Renting isn’t just for students anymore. Over half of UK homes will be rented – with a third rented privately – by the year 2032, it has been predicted. Find out more from an article taken from the RLA’s member magazine the Residential Property Investor (RPI).
It will be the first time in 60 years that the majority of homes will not be owner occupied – and by then home ownership will be the preserve of the elderly.
A report by the Intermediary Mortgage Lenders Association (IMLA) forecasts that just 49.2% of households in the UK will own their own homes in just 18 years’ time.
At peak, in 2003, 71% of households in England were owner occupied. Today, the figure is 65%, and the IMLA says the proportion is set to drop further.
The report, ‘Reshaping housing tenure in the UK: the role of buy-to-let’, also makes the point that the UK has come from the position of having an unusually small private rented sector by international comparisons.
“This was the product of a large expansion of social housing in the 1950s and 1960s, rent controls in the private rented sector and policies that favoured owner occupation such as right to buy in the 1980s and favourable tax treatment.
“The growth of the private rented sector can therefore be considered in some sense a normalisation after a period when government policy artificially suppressed the sector’s size,” says the report.
Not enough house building
The report specifically singles out the shortfall in supply of housing: “If current trends continue without a major policy or economic shift to address the shortage of new homes, the majority of UK households will be renting in the private and social sectors by 2032 for the first time since the early 1970s.”
Private renting has already overtaken the social sector to stand at 18% of all households, while according to the Department for Communities and Local Government, of the 14.3m home owners in England, the largest number are already aged 65-plus.
The IMLA report forecasts that if current trends continue, by 2013, 49% of UK households will own their own home, 35% will rent privately and 16% will be in the social rented sector.
It identifies multiple trends driving the rise of private renting, including the fall in social housing; growing obstacles to home ownership; more students; high levels of immigration; later marriage; and more relationship breakdowns.
It forecasts that continuing falls in owner occupation and social renting would also mean more than a third of households renting privately within two decades – twice as many as today.
Demographic projections point to rapidly rising housing demand, with the UK population expected to reach 67.8m by 2020 and 75.3m by 2035.
The report, by IMLA’s director of research Rob Thomas, says that higher tenancy demand has been the main driver of growth in the private sector over the last 25 years.
Rent deregulation in 1988 and the launch of specialist buy-to-let mortgages in 1996 – before which, relatively expensive business loans had to be used – have allowed private landlords to respond to this demand.
The report also says that a “surprisingly high proportion” of new rental property has been acquired without a mortgage. It says that only 420,000 of the additional 1.31m private rental properties bought between 2007 and 2012 were financed by buy-to-let loans (DCLG figures), while a further 9% of rental properties were inherited.
However, perhaps this was not too surprising, given the ‘precipitous’ decline in buy-to-let lending during the credit crunch. As the graph on the next page shows, first-time buyer lending also fell off a cliff, but not to the extent that buy-to-let lending did. There were a number of factors at play, but the report emphasises that the decline was a reflection of the extent to which lenders withdrew credit, rather than of a scaling back by landlords of their ambitions.
Buy-to-let lending was hit by a number of factors: some lenders, notably Mortgage Express, part of Bradford & Bingley, stopped lending altogether; there was a perception by some enders that buy-to-let was risky; and a concern that the regulator shared that view.
% of households in private rented sector: international comparisons
Effects of MMR
However, buy-to-let lending is now in recovery, and landlords have been encouraged by low interest rates, and the fact that buy-to-let finance is “the cheapest source of mortgage finance available for rented residential property”.
In addition, it says, the new regulatory landscape disadvantages first-time buyers but not buy-to-let borrowers.
The Mortgage Market Review (MMR), which was introduced at the end of April this year, means that ordinary residential mortgage applicants must pass strict affordability tests, including their ability to keep paying the mortgage in the event of things like a redundancy, the loss of one income due to having a baby, having to cope with childcare costs, and a rise in interest rates.
The MMR has also made it all but impossible for ‘ordinary’ borrowers to take out an interest-only loan. The report says that, assuming an interest rate of 4%, first time buyers required to take out a capital repayment mortgage will face monthly mortgage payments 58% higher than a landlord borrowing the same amount on an interest-only basis.
“While many first-time buyers may feel that buy-to-let investors are making it harder for them to get on to the property ladder, a heightened sense of competition is the inevitable result of insufficient growth in the housing stock as a whole in the face of a rapidly growing population.
“With population growth projected to remain high for the next two decades and, as yet, no sign that the supply of new social rented or private housing will keep pace, this sense of competition is set to remain.
“Barring a major clearing of the logjam of inadequate supply, current trends projected forward point to a majority of households renting by 2032 and 35% in the private rented sector.
“One irony given the Government’s preference for home ownership is that the ‘triple lock’ of new regulation – the Basel 3 capital adequacy regime, MMR and macro-prudential rules – seem to advantage buy-to-let landlords over first-time buyers. The concerns that the Financial Conduct Authority (FCA) has expressed about the gaming of buy-to-let mortgages (where first-time buyers claim to be buy-to-let investors) seem to confirm that even the regulator agrees that the new rules put first-time buyers at a disadvantage.”
UK tenure projections to 2032
|Owner-occupied units (thousands)||% of total||Private rented units (thousands)||% of total||Social rented units (thousands)||% of total||Total units (thousands)|
|Source: DCLG / IMLA|
Lower rental yields
However, the report does not suggest that landlords always find it easy to obtain buy-to-let finance.
It says: “The low gross rental yields that have become a feature of the market in parts of the country in recent years, as property price increases have outstripped those of rents, can impose a constraint on buy-to-let investors as they limit the amount they can borrow.
“Most buy-to-let lenders require that rental income must be at least 125% of annual mortgage interest typically calculated at a non-discounted interest rate.
“So for a property valued at £200,000 with a gross rental income of £6,000, the lender would want to ensure that interest costs are no more than £4,800.
“At an interest rate of 4%, this means that the maximum loan size would be £120,000, equal to only 60% of the property’s value.
“This could constrain buy-to-let investors’ purchasing power relative to owner occupiers in some local markets.”
Nor does the report go along with the school of thought that landlords benefit from a more benign tax environment than owner occupiers.
It says: “A factor that has been cited as a driver of the private rented sector, and specifically of the buy-to-let mortgage, is taxation.
“It is argued that because landlords can deduct mortgage interest in calculating their tax bill in a way that owner occupiers cannot, they have an advantage over first-time buyers.
“However, this argument is erroneous. “Owner occupiers in the UK are not subject to Capital Gains Tax or, since 1963, to any tax on their ‘imputed’ rental income (previously known as Schedule D income).
“Private landlords in contrast are subject both to Capital Gains Tax and tax on rental income, subject to allowable deductions for most of their costs.”
Buy-to-let buyer gross lending for UK house purchase (2006=100)
The report also says that the rising student population (2m in 2000/1 to 2.5m in 2010/11) is another major factor in the growth of the private rented sector, with students “overwhelmingly” dependent on being able to rent privately.
Net immigration averaging 200,000 a year is another factor.
The age of tenants also falls under the spotlight in the report. Currently, home ownership rates are lowest among the young. However, this is gradually moving up the age brackets as more people struggle to get into owner occupation in their thirties and beyond.
“In 1991, 36% of 16 to 24-year-olds and 67% of 25 to 34-year-olds were home owners. By 2012/13 this had fallen to 11% and 40% respectively.
“Unless a major policy or economic shift takes place, majority home ownership is set to become the preserve of the old.”