Private rented sector slowing in UK but will expand in the long term

The growth of the private rented sector in the UK has slowed due to Government intervention and economic uncertainty but affordability issues for first time buyers means that it is likely to continue to expand in the long term.

Landlords have had to adjust to tax and regulatory changes and as a result the number of rented homes has not grown as much as in previous years but at the same time the number of first time buyers has also fallen, according to the eighth edition of Kent Reliance’s Buy to Let Britain report.

It reveals that the value of the private rented sector failed to rise in the last quarter, as house prices fell and the sector grew more slowly, taking it to £1.4 trillion with the combined effects of higher stamp duty costs, reforms to the tax treatment of mortgage interest, and tighter lending rules being responsible for the slowdown.

The number of households in the sector increased by only 3% in the last year to 5.7 million, 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.

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 with 19% of landlords reporting 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.

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 10 years prior to 2008. Over the same period, the private rented sector has grown by 2.2 million 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 house building. Just over 363,000 first time buyers used a mortgage to buy a home last year, still 94,000 fewer than the typical number seen in the 10 years prior to the financial crisis, despite an increasing population.

The report says that 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.

It points out that estimates from the Office for National Statistics (ONS) suggest an additional 2.4 million households will be created in Britain over the next 10 years and assuming that 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.

It adds that in the long term, the private rented sector market will also continue to professionalise as it bridges the supply gap, improving the service landlords provide for tenants as amateurs leave the market. Indeed, it explains that this process has already begun in earnest as 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 some 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.

‘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,’ said Andy Golding, chief executive of OneSavings Bank, which trades under the Kent Reliance and InterBay brands in buy to let.

‘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,’ he pointed out.

‘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,’ he added.