The promised slowdown in the residential sales market, and a tightening of the dysfunctional mortgage market, promise to help redress the balance in the rental sector.
Agents are now suggesting that residential sales in the peaky London and south east market are now easing off, with prices stabilising after a long period of growth. An influx of foreign buyers and renewed economic confidence have conspired to push prices skyward, with complaints that local “real world” homebuyers can no longer afford to live near their work. Liam Bailey, head of residential research at Knight Frank, is among those predicting a cooling of the market. He has pencilled in a major slowdown in 2015, with a 4-5% rise in the market annually over the medium term.
Meantime, mortgage availability is tightening. New rules put in force earlier this year demand that banks are far more careful when making mortgage lending decisions. And Lloyds has just announced it will be restricting its mortgage lending for homebuyers.
The slowdown could help encourage more investment in the rental market, albeit this will need to be at values which are sustainable over the long term. Recently, housing association Notting Hill decided to sell 36 new homes in Tower Hamlets, rather than rent them, as previously planned. “We have found that one one particular onsite scheme, due to rising sale prices and build costs against static rents, will not now pass our appraisal criteria.” Local sale prices had advanced 19%, while construction costs had gone up 25% ahead of those expected.
Notting Hill told Inside Housing it was still pressing ahead with private rented homes, where they make financial sense, with decisions on a site by site basis.
Others remain committed to looking long term at the rental market. Richard Evans from Thames Valley Housing Association told the publication: “Unlike the build to sale market which is entirely cyclical, PRS – if done properly – is market neutral. It represents a good cross-subsidy opportunity for landlords that operate in high value areas.”
One issue is affordability. While foreign buyers may have been keen to put their capital in the safe haven of London, they have discovered that an expensive flat can’t necessarily deliver a great rental return. While sales prices have headed north, the salaries of individuals who rent – many of them young professionals in the London region – have not risen in the same way, and so letting agents report a ceiling on rents.
In some areas, this has led to a crazy mismatch. Bloomberg reported on a Fulham property, which four sharers are renting for £2,600 per month. Sale prices have risen so dramatically, that were the four to contemplate buying the house, their mortgage would be £7,100 per month; Bloomberg bases this on a 25 year mortgage with a 20% deposit paid, and 3% mortgage interest.
One other issue that will help the rental market, is the availability of mortgage lending to small buy to let investors. Banks and building societies, while slower than ever to approve lending on private homebuyer mortgages, seem happy to lend instead on buy to let acquisitions.
For homebuyers, the lender must now stress test personal finances and income against interest rate rises. Lump sum payments from, for example, pensions are routinely excluded from calculations of the ability to repay a mortgage.
In contrast, the brakes are off when it comes to buy to let. According to brokers, any would-be investor with sufficient deposit can obtain a mortgage, so long as the expected rental is 125% of the interest payment on the buy to let mortgage.