As landlords continue to exit the buy-to-let market, to the detriment of their tenants, could this rout also lead to buy-to-let mortgage lenders following their lead?
This is a question posed by Chloe Cheung writing for the FT this last weekend. It’s a serious question, a development that could be a further twist in the downward spiral of reduced rental supply, and an even bigger crisis in renting. Her research reveals there could be more than a grain of truth in the theory.
Despite claims by some sceptics in the media: “We can’t let landlords define the narrative on renting,” says one headline.
“Thought landlords were selling up and making it even harder to rent? Think again,” the article goes on, one promoted by opendemocracy.net. This is a website that says it reports on social and political issues and, as it says, is “seeking to challenge power and encourage democratic debate” and whose founders have been involved with established media and political activism, that’s according to Wikipedia.
“The narrative that landlords are selling up because of tax changes or the upcoming Renters’ Reform Bill, which will ban ‘no fault evictions’, has been repeated time and time again recently, from MPs to landlord bodies and even the Bank of England,” says opendeomcracy’s article.
“But after the chief executive of the UK’s biggest landlord lobby admitted he had misrepresented the facts – and that the sector was actually growing slightly – the claim has fallen apart.” says the website.
The website even claims the new Housing Minster Rachel McClean is backtracking on the narrative that landlords are leaving stating that: “If one leaves, I’m almost certain another one will come in. So this idea that our regulation will drive them out in the sector – I don’t accept that,” she apparently said.
Back to reality
All that’s far from the evidence we are seeing on the ground, and definitely not the situation many tenants are experiencing. Writing in the Sunday Times this week Laura Hacket says, and she includes herself in this, tenants are degrading themselves “to get a foot in the door.”
She says that it was only when she and her friends resorted to writing a “simpering personal statement” just to get the chance to rent a flat that it dawned on her: “Britain’s rental market is broken,”!
We constantly hear stories now of queues of tenants are outside rentals on viewing days in our major cities – up to 17 in one report this writer heard. These reports from landlords and letting agents cannot all be exaggerated and defy the logic of this wishful thinking in the open-democracy story.
According to recent research by the National Residential Landlords Association (NRLA), around 30 per cent of buy-to-let landlords are planning to either cut down their portfolio this year, or leave the market altogether. This, it says, would represent the biggest landlord sell-off in over six years.
The rot started in 2017 with George Osborne, the then Chancellor’s Section 24, a hard hitting hitting tax measure to remove landlords’ ability to claim full tax relief on mortgage interest payments. This was the start of a steady stream of buy-to-let landlords deciding to exit the private rented sector.
Some 220,000 landlords left the sector in the first two years of the legislation taking effect according to the NRLA, and many more have been leaving since. In addition to the deterrent of Section 24, the Government introduced a slew of new regulations that have made, in particular, the ‘accidental” and small-scale landlord, most with less than three properties, to think twice about staying or making new investments.
Since then we’ve had Covid, an upcoming Renters Reform Bill, which will abolish Section 21, plus measures to increase energy efficiency standards which will demand significant new investment for some landlords, and more recently, rocketing mortgage rates.
A potential mortgage drought
If landlords do continue to exit the private rented sector at the current rate it will undoubtedly have an impact on the buy-to-let mortgage market. Lenders will start to cut back on their offerings and lack of competition will increase rates.
The potential for amateur or accidental landlords to continue to exit the PRS market could see a reduction in buy-to-let mortgage business for small-scale borrowers resulting in lenders tightening their criteria for those remaining in the market. So Jon Cooper, head of mortgages at lender Aldermore told the FT newspaper.
“Specialist lenders that focus on limited company BTL and portfolio landlords, which by tradition have a more flexible lending approach, may receive more business as a result,” he says. “If this were to occur, it would have a knock-on effect on some specialist lenders’ operational rhythms and delivery timescales,” he said.
Also, Stephanie Charman, strategic relationships director at Sesame Bankhall Group told the FT: that she has witnessed a “small number of amateur landlords selling properties due to pressure from interest rates, the potential for significant spending to bring properties up to EPC specifications, and concerns around increases in rent arrears. However, if amateur landlords continue to exit further, we could see mainstream lenders who don’t offer a more specialist product range look to pull back from the market.”
How will mortgage rates be affected?
Fewer landlords will affect the demand for mortgages resulting in fewer suppliers, reduced competition and higher mortgage rates will further exacerbate the decline, its a downward spiral that will continue unless something changes.
For the small-scale buy-to-let landlords that change can only be one thing, a re-assessment of Government policy towards the PRS, one that would encourage rather the present situation where small-scale landlords are being discouraged, resulting in the present crisis in the rental market.
On the other hand, the UK’s biggest buy-to-let landlord in the UK, Grainger Plc is planning to expand its market share. They expect the market to continue to grow, their estimates from 4.7 million households to 7.2 million to 2025.
While still relative insignificance in numbers, compared to the millions of small-scale landlords with no more than a handful of properties, these institutional landlords have the advantage of scale and the tax rules are more in their favour. It doesn’t take a genius to see which way the PRS is heading. Is there a secret plot – despite constantly reassuring landlords how much they are valued – that the Government wants it that way?
