmanybecominghomeownerslaterintheiradultlives,apatternmuchclosertosomeofourEuropeanpartners.

Anothernewphenomenonislettobuywherethosealreadyinowner-occupationrentoutandre-mortgagethefamilyhomeinordertoenablethehouseholdtomoveupthehousingladder.Theresultisthatmorehouseholdsowntwoormorehomeswhileahigherproportionofhouseholdsareunable,andmaybeunwilling,topurchase.Morebroadlymanyowner-occupierswhowishtomovemaysimplyholdontotheexistinghomeandletouttheproperty.

Allofthesefactorssuggestthat,eveniftheeconomyandthehousingmarketimprove,therearelikelytobecontinuingconstraints on entry into the owner-occupiedmarket, especially where family assistance is not available. There arereasonstoexpectsomeexpansionnonethelessandnotleastbecauseofgovernmentpolicy,andbecauseinmanypartsofthecountryaffordabilityhasincreased.Ifrealincomesstartedtorisesignificantlythatexpansioncouldbemorerapidthancurrentlyexpected.Ontheotherhandtherearediversereasonswhythosewhohaveequitymaydecidetomaintainorincreasetheirinvolvementinpropertynotsomuch,asinthepast,byupgradingtheirowner-occupiedhomebutbyaddingtotheirportfolio.Thesepressuresarelikelytoremainstrongunlessalternativeinvestmentopportunitiesimprove.

Private renting and social rentingTheothersideofthestoryistheextenttowhichprivaterentingissettotakeonpartsoftheroleofsocialrentingifthestockofrentedhousingcontinuestodecline,evenweretheretobefullreplacementofsalesthroughRighttoBuyandthesaleofhighvaluedhomes.

Thereare largefinancial reservesbothwithin thehousingassociationandparticularly the localauthority sectors, soit isnot impossibleforthesectortocontinuetoexpand,butotherpressuressuggestthattheuseofthesereservesis constrained by the extent of subsidy required. The pressures on developing housing associations and even localauthoritiesarecurrentlytotakealargerroleintheprovisionofhomesforsaleandmarketrentpartlytoenablethemtocross-subsidisesocialhousingandpartlytotakeapositiveroleinprovidingandmanagingacrossthemarket.Otherpressuresonhousingassociationsareresultinginlargescalemergersandacquisitionsandwiththatscalethepotentialtotakeonawiderrangeofactivities.Equallythereareinitiativestosupporttheprivateprovisionofsubsidisedhousingnotablyforemployeesbutalsomoregenerallyasacontributiontocommunity.Thuswhatwearelikelytoseeisthetwosectorsgrowingclosertogetherespeciallyintermsofprovidingforlowerincomeworkinghouseholds.

Oneoutcomeofthesetrendscouldbebettermanagementofthatpartoftheprivatelyrentedstockthataccommodateslowerincomehouseholds;anotheristhatbetteroffsocialtenantswilltransferintoatleastpartialowner-occupation;athirdisthattherewillbegreateremphasisonplacemakingandmixedcommunitieswitharangeoftenuresavailable.

ConclusionsWhiletherearereasonstoexpectowner-occupationtogrowatleastamongmaturetraditionalhouseholdsitishighlyunlikelythatyoungerhouseholdswillenterowner-occupationtotheextentthattheydidduringthelastfourdecades.Thistypeofmodelcouldimplythattheproportionofowner-occupationinEnglandcouldgrowtomaybebetween64%and66%overthenextfewyearsandstabiliseataroundthatlevel.Equallysocialhousingmightundersome,perhapsunlikely,circumstancesremainat roughlycurrent levelsashousingassociationsrespondto thechallenge toexpandwithoutdirectsubsidy.However,itisfarmorelikelytodecline,especiallyifpartialownershipstartstotakealargerroleinaffordablehousingprovision.Aguesstimatemightbethatitwouldfalloverthenextfewyearstobelow15%.Overtime,unlessthereisapolicyreversalitcoulddeclinefurthertoaslittleas10%ofthetotalstock.ThiswouldsuggestaPRSintherange20%and22%withinthisParliamentandperhaps25%asthelongertermequilibriumlevel.Thesearelowerlevelsthaninmanyotherprojections,reflectingcurrentgovernmentpolicyandanassumptionthattheeconomycontinuestoimprove.Iftheoutlookismorenegative,theproportioninprivaterentingwillbehigher.Butifrealhouseholdincomesrisesignificantlytheproportioninowner-occupationcouldbehigher,moreinlinewithmatureNorthernEuropeanmarketsthatstillfavourthatsector.Ifso,youngerhouseholdswillrentbutthevastmajorityofstableworkinghouseholdswillbeowner-occupiers.

