An independent think tank that concentrates on the views of lower income groups recently called for the Government to license letting agents in the same way that they license estate agents. After conducting a mystery shopper exercise of 25 letting agents in three major cities, the Resolution Foundation found that ‘cowboy’ letting agents do in fact exist, and that tenants using these particular agents can expect to pay significant up-front costs and unrealistic agent fees.
The data collected showed that administration costs varied enormously, ranging from £95 up to £375, and that deposits on investment properties were generally equal to one month’s rent in Manchester but up to 2.5 month’s rent in London. When the letting agents’ websites were viewed only two of the 25 displayed their rental costs and fees; a fact that indicates most renters may not understand the full extent of the costs before they agree to rent a property.
Vidhya Alakeson, Director of Research at Resolution commented “We need more transparency so tenants at least know what fees they’re facing and to help create a more competitive market. Given that an increasing number of families have no option other than to rent long term, we need to question why letting agents are not regulated to the same degree as estate agents.”
The report and the call to the Government for letting agent licensing has been backed by the Ombudsman.
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It’s a well-known fact that young people (18 to 25 years) today find it virtually impossible to save the deposit needed to purchase their first home, but according to the letting giant Rightmove they also struggle to pay the high rental prices being asked by private landlords. Even with decent jobs that pay an average wage, young people in particular struggle to keep up with their rent payments, and many fall into arrears within the first 12 months.
But why is this?
According to Rightmove, a lot of young people looking for their first rental property are being forced to take on more than they can comfortably afford. Smaller properties with affordable rents are snapped up as soon as they hit the rental market and at present the demand far outweighs the supply. A lot of new rental instructions are family-sized properties that have failed to sell, but if time is short then a tenant will often consider any property with what seems like an affordable rent.
It is only after a few months of paying rent, council tax, utility, food and fuel bills that young people completely understand the true cost of renting a property. When asked about the number of tenant eviction cases they had seen lately, Paul Shamplina from Landlord Action said that the number had indeed risen, and that many did involve young people with severe rent arrears.
The question has to be asked then, what does the future hold for young people looking to leave the family nest?
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Statistics recently released by the savings and investment website InvestorBee show that based on current earnings and property prices first time buyers need to save for a minimum of 10.4 years in order to afford the deposit for a property. This figure rises to an incredible 19.6 years for first time buyers in London and averages 11.6 years for the rest of the country.
At present the average Londoner earns £45,750 per annum but according to the Land Registry the average house price stands at £430,000. This means that saving 10% of the average annual salary will create a 20% deposit in just over 19 years.
Understandably though it seems that house deposits are not top of the agenda when it comes to savings. In fact nearly a quarter of the people surveyed by InvestorBee said their savings were for retirement and a further 12% said they were saving an emergency fund for if the economy took another turn for the worse.
So what do these figures mean for landlords?
While they may come as a blow to first time buyers the figures indicate that the private rental sector is set to stay strong for many years to come yet. It also means that as a long term investment opportunity, private rental sector property is still the place to be.
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Buy to let landlords are currently living in a wealth bubble that simply won’t last forever, according to Andrew Gold, chief operating officer at Mutual One. Speaking at the Council of Mortgage Lenders’ annual conference Gold said “It’s a case of when, rather than if, first-time buyers will return to the housing market. When they do — the question is whether they will burst the buy to let bubble.’
Buy to let landlords are currently benefiting from average rental incomes of £720 per month, the highest figure so far recorded. They have recently started experiencing more relaxed approval criteria for buy to let mortgage products as well, and this can only lead to more and more landlords entering the private rental sector. The wealth bubble is at present holding its own but predictions say it could pop at any moment.
Many of the major banks and building societies are yet to make homeowner mortgages more affordable and so first-time buyers still struggle to find the high deposits needed to secure their first mortgage. If this changes though, and homeowner mortgages become more easily available to buyers the buy to let market will take a hard knock…and as Andrew Gold says, the question is will the knock be hard enough to burst the wealth bubble?
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Countrywide, one of the UK’s largest buy to let mortgage brokers, has urged the big financial names to join the buy to let market after it was revealed that over 90% of all buy to let mortgages approved over the last 12 months were done so by just two lenders.
BM Solutions (a part of the Lloyds Banking Group) and TMW (owned by the financial giant Nationwide) are responsible for nine out of teninvestment property mortgages approved over the last 12 months; a fact that means they literally dominate the market. Although this doesn’t immediately cause a problem, it would result in a catastrophic effect on the buy to let market should one of the two lenders decide to withdraw from this form of lending.
Countrywide spokesman, Nigel Stockton, said recently “We say that it’s a very competitive market place but it’s not really. While we’re talking about the market doing well it is, so long as TMW remains committed and BM remains committed. We need big lenders like Royal Bank of Scotland and Santander to come and play properly”
Santander announced earlier this week that they would be entering the buy to let market within the next few weeks. Hopefully then this will see the start of a more competitive market and better deals.
