Buy-to-let borrowing set new records this year, with lenders advancing loans worth in excess of £17.5 billion, according to the latest statistics from the Council of Mortgage Lenders (CML). However, the private rented sector still remains a small and immature part of the housing market.
A combination of demographic, economic and social factors is set to increase demand for private rented housing over the next 15 to 20 years. Based on demographic projections alone, there is potential demand for an additional 600,000 private rented homes by 2021, which would require £100 billion of new investment at current prices. However, other factors such as unaffordable house prices, changing attitudes towards renting and immigration are likely to boost this figure. This implies increased demand for buy-to-let finance but the extent of this will depend upon the sources of new rental supply to meet this potential demand.
If house prices continue to remain high, more households will fall into the affordability trap, where they have no other option other than to rent. Currently, around 70 per cent of private renters cannot afford to access ‘entry level’ owner occupier housing, including 22 per cent of private tenants who are in receipt of housing benefit.
The rental market also feels much of the initial impact of in-migration. The latest household projections assume net migration of plus 130,000 people per annum. However, over the last five years net migration has been running in excess of 200,000 per year, due in particular to the enlargement of the EU. If future levels of migration remain strong then the impact will be felt most immediately in the private rented sector.
Reducing aspirations
Aspirations towards home ownership within the younger age groups have reduced over recent years. Young households are seeing the benefits of renting, because of the increased flexibility it offers and competitive rental payment in comparison to servicing a mortgage. Since 1999, only 40 per cent of under 25 year-olds have aspired to become home owners within the following two years. The unwillingness to take on the commitment of a large mortgage so early in life is a key issue for younger households, especially single person households. The number of households moving towards renting is set to remain high as we are likely to see a steady rise in households opting to rent, boosting demand further.
The bulk of demand for renting is likely to originate from the ‘mid-market’ and ‘affordable’ segments which account for the majority of demand today. These two groups contain households who are either unable to access the owner occupied market or are consciously delaying entry into the owner occupied sector until they are ready to do so.
Problems with supply
While the demand pressures are growing, it is the supply side where the problems lie. The existing supply of private rented housing is not mature and well balanced, relative to the rest of the market. Only an improved supply of quality rented housing is likely to stimulate potential demand and support the move towards a larger and more mature private rented sector.
The advent of the buy-to-let finance in 1996 to boost the market resulted in major refinancing of privately owned investment stock rather than a boom in supply. And although there has been a major injection of new finance into the private rented sector over recent years, primarily via buy-to-let mortgages, the supply of rented housing in the UK remains low by international standards.
A small rented sector limits job mobility and the development of a dynamic workforce. The private rented sector has an important role to play in providing balance to local housing markets and although it is delivering a much-needed supply to those who are currently unable to access the owner occupied sector, the scale of investment required can only realistically be delivered via institutional funds.
The arrival of Real Estate Investment Trusts (REITs), in January 2007, where small scale investors can buy shares in a listed investment company, which buys a portfolio of commercial and residential property will provide an important conduit for new investment. However, we are unlikely to see the required growth in stock without measures to help stimulate the supply of rented housing.
