How might government housing policies affect your buy to let investment?
The Government's overview on their housing policy comes from the Communities department, and their strategy is to fulfil reforms as getting the housing market moving again
When the Coalition government came to power, it looked as though housing wasn't top of their agenda, especially as they cut the post of Housing Minister from the Cabinet. It also looked like increased taxes on those who held property were going to continue for several years, with changes to stamp duty and a crack-down on anyone who wasn't declaring their property gains.
But, in 2012, there was a step change in how the Coalition government viewed property. Although there has long been an acceptance that we aren't building enough homes in the UK, it's usually directed at social housing and private home ownership. However, following several reviews and some increased pressure from organisations such as Shelter, the Government now has a clear strategy to support and enhance the number of homes being built, as well as for the way in which homes are provided for the private rental market in England and Wales.
So what are the key existing and planned government policies on residential housing that might affect you, as a landlord?
The Government's overview on their housing policy comes from the Communities department, and their strategy is to fulfil the following reforms:-
- Get the housing market moving again
- Lay the foundations for a more responsive, effective and stable housing market in the future
- Support choice and quality for tenants
- Improve environmental standards and design quality
Getting the housing market moving again
Since the credit crunch, we've been selling less than half the number of homes we would normally sell and property prices have only recovered in some of the prime areas, such as Central London. Many other areas are seeing property prices continue to fall.
In the main, this has worked well for landlords. Demand for rental accommodation is on the rise and is expected to continue to increase over the next five years.
But, even with demand increasing faster than supply, the frequent reports of 'large increases' in rent appear to be inaccurate. Industry reports, including those from Belvoir Lettings and the Residential Landlord Association, show landlords kept their rents more-or-less the same from 2008 to 2012 and any initial increases in areas such as London appear to have been driven by international tenants moving to the area or by people trading down from two to one bedrooms and offering more rent. This has caused some rents in the Home Counties to be pushed up by tenants moving out from London to the 'cheaper regions'.
Now that the initial hype about rents rising has all but vanished, it appears the reality is that rents have simply kept in line with wages, even where demand is higher than supply. Ultimately, regardless of inflation and rising costs, landlords can only charge what people can afford.
Will government policies dampen rental demand?
In 2013, although the demand for residential lettings is still rising, the main government strategy that may have an impact on landlords is their pledge to help first time buyers get onto the ladder. Currently, many FTBs are struggling because lenders are demanding such high deposits to secure decent mortgage rates, so the Government has introduced a series of schemes, such as 'Help to Buy', where buyers can take out an equity loan for up to 20% of a property's value, provided they can fund a 5% deposit themselves.
The first phase of this scheme, currently in effect, only applies to new builds and, as they aren't building that many (less than half the number built pre-credit crunch), it isn't likely to affect demand for landlord properties. What might, though, is when 'Help to Buy' is expanded to include second-hand homes in January 2014, giving FTBs more choice and access to more cost-effective homes. So it may be that long-term tenants start to look at buying next year through this scheme, especially if there is better economic news.
However, even if the number of FTBs increases next year (as prices are now stagnating or, at best, starting to increase), this fall in demand is likely to be balanced by a fall in supply as 'accidental landlords', who rented their property out to allow them to move, start to sell up and exit the rental market.
So, in summary, rental demand is likely to continue to increase in the next few years and the Government's 'Help to Buy' incentive to get the housing market moving is unlikely to cause any major issues for you, as a landlord.
Lay the foundations for a more responsive, effective and stable future housing market
This is one of the areas where the Government's policies may have a significant impact on the returns you make as a landlord in the future.
Ideally, to maximise returns as a buy to let landlord, you want a short supply of properties available to buy and rent. This will typically boost the capital and rental income returns you make over time - as long as the economy is performing well.
The key government plan that could affect your returns is making it not just easier for local authorities to build more homes, but incentivising them to do so. The more homes that are built, the better the balance between supply and demand and the less likely capital values are to grow.
These policies include changing planning laws to make it harder to object to new build development going ahead and introducing a 'new build bonus' scheme. The scheme offers a local authority money for every new home that adds to council tax revenue and is worth around £8,500 for each new home built (depending on council tax band and whether it's an affordable home). In these austere times, this incentive could be seen as attractive to local authorities, although there is some debate about whether it's actually having any impact on increasing house building.
Another initiative being implemented by the Government is identifying public sector land that could initially be 'given' to developers to build more residential homes for both social housing and the private sector. Clearly, if this is made available in an area near to your properties, then the increase in supply could hamper the capital growth of your investment.
Will an increase in new builds affect your buy to let returns?
While many of these government measures could result in reducing the potential for capital growth for landlords, they could just as easily add value through improved infrastructure, which may be a condition of a developer building. Better roads, a new school or a transport hub could boost the value of all properties in the area.
One of the key reasons the government is raising new build housing as a priority is it believes it is one of the few ways we have left to get our economy moving again. Research suggests that for every £1 invested in new build and construction schemes, the wider economy benefits from over £2.
New builds bring jobs to an area - particularly for our younger population, who are currently struggling to secure a career and new jobs can help boost demand and tenant's ability to pay rent.
So, although more new properties may dampen capital growth over time, if it helps the economy recover, both wages and demand for rental accommodation will increase. If this policy works, landlords should ultimately be able to benefit – at least from an income perspective. From a capital growth perspective, knowing what's happening at a local level to supply and demand for housing longer term if you are considering cashing in your portfolio at some stage would be wise.
Support choice and quality for tenants
This is another area where Government policy could impact substantially on your portfolio returns, especially at postcode level.