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The Localism Act 2011 is due to come into force some time in 2012, and with it will come several changes to the current tenancy deposit scheme. The biggest change will be the length of time that landlords have to secure their tenant’s deposit money within one of the Government approved schemes. At present a landlord has 14 days to deposit money however the changes due for 2012 will see this increased to 30 days.
Another change that could affect some landlords is the disregarding of mandatory penalties for those who fail to register their deposits correctly or fail to give their tenants the required information regarding the tenancy deposit scheme. Current legislation states that a fine equal to three times the deposit amount is payable by landlords who breach the terms of the Act, but as of next year the size of the penalty incurred will be at the discretion of the court, and could be as little as the actual deposit amount.
The changes are being made in an effort to decrease the number of challenges reaching the courts. Hopefully the increased length of time available to landlords who own buy to let property to register their deposits will mean more landlords complete the process correctly, and as a result fewer tenants will have need to make formal complaints.
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The demand for private rental sector (PRS) properties continues to outweigh supply, but even with the flourishing market buy to let mortgage lenders are still being as strict as ever with regards to their lending criteria. This means that thousands of landlords who want to add to their property portfolios are being denied the chance even though the rental income from the properties they want to buy will easily cover their buy to let mortgage payments.
According to recent figures released by the Council of Mortgage Lenders, Quarter 3 of this year (2011) saw a 16% rise in the number of buy to let mortgages being approved, when compared to the figures from Quarter 2. This data looks promising until you see that the number of applications rose by nearly 20%.
When asked why it is that landlords are struggling to gain approval for buy to let mortgages even though the rental market is so strong Graham Kinnear, the managing director of Landlord Assist commented “despite the recent increase in the number of buy to let mortgages available to landlords it appears that the type of property that will be accepted, together with the onerous deposit and lending conditions, means that fewer applications than previously can tick all of the boxes.”
Whether the mortgage lenders will relax their lending criteria in the future is anyone’s guess but at the present time it seems they are happy to lend only when they really want to.
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Earlier this year, The Dogs Trust started the Lets for Pets Scheme in a bid to encourage more landlords and letting agents to allow pets within private rental properties. This week saw the lettings giant Belvoir sign up to the scheme, with the hope that many of the franchised offices would take part.
Managing Director of Belvoir, Dorian Gonsalves, actively promotes the scheme and says that since adding a ‘pets allowed’ search parameter to their lettings website they have vastly increased their traffic. In a recent survey run by the Dogs Trust it emerged that a third of the 5,695 respondents failed to find suitable accommodation within the private rental sector because they had pets and that over a half had to search for between 2 and 12 months before they found a landlord willing to accept their pets.
A whopping three quarters admitted to navigating away from some lettings websites because they stated categorically ‘no pets’ and over 95% of people surveyed said they would use websites with a ‘pets considered’ search option above those that didn’t provide one.
The moral of the story…
Millions of people in the UK have pets and hundreds of thousands of these people are looking for privately rented property right now. Landlords who are willing to accept pets – with clauses in the tenancy agreement - have a much better chance of renting their property quickly. Similarly letting agents that add a ‘pets considered’ search option to their websites will get more people searching through them than through their competitors.
Not much to ask for the potential benefits is it?
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2012 is set to see the annual university fee rise to a staggering £9000 (average); a figure that has landlords worried. Early reports from UCAS, the University and College Admission Service, have indicated that fewer students are applying for university courses to start in 2012, simply because they can’t afford the fees and the living costs. Understandably landlords with rental properties in University cities are worried about the consequences of fewer students, but with potential renters coming from other areas they really have nothing to worry about.
Caroline Kavanagh, Lettings Director of Townsend Estate Agents, recently pointed out that while the number of applications from British students has fallen; those from international students have actually increased. The number of students entering the workforce straight from college has also increased and a large percentage of this sector are currently sharing privately rented properties.
In short, the decrease in student applications doesn’t automatically equate to a shortage of potential renters in university areas. The demand for private rental property by students is forecast to stay as high as it is at present…a demand that currently outweighs supply. Landlords should not be put off investing in student accommodation because of the current UCAS reports, as there are always many more students looking for rental properties than there are properties available.
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2012 could prove to be disastrous for the UK buy to let market if new EU legislation aimed at bringing the lending criteria in line with residential mortgages is approved. According to official reports the proposed changes to the legislation would mean that buy to let mortgage applications would be underwritten using the same qualifying criteria as residential mortgages; that is using annual income and size of deposit. Anticipated rental income would no longer be taken into consideration.
Should the changes be approved when voted on early in 2012, the results would start to become apparent as early as 2013 when some first time property investors will no longer be able to get a buy to let mortgage approved, and seasoned investors find themselves unable to re-mortgage. Without the ability to remortgage some landlords could be forced to sell their property portfolios – a move that would see individual landlords and the private rental sector in general suffer.
On the up-side, the proposed legislation changes would also mean that buy to let mortgage lenders would be regulated in the same way residential mortgage lenders are i.e. by the FSA. Admittedly many landlords see this as a good thing but will this one positive outweigh the potentially disastrous negatives due to be bought by the proposed EU legislation changes?
The majority of landlords will undoubtedly say no…
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