Latest in LettingsIssue 8
PROSPECTS FOR THE PRIVATE RENTED SECTOR – 2008 AND BEYOND
The major influences that will affect the sector in the early months of 2008 and on until at least the Spring of 2009 are:-
- The Shortage of Cash
- Rigidity in the Residential Sales Sector
- Interest Rates
- Government Policy
- Competition
Latest in Lettings briefly examines each of these influences
The Shortage of Cash
Every bank, fincial institution and mortgage lender is short of cash. Banks will not lend to one another, and even less so to mortgage lenders such as Paragon, Alliance & Leicester and others who do not have deposits funds to use.
Headlines in the financial press that refer to multi billion write offs by major international banks do not refer to papaer transactions but to the loss of huge amounts of money invested in sub prime mortgages, car and credit card loans that packages to look attractive are no longer repaying capital or interest. This cash has been drained from the world's financial system.
School funds in the USA, local councils money in Scandinavia and hedge fund investors cash are examples of losses that have caused problems in paying teachers salaries, workers wages etc and even the righ who invest in hedge funds, (but so do insurance companies and pension trustees), are caught.
Money lost is no longer there to lend to borrowers whether personal, corporate or another bank and many would be borrowers will be turned away.
1.5 million residential mortgages that were taken out at low fixed rates fall due to be moved to higher rates during 2008. Borrowers in arrears or with a poor credit history will find it impossible to move to another lender. Expect a significant increase in re-possessions and personal bankruptcies.
B2L borrowers who bought off plan at high prices will suffer where rental income falls below the hopeful projections of scheme promoters. Those who are already over extended with other personal debts are likely to lose their properties.
New B2L landlords will be hard to find, only B2L investors with substantial deposits, a good credit history or with a good deal of equity in their existing portfolios will be able to take advantage of the deals that will be there to be had in the auction rooms or from local estate agents with properties that must be sold. Landlords who bought new 2 bedroom flats in northern cities will be left with properties that cannot be let or sold except at heavy losses if at all.
Rigidity in the Residential Sales Sector
The number of transactions is already falling and will fall further in 2008. Owners who do not have to sell, can wait to downsize or those who would like to test the market will no longer do so. Their price expectations are unlikely to be realised and few will wish to face the cost of HIPS and EPCs unless absolutely necessary.
Some who can afford to buy or rent elsewhere in the UK or overseas will wait out the fall in values while letting their property and become new landlords.
Agents in the southern Home Counties already report the return of the “can’t sell will let” landlord last seen in 1990 – 91 and 1994. Letting the home often makes a job move, divorce settlement or buying a place for retirement - if the original property is flush with equity – a worthwhile proposition while waiting out a price and market activity recovery.
Residential sales agencies will have a hard time with low volumes, an absence of vendors and buyers and the collapse of many deals at the last minute. The cost of transactions has escalated horribly in the last 5 years, while house prices moved upwards month on month both parties lost their costs in new values, but now they are seen as charges that may never be recovered.
The Moneyfacts table recently quoted on the front page of a national newspaper speaks for itself. 5 years ago the arrangement fees quoted for the 6 best fixed rate deals on a loan of £150,000 ranged from £199.00 to £299.00. Today the arrangement fees charged by the same 6 lenders range from £999.00 to a massive £4,500.00!
Estate agents, surveyors and conveyancers will all feel the pain as will mortgage brokers. Countrywide has announced the closure of many offices. Agent start-ups that opened for business in 2005 – 06 with high fixed costs, few assets and a thin market are under pressure and many will close.
We asked an experienced valuer what price an attractive high street estate agency, almost brand new and beautifully equipped would fetch today, his response was “the net value of commission on property sales in the pipeline but only those that complete within sixteen weeks”.
Interest Rates
There will be further reductions in Bank Rate during 2008 provided that inflation remains within the target zone. Controlling inflation is the first and only concern of the Bank of England and their EEC counterparts.
High oil prices, government expenditure and borrowings almost out of control are danger signals. Base rate will not fall because of an economic slowdown or borrowers pain – only if inflation can be controlled.
Reductions may not be passed onto borrowers in full. Banks, credit card issuers and mortgage lenders are anxious to restore their margins and rebuild their cash resources.
Expect credit card interest rates to harden and the mortgage interest charged to marginal borrowers to stay high.
Government Policy
Latest in Lettings has commented previously on Gordon Brown’s proposal to build 3 million new homes by 2020 – only 12 years away. While all of the pressures are present – smaller families, more one person families, longer lives and immigration neither lender or government funds may be forthcoming to fund the programme.
Now, as we go into 2008 developers are postponing new build programmes. The planning process is still achingly slow and there is only slow progress in releasing brownfield land and redundant buildings that belong to local authorities, the NHS, railways and utility companies.
The direct question remains unanswered – who is going to pay for the infrastructure, roads, sewers, utilities, schools and shopping facilities to support new build that is not to take place in an existing urban environment. If, as proposed, costs are to be paid by developers through a roof tax as in Milton Keynes or by forcing the construction of social housing the cost of new homes to sell will rise. Will there be ‘able and willing’ private purchasers or B2L landlords waiting to buy?
It is possible that private buyers will hold off until mortgages are freely available at an economical cost. Neither local authorities, or housing associations will have the money. Government grants and subsidies may not be available since government borrowings are already too high and raising additional tax is a difficult prospect.
Some progress in providing new homes might be made if the authorities became willing to tackle the problem of 750,000 empty homes and empty/redundant commercial premises, including flats over shops. Much of the necessary legislation is in place to bring this vacant stock back into use, but a lack of political will and failure to offer owners tax incentives ensures that these properties will remain wasted assets.
Competition
Some progress in providing new homes might be made if the authorities became willing to tackle the problem of 750,000 empty homes and empty/redundant commercial premises, including flats over shops. Much of the necessary legislation is in place to bring this vacant stock back into use, but a lack of political will and failure to offer owners tax incentives ensures that these properties will remain wasted assets.
Pressure will come from landlords seeking better deals or more services for lower fees, while both local authorities and housing associations will poach every private landlord that they can.
Latest In Lettings is convinced the sector will grow during these difficult times as it grew in 1989 – 1994 to become a major provider of Homes to Let.