Insummary,privaterentingplaysandwillcontinuetoplayakeyroleintheUK’shousingsystem.Itkeepspressureoffthehomeownershipsectorbyofferinghouseholdsaclearalternativewhetherfortheshortorlongterm.Andevenifinstitutionalinvestorsenterthemarketenthusiastically,individuallandlordswillremaindominant–astheyareacrossEurope.Shrinkingthesectorthereforedoesnotseemasensiblewayforwardgivenwhatweknowaboutunmetdemandandneed.Inanidealworldwecouldidentifythegoalsofpolicychanges,establishabaselineandmonitoroutcomestoseeifthesegoalsweremet.Inthiscasehowever,thegovernment’sgoalsaremultipleandsometimesinconsistentandpoordatamakehighqualitymonitoringdifficultifnotimpossible.Ifwearetounderstandandmanagethesectorbetter,weneedtoimprovethesedataassoonaspossible.

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HOWMANYLANDLORDSARETHEREINTHEUK?Tounderstandtheeffectsofthevariouschangesdiscussedinthisdocument,itwouldbehelpfultoknowthenumberofprivateindividuallandlordsintheUK.Unfortunatelythereisnogoodstatisticalsourceforthisnumber,buttherearevariouswaysofestimatingit.

Method 1

Wecan lookatwhatsurveystellus.TheWealthandAssetsSurveyasks if therespondentowns‘Buy-to-letpropertyintheUK(residentialpropertywhichisletforprofit)’(ONS2012).Resultsfrom2012-2014(themostrecentavailable)indicatethat4%ofBritishhouseholdsreportedowningsuchproperty(ONS2015).TheONSestimatestherewere27.0millionhouseholdsintheUKin2015,and4%ofthatis1.08millionhouseholds.

Method 2

Wecouldimputethenumberbypullingtogetherinformationaboutthenumberofprivaterenteddwellingsandthedistributionofthenumberofpropertiesownedbyeachlandlord.ThelatestUK-levelfigureforthenumberofPRSdwellingsis5,174,000in2013(DCLGLivetable101).ForEnglandthereisamorerecent2014figureof4,588,000,whichwasup2.75%from2013.Ifweapplythis2.75%growthratetotheoverallUKfigure,andassumethatgrowthcontinuedatthesamerateinto2015,wecomeupwithanestimateof5,460,000PRSdwellingsintheUKin2015.

The2010PrivateLandlordsSurvey (although itmustberememberedwasquiteasmallsample)indicatedthatsome40%ofPRSdwellingswereownedbylandlordswhoownonlyasingleproperty.Assumingthatthatproportionhasremainedconstant,

thenumberoflandlordsowningasinglerentedpropertyis

5,460,000*.4=2,184,000

Againfromthe2010PrivateLandlordsSurvey,some78%oflandlordsfellintothiscategory.Thismeansafurther22%oflandlordsownmorethanoneproperty,so

thenumberoflandlordsowningmorethanonepropertyis

(2,184,000/78)*22=616,000

andthetotalnumberoflandlordsis

2,184,000+616,000=2,800,000

Finally,the2010Surveytellsusthat89%oflandlordsareprivateindividuals.

Thenumberofprivateindividuallandlordsistherefore

2,800,000*.89=2,492,000

Inthiscontextitisimportanttorememberthatthesurveywasundertakenin2010andthisfigureassumesthatproportionshaveallstayedthesamewhilethesectorhasdincreasedbyoveramillionunits.Theprobabilityisthatthoseholdingmorethanoneunithavebecomemoreimportant-inwhichcasethisfigureisanupperestimate.

ANNEX1

Method 3

HMRC data should tell us something about the number of landlords, as theymust pay tax on their rental income.(However,thefactthatHMRCisrunningahigh-profile‘LetPropertyCampaign’toencouragesmallresidentiallandlordstopaytax indicatesthatnotalldo.)Accordingtodatafor2012/13(thelatestavailable),some1.63millionindividualsreportedreceivingrentsfromUKproperty.Thisisaveryroughindicator,sincethecategoryalsocoverscommercialandagriculturalpropertyand,asnotedabove,notallresidentiallandlordscomplywiththeirtaxobligations.

Method 4

Scotland,WalesandanumberoflocalauthoritiesinEnglandrequirealllandlordsofpropertiesintheirareastoregister.BasedonthenumberofprivateindividuallandlordsregisteredineachjurisdictionitshouldbepossibletoestimatearangefortheentireUK.Howeverwehavebeenunabletofindpublishedstatisticsforthenumbersregistered.

