Ban on letting agent fees divides UK rental industry

Opinion is divided over whether or not the decision to ban letting agent fees in England is a good move for the private rental market.

The announcement by Chancellor Philip Hammond that the ban will be introduced as soon as possible was met with dismay by letting agent and landlord organisations who warned that agents will pass the cost of administration onto landlords who will in turn pass it onto tenants in the form of higher rents.

Some experts pointed out that when a ban was introduced in Scotland it led to higher rents while others said that it did not lead to direct rent hikes. This issue aside, some other pertinent points have now emerged such as landlords possibly avoiding using letting agents which is not always advisable if they are not aware of current legislation and short cuts being taken in terms of tenant checks to keep costs down.

Charles Curran, principal at Maskells, pointed out that lettings agents do incur costs in setting up a new tenancy such as credit checks. Landlords are also now required to check that a prospective tenant has the right to live in the UK so there is paperwork involved.

He also pointed out that a lot of questions remain to be answered. For example, there are costs involved in carrying out checks and if fees cannot be charged it is not clear how these costs will be paid for.

‘We do expect landlords to seek to increase rents to take into account any additional costs. We will have to see the language of any proposed law before making our final analysis,’ he said.

While it is known that there are unscrupulous lettings agents who may be charging more than the average of £220 in fees for a new tenant, Mark Pollack, director at Aston Chase, said that the majority are reasonable.

‘We believe our charges are reasonable in comparison to many of the larger corporate agencies who also charge their landlords an administration fee. Indeed, we have always considered it surprising to charge for a tenancy agreement that we already have on file, although this is an industry norm.

However, the reference fees are a cost that we have to pay to a third party so under the new legislation, in the future agents would presumably have to pay for these themselves,’ he added.

Ali Carter, head of lettings at Russell Simpson, believes there is no place for some of the high fees that are charged. ‘Letting agency fees are in place to cover the cost of drawing up a tenancy agreement. This cost is split between the tenant and landlord. The tenant will also be charged a fee for their reference check,’ he said.

‘This could be a good opportunity for us, as well as other agents, to say that they are no longer charging an administration fee which is usually £150 plus VAT from today. Quite often we will promote a particularly property with a no admin fee tagline. In general we don’t charge the landlord their portion as they are paying us a fee already so we’ve always felt it was unjustified to ask for anything else on top. Overall, we’re quite in line with Hammond’s thinking,’ he added.

Others in the industry believe that regulation of letting agents might have been a more positive view. ‘I can’t help but feel that this is an issue of overall high rental costs and lack of trust in letting agents that do little to earn the respect of their tenants,’ said Bevan Smith, director of BPM Estates, which has offices in central London, Barnet and Potters Bar.

‘Rather than the removal of fees entirely, we would have liked to have seen stricter restrictions on what can and can’t be charged for and what fee levels are justified. This would have helped to put a curve on the immoral practices without punishing the honest, reputable agencies,’ he added.

Sarah Bush, director of Cheffins Residential Lettings, also things regulation would be a better option. ‘The Government needs to focus on the regulation of agents rather than banning upfront fees in their entirety. Rogue agents charging astronomical fees create the headlines and subsequently all agents are deemed guilty by association,’ she said.

‘Fees that are charged by reputable agents can be accounted for and justified at every step of the letting process. The banning of fees across the board will ensure that the costs are passed directly to the landlord, who in turn will increase rental prices to cover their respective costs,’ she explained.

‘A prohibition by the government on fees, combined with mortgage interest relief, will stifle a housing market that is already at breaking point and landlords are likely to leave the private rental sector en-masse. By trying to help tenants and pour cold water on the private rented sector, in reality the Government is doing nothing but heating up the situation for both tenants and landlords alike,’ she added.

Lucy Morton, head of agency at JLL, flagged up that the ban could lead less scrupulous agents to cut corners. ‘It is essential that agents do not cut corners and fail to carry out stringent referencing checks. At JLL and W.A.Ellis we have always advocated complete transparency of all charges made by agents to both landlords and tenants. We have also historically campaigned for the Government to regulate letting agents which it still fails to address,’ she said.

Paul Shamplina, founder of Landlord Action, warned that there could be a surge of landlords opting to self-let and manage and he believes that this would have a detrimental effect on rental property standards.

