The government, opposition and regulators have been analysing the best way forward for a market that offers uncapped returns on property assets, in both an income and growth capacity.
It is true that investors in other asset classes over the past 25 years have been glancing at the property market with envious eyes. The returns have been inconceivable when compared to other investments over the same period.
The ability to double your investment in the course of a five-year turnaround was the claim of agents and sales negotiators alike during the late 1990s and early noughties. And so the market delivered. It is unbelievable, when considering the statistics.
Criticisms of the current situation – such as the shortage of housing, low numbers of first-time buyers entering the market, reliance on the bank of mum and dad and accidental landlords – will be familiar to many, wary of all this growth falling into unselected hands. But, if you can keep your previous home and let it out for a return that covers the cost of the property and provides a top-up income, why would you do differently?
Key points
- Rental controls are not something one would associate with a free property market.
- The regulators have dictated to banks that lending criteria has to meet certain specifications.
- The government opposition has discussed the possibility of rental controls.
As so many members of the public have benefited from these uplifts, one would wonder what the catch is. Lenders were incautious in lending 85 per cent interest-only loans in the years leading up to the credit crunch, which helped feed values in terms of demand and delivered the promised returns. However, as one side benefited enormously, those affected by the alternative reasons for property investment suffered.
Yields on property were, in effect, declining. Failing to keep up with the speed of equity on returns, they fell behind in the years leading up to 2008 and beyond. This left banks having to be generous in their assessments of loans in order to reach the required gearing for future landlords.
All this movement in the market led to a perfect storm. High equity returns pushed down yields, which are the driver for future lending, meaning there was huge pressure for rents to increase.
Growing pressure on rents to be increased in the years following the credit crunch dovetailed with wages stagnating due to lack of growth in the economy. Successive governments tried and failed to cool growth, but eventually directives from the regulator started to slow the increase in rentals.
The increasing commonality of phrases such as 'rental controls' and 'capping market rents' is creating nervousness and are not ones you would normally expect to hear when considering a free market. In fact, they might give a negative tint to how property investment is viewed. Some would even add the terms 'prohibitive' and 'non-capitalist'.
As we all know, markets are driven by supply and demand. Unfortunately for governments over the past 25 years, there has been no let up in demand for property, especially in south east England and now, increasingly, in the north too. This has not allowed equity growth to stand still, regardless of what instruments governments have used to try to maintain order, until the past five years when the regulator dictated to banks that lending criteria had to meet certain specifications. This can be interpreted as either good or as unfair control of the market.
Changes to buy-to-let lending criteria, such as the assessment of loans and the restriction of high loan-to-value buy-to-let mortgages, have led to a reduction in supply for potential landlords. The new portfolio directive, which demands any assessment be made over the whole portfolio for investors who have four or more properties, also prohibits any high gearing on portfolios; which has tainted the rosy way property investment were previously portrayed.
These stringent rules have resulted in investors becoming nervous, which has affected supply.
The changes, coupled with new stamp duty rules on second or additional properties as well as the benefits of having ownership in a limited company structure, mean property investment in a personal name now looks more like a Monday lunch of leftovers than a Sunday roast dinner. The push for structured limited company ownership, which both the government and regulator are firmly behind, allows transparency on payment of taxes from property; something that has not been in place over the past 25 years.
This, along with restrictions on lending from banks, could be construed as control or rent capping. With Brexit on the horizon and uncertainty over businesses, banking, housing and the economy, it would not be impossible for the government and the opposition to have policies in place to show they are willing to affect the way things are going.
Opposition parties have discussed the possibility of official rental controls in the private lettings market. However, if one looks at the current state of lending for property investment, one might think they are already in place.
The regulators' use of directives through enforced recommendations on banks, controlling loans and prohibiting lenders from giving investors what they want, is arguably already some kind of monitor. It remains to be seen if this works, but even so, it is questionable whether it is something you would expect to be associated with a free rental market.
Matthew Yassin is a partner, specialist finance, of Coreco Group