TableA1summarisestheestimatesmadeusingthevarioustechniques.Theyrangefrom1.08millionhouseholdsto2.49millionindividuals.ThishighlightstheproblemofmissingorcontradictorydataaroundlandlordsintheUK.

Table A.1: Various estimates of number of private individual landlords in the UK

Method Estimate % of total (27 million households/49,093,000 adults)

1 GrossupfromWealthandAssetssurvey

1.08millionhouseholds 4%ofhouseholds

2Imputefromdataaboutnumbers ofdwellingsanddistributionoflandlordholdings

2.49millionindividuals

9%ofhouseholds(ifonlyonelandlordperhousehold)5%ofadults

3 HMRCdataonnumberof individualsreportingpropertyrents

1.63 million individuals 3.3%ofadults

4Estimatebasedonnumbersregisteredinareaswhereitisrequired

N/A–datanotavailable

Source:WealthandAssetsSurvey;author’scalculations;ONS;HMRC

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COMPARINGRENTINGTOOWNER-OCCUPATIONFiguresA.2.1andA.2.2showhowthepatternoftenurehaschangedovertimeintermsoftenureinEngland-withowner-occupationstillthemajoritytenurebutdecliningsignificantlyinproportionaltermsandthenumbersofprivatetenantsrocketingfromtheearly2000s.

Figure A.2.1: Housing tenure from 1980

Private tenants Social tenantsOwner occupiers

19801982

19841986

19881990

19921994

19961998

20002002

20042006

2008

2009 / 10

2011 / 12

2013 / 14

Source:DCLGLiveTables

ANNEX2

Figure A.2.2: Number of private tenant households in England, 1980-2013/14

19801982

19841986

19881990

19921994

19961998

20002002

20042006

2008

2009 / 10

2011 / 12

2013 / 14

Source:EnglishHousingSurvey2013/14

In some circumstances private renting offers distinct advantages over owner-occupation (Figure A.1). Young,mobileprofessionalsmaywantthefreedomtomovetootherneighbourhoods,citiesorevencountrieswithoutthecommitmentofhomeownership.Landlordsareresponsible formaintenanceandrepairs,whichsometenantsgreatlyappreciate.There has been a steady increase in property-transactions costs over the last decades – so renting privately allowstenantstotryoutparticularareasbeforemakingacostlylong-termcommitment.Andprivaterentingbenefitsthewidereconomybyfacilitatinglabourmobility.

For lower-incomehouseholds socialhousingwill usuallybe thepreferred tenure, for several reasons. First, it is lessexpensive inmostareas,andsecondlythestandardtenancyhasbeen indefinite—that is, thetenantcanstay for life(althoughthegovernmenthasannouncedplanstochangethisinfuture).SocialrentingalsooffersanaffordablerouteintoowneroccupationformanyhouseholdsthroughtheRighttoBuy(forcouncilhouses)orthesoon-to-be-implementedVoluntaryRight toBuy forhousingassociation tenants.However locationandqualitymay still bean issue for somepotentialtenants,especiallyinareaswheresocialrentsareclosetomarketlevels.Evenso,inalmostallSouthernEnglandandinmanyareasintherestofthecountryonlymorevulnerabletenantsandhomelesshouseholdscanaccesssocialhousing–soitisnotanoptionformostofthoseenteringthePRS.

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Figure A.2.3: Main advantages of renting privately

Wider choice of location

No advantage

Better choice of types of properties available (house/flat, etc.)

Properties are in better condition

Properties more easily available

Get repairs done/lessresponsibility for upkeep

No social stigma

More flexible tenancy arrangements

Other

Source:BritishSocialAttitudesSurvey2010

Figure A.2.4 Disadvantages of renting privately

Rents are too high

Problems with landlords orletting agents

Little choice over whathappens to the property

Restrictions around the length of time you can stay living in the property

Can't invest in the housing market - lack of security for the future

No disadvantage

Don’t know

Other

Source:BritishSocialAttitudesSurvey2010

Therearedownsidestoprivaterentingcomparedtoowner-occupationorsocialrenting.Formoreaffluenthouseholdsinparticular,owner-occupationisthefavouredtenurebecauseitoffersfullcontrolovertheproperty,securityoftenure—whichisseenasparticularlyimportantinthecaseoffamilieswithchildren-andthepossibilityofcapitalappreciation(FigureA.2).Thustheverygreatmajorityofmiddle-incomehouseholds,withorwithoutchildren,owntheirownhomes.

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