Social housing cuts set alarm bells ringing in rental sector
Government cuts to social housing will put even more pressure on the private rental market
Saturday 23 October 2010
The measures announced in the comprehensive spending review are still being digested, but the Chancellor's decision to cut the social housing budget in England by more than 50 per cent has led to calls from lettings agents, landlords, brokers, lenders and charities for the Government to do more to increase supply and ensure buy-to-let funding is dramatically increased.
The private rental sector is being relied upon to support demand for social housing yet is itself in a far from healthy position. It is already struggling to match existing demand, and the buy-to-let market is virtually unrecognisable from its peak three years ago. In addition, changes to welfare rules could put existing landlords off letting to those receiving housing benefit.
The Government is being called upon to produce a coherent and practical strategy to deal with an impending housing crisis. One leading lettings agent, Hamptons International, claims the latest cuts are likely to have a more dramatic impact on the structure of the UK housing market than the introduction of Right to Buy in the 1980 Housing Act.
Adam Challis, head of research at Hamptons International, says: "While [the] 150,000 new affordable homes announced by the Government are necessary, this is just the beginning in terms of addressing the large number of new homes required by the population of the UK."
He is also concerned that while the Coalition has scrapped the target-led system of the previous government, it has not provided any concrete direction for its alternative, the "Localism" agenda.
Affordable housing schemes take time to materialise which will only add to the existing pressure on the rental market. Meanwhile, the current lack of mortgage finance means that the average age of the first time buyer has risen to 37, from 34 five years ago, as prospective buyers are unable to provide the high deposits demanded by lenders.
Countrywide Residential Lettings, the UK's largest letting agent, reported that in September more than 19,700 new tenants registered for rental accommodation, up 44 per cent on the year to date, while the number of new rental properties coming to the market rose by only 1 per cent during the same period.
The landlord community has responded by calling for a change in government-thinking over welfare reforms.
David Salusbury, chairman of the National Landlords Association, has urged the Government to put in place a strategy to incentivise the growth of the private rented sector and support professional landlords.
He says: "Despite the Government's recognition of the true cost of providing homes to rent, the Government's planned cuts to local housing allowance could well result in heavy additional financial burdens on the private rented sector, at precisely the time that demand for affordable housing to rent will be increasing. It is crucial that the Government rethinks cutting local housing allowance rates to the 30th percentile of market rates in one go and introduces transition arrangements."
He also says the increase in the age limit for the shared room rate from 25 to 35 will place a greater local demand on shared housing.
The issue of financing is key. Buy-to-let lending is down 80 per cent on its peak and, as Melanie Bien, director of mortgage broker Private Finance, says, there is little sign of the situation improving significantly.
"Buy-to-let lenders are few and far between, even with the return of Paragon to the market recently. Criteria remain tight, sizable deposits are necessary and fees are high. More lending is essential to meet the likely increased demand.
"Already, rents are rising significantly. More pressure from an increased number of tenants will push them higher – good news for a few landlords perhaps, but hardly a sustainable situation in the longer term," she said.
Paragon's return to buy-to-let lending has been a welcome, if small, filip for the professional investor. Once the third largest buy-to-let lender, it was forced to withdraw from lending in 2008 due to the seizing up of the wholesale lending markets. It recently secured a £250m funding line, although its lending criteria is firmly aimed at the professional landlord.
Other recent additions to the market include Aldermore and Precise Mortgages, as well as the return of Kensington. However, they are all relatively small players while Lloyds Banking Group, currently the largest buy-to-let lender, moved to scale back its exposure in September. Buy-to-let property portfolios will be limited to a maximum of three properties, or £2m worth of lending – whichever is exceeded first – across the Lloyds Group. It also no longer offers buy-to-let via brokers through its Cheltenham & Gloucester and Lloyds TSB Scotland brands.
David Whitaker, the managing director of buy-to-let and commercial mortgage broker Mortgages for Business, is angered by the retrenchment of both Lloyds and RBS from the buy-to-let market at such a critical stage for the private rental sector.