‘Agents will need to be forward thinking about how they can absorb some of this cost and the loss through other areas of their business. It has never been more vital for agents to educate less experienced landlords on the importance and benefits of a managed service, making sure they are compliant with industry legislation and preventing them from exiting the sector altogether,’ he added.

Property Tops The List For Investment Options Over The Last Decade

Since the financial crisis in 2008 the economy seems to have been in a constant state of uncertainty, leaving many questioning where exactly is the best place to invest their money.

There are plenty of options from the stock market to savings accounts, but what may surprise some is that findings from a recent study have shown property to bring the biggest return on investment over the last 10 years.

A recent study from estate agents Romans and Leaders has shown property to be the best investment option by some margin, by carrying out a comparison between the four most popular investment options, which are savings accounts, FTSE 100, property and gold.

This research looked into how much return you would see from an investment of £50,000 in 2006 into each of these investment options.

The results showed property at the top of the table by some distance. An investment in FTSE 100 would’ve seen a profit of £3,000, a savings account would bring in roughly £15,000 of profit and an investment in gold would fetch an extra £50,000 across the 10 years. While £50,000 is still a great return, property showed to be the clear leader with approximately £90,000 higher return than gold and an overall profit of £140,000 based on annual house price increases.

Managing Director at Leaders, Allison Thompson spoke on the results explaining why property comes out on top, she said “Despite many changes over the last ten years to the housing market and wider economy, buy-to-let is still the clear winner. As well as the most rewarding, it is also the safest of all the investment options over the long-term. We have seen historically that, although cyclical, house prices always rise in the long run. With the acute shortage of housing across the UK, this is only likely to continue.”

Thompson also suggests that while many are looking for the right time to jump into property investment, short term fluctuations in the market shouldn’t deter potential investors:

“Understandably, a lot of investors want to get the timing right when purchasing a property, but inevitably if you’re in it for the medium to long term, just learn to accept these fluctuations as any short term gains or losses. Second guessing and predicting the market will more than likely pale into insignificance in comparison to your overall return after ten years.”

Remortgages drive growth in UK home lending market

Gross mortgage lending in the UK held steady in October but is being driven more by remortgages than new buyers due to a lack of supply in the current housing market.

It reached an estimated £20.6 billion, according to the latest figures from the Council of Mortgage Lenders and closely matches September’s gross lending total of £20.5 billion, but is 5% lower than October last year when it was £21.8 billion.

‘Housing market sentiment is holding up well, with demand still strong. This has led to a pickup in approvals, as expected. The more pressing issue is on the supply side, where the lack of private sellers continues to be an obstacle for would-be borrowers,’ said CML senior economist Mohammad Jamei.

‘For this reason, we expect lending in the months ahead to be driven more by remortgaging activity and less by house purchases. Remortgaging will be helped by competitively priced mortgage deals, which are encouraging borrowers to refinance,’ he added.

According to Ishaan Malhi, chief executive officer of Trussle, the figures conceal two very different stories in the mortgage market. ‘On the one hand, new purchases are seeing a slight fall as first time buyers continue to face challenges saving for a mortgage deposit. This is having a long term impact on home ownership,’ he said.

‘On the other, we’re witnessing a surge in remortgaging, up 17% in the last 12 months, as existing home owners take advantage of record low rates to secure better deals,’ he added.

John Goodall, chief executive officer of peer to peer platform Landbay, also believes that the push is coming from home owners changing to lower interest products. ‘Many existing homeowners are choosing to take advantage of low interest rates to refinance their mortgage. However, this growth in lending volumes belies a much more mixed picture across the sectors. Buy to let lending levels remain around 24% down on this time last year, as April’s 3% stamp duty hike caused an initial wave of transactions, but left in its wake a much more subdued market,’ he pointed out.

‘The fundamentals of the buy to let market are still pointing toward long term sustainable growth, but landlords have had a white knuckle ride over the last 12 months, and we hope to see them given some relief at next week’s Autumn Statement,’ he added.

The lack of homes for sale is also highlighted by comments from John Eastgate, sales and marketing director at OneSavings Bank. ‘Mortgage activity is in good health, reflecting growing consumer confidence after the European Union referendum and impressive resilience in a quite exceptional year. Borrowers are benefitting from record low interest rates, with remortgage activity buoyant, although purchases are constrained by lack of homes for sale,’ he said.

