The current housing market is not optimal for potential homebuyers, which is why the number of owner-occupied properties is dropping significantly.
The percentage of owner-occupiers in the UK dropped 8 percentage points to 65% in the 7 years to 2014 according to the Financial Times, marking the lowest fall in Europe and lower than the national average for the entire European Union.
Rising house prices all across the country are still to this day having an adverse effect on homebuyers (particularly first-time buyers)—rising property prices mean a higher deposit is needed and more finance required in the form of a larger mortgage. Yet mortgage lenders are still reeling from the financial crisis that rocked the market in 2008, so have developed more stringent lending criteria to mitigate their risk. Their reluctance to lend is putting further upwards pressure on deposits, because those who want to secure finance for their property have to put more money down upfront in order to secure both their dream home and the mortgage that goes with it.
The cost of bricks and mortar in the UK means that a large percentage of homeowners have to purchase their home using a mortgage—but even this is dropping in the wake of stricter lending criteria by mainstream mortgage lenders. 2013 alone saw the proportion of home purchases funded by mortgages drop 62%, as a massive 4 in 10 property purchases were made by cash buyers in the same year.
Thus is the nature of the current market that those who were once poised to buy their own home now find themselves priced out of the market, and have no choice but to enter the Private Rented Sector (PRS) whilst they save for a house of their own.
In what the press are calling ‘Generation Rent’, this generation of would-be homebuyers are forced to rent for longer before being able to buy their own home. This has come about by circumstances outside their control—namely ever-growing house prices pushing up the boundaries of affordability, and the stricter criteria of lenders demanding a larger up-front deposit.
To add insult to injury for those stuck in the stop-gap, the fact that rents are increasing in line with the stratospheric house price growth all around the country means that a lot of renters can only afford to save a small amount each month towards their deposit—and many cannot afford to save anything at all. This then triggers a vicious cycle: as rents increase, so too do house prices, meaning that would-be homebuyers are pushed further and further away from their dream of homeownership as they struggle to save for the deposit they need to get onto the property ladder.
However, it’s not all doom and gloom for those stuck in the rental sector—conditions in the rental market are more geared towards the tenant in this current market. Although rents are slowly but surely rising, the demands of tenants are also rising in tandem, meaning that tenants nowadays get a lot more for their money. Tenants are not burdened with the headache-inducing tasks of replacing furniture or appliances if something goes wrong (that can often be timely and costly), and best of all tenants have ultimate flexibility over their housing arrangements that those tied into a mortgage do not have. Therefore, even people who are not priced out of the market are looking to the PRS as an affordable and tangible alternative to homeownership, enjoying the freedoms that being a tenant offers.
Because of the influx of tenants in almost every city in the UK, the dwindling stock available on the current rental market cannot even begin to fulfil the growing demand. It is unsurprising then, with the rental market so acutely geared towards providing a viable alternative to homeownership, that many people are looking to the sector not just as a stop-gap in the journey onto the property ladder but rather as a long-term tenure of choice.
Therefore, the time is right for landlords to take advantage of this ever-growing market. For years the buy-to-let market has been profiting greatly from rising house prices, but now landlords can invest in buy-to-let property as a means of providing sought-after rental accommodation to an undersupplied market.
By providing a much needed service, landlords stand to benefit from the influx of demand—providing their property is in a good location and in good condition, landlords can generally have their pick of tenants, as well as ensuring low void periods in the future by choosing a location with heightened tenant demand. In addition, rising rents mean a better return on investment for landlords—and because rents have been steadily growing for years, it is no surprise that buy-to-let has been outperforming other mainstream investment classes like stocks and shares for over a decade.
In addition, buy-to-let also offers its landlords yet another financial initiative, this time in the form of capital appreciation. Whereas rental returns ensure a steady stream of income throughout the duration of a property’s lifecycle, landlords can also benefit immensely from capital appreciation when the investment is sold. Capital appreciation is the profit made when a property is sold for more than its purchase price—and since house prices have been growing significantly for nigh on a decade, it’s almost a guarantee when selling a property in such a buoyant market as it stands at this current time.
Therefore, landlords stand to gain a lot from providing much-needed housing in the private rental sector, so there has never been a better time to invest in property.