A key milestone in the history of the UK is due to pass in a few months’ time that I am pretty sure will go unnoticed, but it is one that I am going to do my best to promote.
On September 24th 1996, a group of lenders were corralled by the Association of Residential Letting Agents – the forerunner of today’s Propertymark trade association – into offering a much wider range and more easily-accessible package of buy-to-let loans for landlords.
The group, which included two lenders – Paragon and NatWest – were reacting to the difficult housing market created by the disastrous economic management of the UK economy by John Major’s Conservative government.
Black Wednesday
Older readers will remember 1992’s ‘Black Wednesday’ sterling crisis when the UK crashed out of the European Exchange Rate System, and the economy tanked even harder than it had previously.
The result of this? Homeowners were reluctant to sell their properties and move home as house prices nosedived. Consequently, the lending and property industry got together to offer a solution.
Professional’ landlords
Up until then, only ‘professional’ landlords were able to access buy-to-let mortgages because, somewhat bizarrely, homeowners had clauses within the T&Cs of their mortgage contracts preventing them from renting out their properties.
Many did, without permission, but risked serious consequences if their lender found out.
It didn’t take long before other high-profile lenders joined this BTL revolution (it is fair to call it) and once the recession ended and the property market picked up, it was clear that this arrangement should continue to help grow the private rented sector – and the touch paper had been lit.
Boomed from the get-go
The private rented market that we take for granted today boomed from the get-go, driven by two factors – accidental landlords and a new army of investors who realised that rental property, if operated cannily, could help them build portfolios that were likely to far outperform mainstream/low risk pension or stocks/shares investment vehicles.
I remember the national press running endless interviews with people from both these groups, frothing energetically over the opportunities that the private rented sector afforded them, something the sector needed after decades of decline.
Landlording has come a long way since the late 1990s, but it’s not all good news. While the private rented sector has grown from around 10% to 19% of the overall housing market and annual rent rises have often outpaced inflation, rates of return have been flagging as property values have risen.
10% gross return
Let’s remember that the gross rate of return during 1996 was nearly 10% (a blunt instrument of calculation, but the only one available, i.e. average annual gross rent as a percentage of average house price). By the early noughties, that had slipped to 7.5% (both figures from the Cambridge Centre for Housing and Planning Research) and today it’s approximately 6%, according to the latest report from Zoopla.
And then we have the Renter’s Rights Act, which, only a month ago, introduced a jaw-dropping mountain of red tape for both landlords and letting agents to deal with, and who face considerable fines if they omit to adhere to the new regulations.
I don’t think these headwinds will ‘kill’ the private rented market as some commentators have claimed in recent months, but being a landlord is no longer the heady opportunity that it once presented back in 1996 when the first BTL products were introduced to great fanfare.
Today, these mortgages are more expensive, lending criteria tougher and regulation heavier. Turning a handful of heavily mortgaged flats into a large portfolio within ten years via fast remortgage flipping, as vast numbers of people did, is now much more difficult.
But until the Government comes up with a radical plan to build millions of homes over a relatively short period, which every government to date has failed miserably to do, despite promising otherwise, private rented housing continues to be a place where both capital appreciation (in the long term) and rental income are hard to beat.