‘However, with the Government set to fall short of the 200,000 new homes it had committed to providing annually, the UK’s chronic housing shortage, and resultant rising house prices, are set to remain a major barrier towards lending growth. Tax changes on buy to let will only make matters worse. The mortgage market needs to be supported by house building of all tenures which is the only long term solution that can prevent further deepening of the housing crisis,’ he added.

Henry Woodcock, principal mortgage consultant at IRESS, believes that the mortgage market remains vibrant. ‘Low interest rates, a levelling of house prices and continued consumer confidence have all combined to maintain market momentum,’ he said.

‘It’ll be interesting to see if the Chancellor has any good news for the mortgage and housing markets in the Autumn Statement. It’s expected he will confirm earlier announcements of funds towards new homes to be built by small firms, but many would like to see further investment into rental properties,’ he added.

New buy to let powers granted to Bank of England committee from early 2017

The Bank of England’s Financial Policy Committee (FPC) will be granted new powers by the Government to help it protect the financial system from future risks in the buy to let mortgage market.

The FPC is responsible for identifying, monitoring and taking action to remove or reduce systemic risks in the financial system and these new powers are aimed at enhancing the tools it has at its disposal to head off potential threats to financial stability should they arise.

From early 2017 the FPC will be able to direct the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) to require regulated lenders to place limits on buy to let mortgage lending in relation to loan to value ratios and interest coverage ratios.

It follows the FPC recommending that it be given additional powers of direction over both the residential mortgage lending market and the buy to let mortgage market in September 2014. The Government granted the FPC powers over the residential mortgage lending market in April 2015 and then consulted on the buy to let market.

The consultation noted the positive impact of buy to let landlords in the economy and the role they play in widening and balancing the overall housing market. They provide good quality accommodation for those who cannot at this point afford to buy a home, or who do not wish to commit to home ownership for personal or employment reasons.

At the same time, the consultation set out the financial stability risks that buy to let lending may pose and how the FPC’s recommended tools would address these risks and ensure long term economic stability.

‘It is crucial that Britain’s independent regulators have the tools they need to keep our financial system as safe as possible,’ said Chancellor of the Exchequer Philip Hammond.

‘Expanding the number of tools at the Financial Policy Committee’s disposal will ensure that the buy to let sector can continue to make an important contribution to our economy, while allowing the regulator to address any potential risks to financial stability,’ he added.

Home lenders urged to take rental payments into account

Home lenders in the UK should recognise rental payments when making lending decisions, as new research unveils that rental rates are rising rapidly when typical monthly mortgage payments for first time buyers are falling.

In the UK private tenants paid more for their accommodation in 57% of districts during the third quarter of this year, compared to the same period in 2015, according to the first time buyer index from Experian.

At the same time, the monthly mortgage payments a first time buyer could expect to pay has dropped in 65% of districts, assuming their loan was for 90% of the property on a two year fixed rate mortgage over 25 years.

The amount renters pay for their accommodation is either above or within 10% of the monthly payments they could expect to pay for a mortgage in 27% of UK districts and the research says this suggests that, if they could raise a deposit, many of the UK’s 4.3 million private renters would find monthly mortgage payments to be manageable and in line with their current rental commitments.

Scotland is home to six of the 10 districts where rental rates exceed monthly mortgage payments by the greatest margin. Manchester, Salford and Hull in the North of England also offer among the most favourable conditions for renters to become first time buyers.

‘What our research shows is that while a mortgage is a major ongoing commitment, renters often have a track record of making monthly payments which are often similar to what they might pay on a mortgage,’ said Experian’s Jonathan Westley.

He explained that lenders already apply rigorous checks to assess whether mortgage payments will be affordable for would be home owners, following the Mortgage Market Review but by taking rental payments into account, lenders can get a more complete picture of a borrower’s financial track record and make more suitable lending decisions.

The research also found that in 36% of districts the cost of renting had increased in the third quarter year on year, while mortgage payments had fallen. The reverse was true in only 4% of places, suggesting the balance across the country is shifting towards mortgage payments becoming more affordable compared to those who are currently renting.

