The outlook for the private rented sector (PRS)

Hidden Figures

Why recent policy changes won’t stop the growth of renting Landlords are buying fewer homes. Since the introduction of the 3% stamp duty land tax (SDLT) charge in April 2016, landlords have sold 50,000 more homes than they’ve bought. Investors only made up 12.3% of purchases in 2017, compared to 16.4% in 2015. Landlords seem to be thinking twice before adding to their portfolio or replacing homes they’ve sold.

 

Despite landlords selling more homes than they bought, the private rented sector in England continued to grow in the 12 months after the introduction of the higher stamp duty charge. Between April 2016 and 2017 the number of households renting increased by 164,000, 3% more than 2016. We forecast that the sector will continue growing in 2018, and over the next five years. By 2022, 20.5% of households will be renting in Great Britain, up from 19.4% today. By 2025 the sector will reach six million households.

 

Continued growth of the private rented sector may come as a surprise in an environment where landlord purchase activity has fallen, but there are greater forces at play. The growth in demand for rented homes is being driven by long-term structural shifts in demographics and the housing market, many of which aren’t unique to the UK. House prices consistently growing above incomes has raised the barrier to entry for many people, driving a steady decline in home ownership and growth in demand for renting. The performance of property as an investment has also discouraged owners from selling surplus property. And, a decline in social housing has seen more tenants on housing benefit, seeking accommodation in the private rented sector.

 

There are many routes homes can take to the rental market

There are more ways for a home to make it into the rental market than being bought for that purpose. A common source of property for landlords are homes that were previously a main residence or second home. Couples who are both homeowners moving in together, relocation for work or simply keeping a starter home as an investment. We tend to see a larger number of these moving into the rental market when price growth and activity slows in the sales market. We estimate that in 2017, 80,000 homeowners trying to sell their homes decided to put those sales on hold and rent out their properties.

 

Many landlords also inherit property. Statistics on Inheritance Tax from the Office for National Statistics (ONS) show 200,000 estates were inherited in the 2014/15 financial year that included a residential building. Most years at least 200,000 homes change ownership through inheritance. Many of these homes will be sold or used by the heirs as a family home, but recent research from UK Finance shows that 16% of landlords acquired their property without a purchase, which would include inheritance. While we can’t apply these numbers to total rental households, they do show that a meaningful amount of rental stock comes from inheritance, with a larger number supported by funds gained from inheritance.

 

In recent years we’ve seen the growth of a new part of the rental market too, the professional build-to-rent market. Generally, blocks of flats purpose-built to rent,owned and operated by professional organisations. The sector only accounts for a small part of the industry today, but we estimate there are more than 100,000 units in the planning pipeline and that is set to continue growing.

 

These three sources of rental property, which are not dependent on individual landlords purchasing new homes, explain how the sector can expand while landlord purchase numbers are sluggish. This means that, despite recent policy challenges, ongoing changes to demand from long-term structural shifts in the market are helping landlords’ wealth and purchasing power.

The sector is anchored by large amounts of housing wealth

There is an incredible amount of wealth tied up in housing. The latest ONS Wealth and Assets Survey estimates there to be £4.6 trillion of housing wealth, a third of total household wealth. Alongside that, the English Housing Survey shows 1.3 million more households own their homes outright than own with the help of a mortgage. Cash owners are the biggest of any tenure group, and their numbers have increased for 23 out of the last 25 years.

 

The same is true for landlords, most individual landlords have no debt on their rental property. 65% of investor purchases were made with cash in 2017, £21 billion worth of property. A similar proportion of landlords have no mortgage on their existing portfolio too.

 

This volume of cash has been able to build up largely through high house price growth over the past 25 years, driving growth in landlord total returns. On average 40% of a landlord’s return comes from capital growth. This helps us understand investor behaviour today, house price growth is a key part of their
return. It is no coincidence that the biggest falls in investor activity have been in London, where the outlook for house price growth is currently weakest.

 

The mass of cash in the market alongside increasing institutional interest in the private rented sector is acting as an insulation to changes in policy and credit availability. This is creating a firm foundation on which the sector can continue to grow, particularly as the drivers of demand for rented homes will continue.