The value of the PRS in Great Britain failed to rise in the last quarter, as house prices fell and the sector grew more slowly. It stands at £1.4trn.
The combined effects of higher stamp duty costs, reforms to the tax treatment of mortgage interest, and tighter lending rules are responsible for the slowdown. The number of households in the sector increased by only 3% in the last year, to 5.7m, far slower than the rate of increase seen over the past decade. On the supply side, only 1% more landlords increased rather than shrunk their portfolios in the last three months, according to a survey of 1,043 landlords, run in association with BDRC Continental. Meanwhile, analysis of UK Finance data shows the number of outstanding buy to let mortgages increased by just 1.5% a year, one sixth of the rate seen three years ago, as house purchase demand has slowed.
Tenant demand has eased too. 19% of landlords reported tenant demand increasing in the last three months, while 23% saw demand fall. However, this figure was heavily influenced by London, where political and economic uncertainty is having a large effect in prime areas.
First-time buyer demand to sustain PRS, after lost decade for two million buyers
While landlords have seen softer tenant demand in recent months, first-time buyer activity is still a long way from recovering to its pre-recession levels, despite a raft of government support measures. This has contributed to the long-term growth of the PRS, and is set to do so in the future.
In the last decade, two million fewer first-time buyers have been able to buy with a mortgage than in the ten years prior to 2008. Over the same period, the PRS has grown by 2.2m households, accommodating frustrated buyers.
This fundamental support for rental demand has not changed, as first-time buyers continue to struggle with affordability issues, high house prices and insufficient housebuilding. Just over 363,000 first-time buyers used a mortgage to buy a home last year[1], still 94,000 fewer than the typical number seen in the ten years prior to the financial crisis, despite an increasing population. Without a sustained recovery in first-time buyer activity, this means 940,000 fewer first-time buyers will purchase their first home over the next decade than in the 10 years before the financial crisis.
ONS forecasts suggest an additional 2.4m households will be created in Great Britain over the next ten years. Conservatively, assuming first-time buyer numbers recover somewhat, and private renting continues to account for a little over a fifth of households, rental housing supply will still need to cater for an additional half-a-million households.
Professional landlords to bridge the long-term supply gap
In the long-term, the market will also continue to professionalise as it bridges the supply gap, improving the service landlords provide for tenants as amateurs leave the market.
This process has already begun in earnest. 31% of landlords now make a profitable, full-time living from property investment, compared to 26% three years ago.
Furthermore, landlords are increasingly operating as a business, and those buying property are increasingly doing so as a limited company, allowing them to continue to offset mortgage interest costs against tax. Kent Reliance’s data shows that in the first quarter of 2018, 72% of mortgage applications for purchase were via a limited company – more than twice the level seen two years ago, and up slightly from 70% in 2017.
Andy Golding, Chief Executive of OneSavings Bank, which trades under the Kent Reliance and InterBay brands in buy to let, comments: “Landlords were left reeling after the introduction of tighter regulation and higher taxes, while the spectre of Brexit is already weighing on the housing market. This has naturally deterred investment into the private rented sector, especially from amateur speculators.
Political opinion may be set against the PRS, but without it, the housing crisis would be deeper still. First-time buyer numbers, despite recent fanfare, are a long way from pre-recession levels and with household numbers growing, and new housing starts inadequate, it is the PRS that will continue to pick up the slack. Policy should recognise that, and support growth in supply across all tenures.
A housing market with dwindling supply of rental accommodation yet growing demand would, without a significant rise in affordable housing, provide the worst of all worlds for tenants: higher rents, with less choice and security, hampering their ability to save to buy a home.”