Increase in large scale rental schemes
Not all landlords will be affected, but one of the biggest policies to be aware of, both nationally and locally, is the investment in Build to Rent schemes. The government has pledged £1 billion to developers to help them unlock stalled building sites and developments, where funding to build cannot be secured from banks. Properties are expected to be built fairly quickly on these sites - within a matter of years – and no doubt in time for the next election!
The idea behind the schemes and funding is for developers (including housing associations) to build properties and then sell them to an institutional investor for long-term rental. This type of deal is already being done; for example, Berkeley Homes has built several developments and sold them on to the Notting Hill Housing Group.
This particular scheme has £90 million to invest in a private rented sector portfolio. Other developments are expected to be built in Hounslow, Lewisham, Barnet, Hackney, Harrow, Croydon and Tower Hamlets.
In the main, these properties will be aimed at reducing housing waiting lists, so if you're renting purely to professionals, the scheme is less likely to affect you. However, if you rent to tenants on benefits, these properties may provide serious competition and you might have to increase the quality of your property so you can compete with new builds that have been designed with the tenant in mind.
To find out whether your portfolio might be affected, speak to local planners and look at the list of companies and organisations that are expected to be granted funding to find out whether there are Build to Rent schemes coming to your area:- https://www.gov.uk/government/policies/improving-the-rented-housing-sector--2/supporting-pages/private-rented-sector
Effect of caps on benefits on rental income
In addition to building more homes, the Government is capping the amount of support a potential private tenant can be given, via the likes of Universal Credit. If you do rent to those on benefits – and especially if the benefits are currently paid directly to you, as this may stop at some stage - then you should speak to your local housing officer to find out what rents you're likely to receive in future, whether you can maintain these coming to you directly and if any further cuts may be made.
Increased focus on taking action against landlords who don't let properties legally
Another initiative, currently being implemented more at a local level than national, is the prosecution of landlords who aren't renting HMOs or other properties legally. Some landlords have been given jail sentences; others have been fined £20,000 and more, while some have had lesser fines. Making sure your property is let legally is a tough task, so make sure you keep up with any changes in the law via a letting agent who belongs to an Ombudsman Scheme (such as a member of NALS or ARLA). If you don't use an agent, consider joining one of the landlord associations such as the Residential Landlords Association or National Landlords Association.
Compulsory ombudsman scheme for Letting Agents
The final key initiative, which the Government took at the end of April 2013, should help you as a landlord. After pressure was put to bear on the Housing Minister with a proposal in the House of Lords to amend the Estate Agency Act, he agreed to ensure all lettings agents have to belong to an Ombudsman Scheme.
Currently, anyone can set themselves up as an agent - and do! – and criminals have been able to make money from unsuspecting tenants and landlords fairly easily. The first step into regulation of the lettings industry is the requirement that anyone who lets a property as an agent has to be a member of a lettings ombudsman. If things go wrong, both you and your tenants in the future should have an independent third party that can deal with any disputes between you and your agent. The legislation is expected to come into force by the end of 2013.
Summary of policy impact
So in the one hand, government policies to increase the supply of rental homes and choice tenants have of who they rent from may affect supply and demand in your area and impact adversely on your rental income. In addition the caps on benefits if you rent to tenants receiving them may reduce your rental income or prevent you from increasing rents in the future.
On the other hand, government policy seems to favour good landlords and letting agents by prosecuting the bad ones and ensuring there is some protection for landlords from previously rogue agents.
Improve environmental standards and design quality
Recent studies have showed that 85% of private rental sector tenants were 'very' or 'fairly' satisfied with their accommodation (higher than the social housing sector!). Over 75% of properties in the private rental sector also meet the Decent Homes Standard.
Impact of policies to improve property energy efficiency
However, utility bills for tenants are becoming an increasing burden and the Government is keen to support policies that reduce the impact of energy consumption on the environment. In response, they have introduced The Green Deal, which allows energy-saving improvements to be made to a property and the cost of the work to be spread over time, via a loan which is repaid through instalments attached to the property's electricity bill.
As a landlord, you need to get your tenant's permission to go ahead with The Green Deal, because the loan for the cost of the work is attached to the property and therefore likely to be paid for the tenant. It is anticipated that the saving on the energy bill will exceed the cost of the loan repayment, although this is not guaranteed. The potential benefit to the tenant is a reduction in their overall heating bill, and the potential benefit to you, as the landlord, is a capital improvement to your property, paid for by the tenant.
Tenants can request energy efficiency measures via the landlord and if landlords don't improve some of the poorer properties (those with an F and G rating), from 2016, tenants can't be unfairly refused Green Deal measures. From 2018, properties with an energy efficiency rating of F and G may not legally be rented.
As a landlord if you have poorly maintained properties which are not energy efficient, then it's likely this policy will impact on you severely and it's vital to consider improvements – which as they may not cost you anything is worthwhile.
Summary of Government policy impact on buy to let landlords
The government for now appears to be fairly pro private sector landlords as long as you abide by the laws, including the new ones and make sure you keep your properties well maintained and energy efficient.
At a local level though, due to policies which in theory should create a higher level of supply of both homes for ownership and rent, capital growth may be dampened in the future.
Understanding and knowing what's happening in your local area now and in the future as far as supply and demand for property is concerned will be important for all buy to let landlords. It can affect when you look to cash in your assets or influence how and when you expand your portfolio.
For more information on the Government's housing strategy and private rental sector, visit www.homesandcommunities.co.uk/housing
Read our latest article on how the All-Party Parliamentary Group on Hunger is urging ministers to give councils powers to fine landlords who do not offer tenants on benefits at least a fridge and two-ring electrical hob.
Want to see how rental markets have changed in the area where you live? Try our interactive rental property heat map.