He says: "Just at the point that the Government needs the bailing out of social housing, the two organisations that they own stakes in that they could be helping, are retreating."
He says that, while welcome, the presence of specialist lenders can only bring a modest volume against that which is needed. "A lot of early financing is dealing with bank debt and refinancing, not the creation of new letting units, or conversions of houses to flats," he said.
The massive shrinkage in the buy-to-let market is not totally unwelcome. Just before the credit crunch the deals that were being offered to inexperienced buyers – so-called "amateur landlords" – were verging on the daft.
For example, Rooftop Mortgages, the now-defunct UK lending operation of US investment bank Bear Stearns, offered a product which allowed borrowers to buy 20 units, provided they already owned three – all with only a 15 per cent deposit. Crucially, while most lenders apply a rent to interest (RTI) cover calculation in their decision making – usually demanding that the monthly rental will be between 120 per cent and 130 per cent of the monthly interest payment, Rooftop didn't set any RTI requirements. Therefore it didn't dictate to the investor whether a property was a good yielder or not.
Not unsurprisingly, in 2006 Rooftop became the first UK residential mortgage lender in recent years to have its securitisation downgraded by a rating agency – amid concerns over the lender's "aggressive" products and accusations of "relaxed" underwriting standards.
Kensington returned to the buy-to-let market in May with a markedly different approach than before. It is now targeting only experienced landlords who already have at least two buy-to-let properties and are looking to expand their portfolio. Kensington's spokesman Alex Hammond said: "The availability of funding is still well down from the peak and the dynamic of the market has changed. Buy-to-let has never been a recipe for overnight riches, but the glimmering attraction of a property investment that tempted so many first-time landlords was, in a booming market, capital gains.
"However, with house prices largely expected to remain stable in the medium term and tax on capital gains now higher, the traditional draw of buy-to-let is less likely to entice casual investors.
Instead the real opportunity lies in rental income which, due to the high level of demand, is providing landlords with increasing yields and, with capital gains still likely over the long term, an investment in rental property remains an attractive proposition for landlords who have the vision and resource to commit for a sustained period."
But with not enough finance to go around, the private rental sector is not going to be able to deal with the demands placed on it by the Government's cuts.
Alan Cleary, managing director of new buy-to-let lender Precise Mortgages, says the Government should have considered this when it planned its cuts to social housing. He says: "It must provide incentives for lenders to lend and for professional landlords – who are in the market for the long term – to invest further in the sector. If the Government fails to provide some safety net for the private rental sector we could be heading for a housing disaster."
'The lesson is not to put all your eggs in one basket'
Phil Mellor sees himself as a professional property investor, in it for the long term; yet he has been hit as hard by the credit crunch as those who dipped their toes into buy-to-let during the boom years.
He has seen a 12-15 per cent fall in the value of his eight properties in south Manchester over the past two years, and has also had to try to deal with the repercussions of his mortgage lender insisting he moved from interest-only to capital repayment.
"The restructuring was going to put me out of business. I was basically told: 'The good times are over, we want our money back. We can see your earnings and so we'll take every last penny of your income. If you don't, you'll be in default and we'll take all your houses off you.'"
Mellor, 50, eventually went to a specialist broker, Mortgages for Business, who arranged a 10-year flexible deal with Aldermore. Otherwise he was in danger of losing one or more of his properties. "The lesson is not to put all your eggs in one basket – portfolio landlords need to spread the risk. But if you're offered a really good deal, why would you go for something less attractive?"
Mellor thinks that, if the private-rental sector is to cope with increased social-housing pressures, some regulations need to change in favour of the landlord rather than tenant.For example, the last government changed the rules so housing benefit is paid to the tenant, not to thelandlord.
"I've had to wait two months while the tenant has been in arrears before I can apply for benefits to be paid for me, so by then, three months in arrears. It's a real killer."
So after all the stress of the past two years, Mellor is understandably reticent about expanding his portfolio: "If there was a deal out there which could support me purchasing a house with a depressed price, now is the time to buy. But I know it's going to be worth less in six months, and even less in 12. Have you got the finance, the portfolio and the business plan to support it? What happens when the bank rate goes up?"
Compare with the Independent: See how much you could save by switching credit cards. Compare now
- 1 Is your name now 'banned' in Saudi Arabia?
- 2 Gender-specific books demean all our children. So the Independent on Sunday will no longer review anything marketed to exclude either sex
- 3 Missing Malaysia Airlines Flight MH370: Did jetliner fly into area controlled by Taliban? Net widens after claims final satellite signal could have been sent from the ground
- 4 Nasa-funded study warns of ‘collapse of civilisation’ in coming decades
- 5 'Missing Malaysia Airlines Flight MH370 plane found in Bermuda Triangle!' Viral Facebook links are profiting hackers
Katie Hopkins continues campaign to become Britain's most hated talking head with poorly timed Bob Crow tweet
Ukip and Nigel Farage on course for remarkable victory in European elections
No EU referendum under Labour: Ed Miliband to reveal that vote on membership is ‘unlikely’ in next Parliament if party wins power
Tony Benn was entirely ineffectual - and usually wrong
The rise of Ukip: Study warns Labour that Eurosceptic party's electoral base now 'more working class than any of the main parties'
Europeans have ‘got whiter’ due to natural selection in past 5,000 years, scientists say
iJobs Money & Business
£35000 - £43000 per annum + Bonus and Benefits: Harrington Starr: A global lea...
£50000 - £60000 per annum: Harrington Starr: Linux Systems Administrator - UNI...
£32000 - £36000 per annum + generous benefits: Pro-Recruitment Group: * TAX * ...
£37000 - £40000 per annum + £20000 benefits package: Pro-Recruitment Group: **...
Day In a Page
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony
A charming four-bedroom Oxfordshire cottage with oak floors and chunky-beamed ceilings, £465,000
A beautiful one-bed flat in a sought-after portered block, with access to Norland Square communal gardens
A one-bedroom flat within a Sixties school conversion with high-spec design and open-plan kitchen, close to Lambeth North Tube, £435,000
A 17th century four-bedroom house, with open fireplaces, cellar and pool, £600,000
A three-bedroom, coach house with luxury open-plan living space and contemporary breakfast bar
A newly refurbished one-bedroom flat in the heart of Mayfair, close to Grosvenor Square
A charming four-bedroom house overlooking Burleigh Square Park, close to Thorpe Bay
A three-bedroom farmhouse with a large inglenook fireplace and exposed beams
A boutique mews house, set around a central courtyard, with three bedrooms and a private roof terrace
A four-bedroom farm-conversion with three bathrooms and two reception rooms
A two-bedroom detached house with ensuite bathrooms and a sun-drenched decked terrace, £750,000
A modern and spacious two-bedroom, penthouse flat with two bathrooms in a prestigious development
A beautifully renovated five-bedroom terrace with three reception rooms and a courtyard garden, £700,000
A four-bedroom period house which has been extended to provide almost 2,500sq ft of living space, £675,000
A pretty three-bedroom Georgian home with a 22ft drawing room and a master suite with a balcony, £525,000
A substanstial family home with five bedrooms and landscaped gardens in the much sought-after Branksome Park area
A well-presented three-bedroom house with front and rear gardens, close to White City station, £475,000
A handsome five-bedroom house in a sought-after location close to the city centre
A five-bedroom country home with valley views, equestrian stables and 27 acres of land, £725,000
A six-bedroom farm house with separate, detached cottages and 371 acres of land
A two-bedroom cottage with parquet floors, chunky beams and an open fireplace
A three-bedrrom flat with 2,733sq feet of living space, a beautiful private garden and 15 acres of communal grounds
A four-bedroom chalet bungalow with three bathrooms and a spacious garden, £525,000
A two-bedroom flat with an open plan kitchen and two balconies, close to Arsenal station
A Grade II-listed home with six bedrooms, secluded landscaped gardens and views across Hadley Green
A Grade II-listed mansion with two apartments and a cottage, near Gretna Green
A three-bedroom Grade II-listed mews house with vaulted ceilings and roof garden