‘Lenders take more into account than simply the amount you have raised for a deposit and what multiple of your earnings you are looking to borrow. The responsibility of ensuring mortgage payments are affordable for borrowers in the long term is one lenders take seriously,’ Westley pointed out.

‘They want to get a complete picture of a would be home owner’s financial commitments and see a strong track record of making regular payments. This helps lenders to understand how a borrower would manage mortgage payments now and in the future,’ he added.

Experian has developed the Rental Exchange to help renters get a mortgage. It allows rental payment information to be submitted to Experian, which will help strengthen renters’ credit histories and ease their difficulties when they buy a home.

UK property prices still rising, up 1.4% in October, despite Brexit uncertainty

Residential property prices in the UK continued to grow in October, up 1.4% and are now 5.2% up year on year, taking the average cost of a home to £217,411, the latest lender index data shows.

On a quarterly basis they were up just 0.1% but experts point out that this reflects a slowdown caused by the political uncertainty around the referendum in June on the UK’s membership of the European Union.

There was concern that the vote to leave the EU might be catastrophic for the housing market and the annual rate is down from a peak of 10% in March but Halifax Housing economist Martin Ellis pointed out that a slowdown was not unexpected and there are factors other than Brexit.

‘Annual house price growth has nearly halved from a peak of 10.0% in March this year, but remains robust at 5.2%,’ he said, but added that the slowdown appears to have been largely due to mounting affordability pressures, which have increasingly constrained housing demand.

He also pointed out that activity levels, like house price growth, have softened compared with a year ago. ‘Home sales, however, appear to have stabilised in recent months following the distortions earlier in the year due to the changes to stamp duty in April,’ he explained.

‘Whilst house price growth may ease further in the coming months, very low mortgage rates and a shortage of properties available for sale should help support price levels,’ he added.

Mark Posniak, managing director of Octopus Property, believes that the market is proving to be more resilient than anticipated. ‘In a politically and economically uncertain time, both at home and overseas, the resilience of the UK property market will certainly be tested. Demand may well be down amid such uncertainty, but as the latest mortgage approvals statistics reveal, it’s by no means out,’ he said.

‘The low cost of borrowing, weak supply levels and a robust jobs market are preventing prices from falling more sharply. Confidence is likely to play an increasingly prominent role in the short to medium term,’ he pointed out.

‘As inflation rises, people will feel less well-off and will become more cautious, and this could result in subdued transaction levels. Brexit related uncertainty remains the key narrative for the UK housing market at present, and last week’s high court ruling on Article 50 could see that uncertainty prolonged for longer than anticipated,’ he added.

Randeesh Sandhu, chief executive officer of Urban Exposure, also thinks the court ruling could have an effect as continued uncertainty about the Brexit process could hit confidence but at the same time there is still more demand than supply.

‘We still view the overall UK housing market picture as positive in light of enduring supply and demand fundamentals and no sign that the government will halt its long-term support of the sector. There are a number of issues that must be remedied on the supply side if the UK is to meet the government’s building targets, so in parallel we see opportunities for continued growth as and when these opportunities are unlocked,’ he concluded.

UK housing market expected to be strong and active throughout Brexit process

The path towards Brexit will dictate what happens in the UK housing market over the next few years but it is expected to remain reasonably strong and active, according to a new analysis.

There may be some turbulence along the way with article 50 to be enacted by march 2017 and the country set to leave in 2019, but the latest forecast from real estate firm JLL says that there will still be moderate growth with the residential market picking up again from 2020 onwards.

‘Demand will be undermined in the short term by uncertainty and a more subdued economy while supply issues will exacerbate, lending support to prices. The perennial issue for the housing industry remains supply and we are pleased that there seems to be fresh impetus in this regard,’ it says.

‘The big question, however, is whether policy initiatives target short term supply improvements, or look beyond the immediate horizon to create lasting, long term solutions,’ it adds.

JLL forecasts growth of 0.5% across the UK in 2017 and 1% in 2018 followed by 2% in 2019, then 4% in 2020 and 5% in 2021 but there is regional variations. Scotland is expected to be flat in 2017 then see 1% growth in 2018, 2% in 2019, 3% in 2020 and 4.5% in 2021. Wales is expected to do less well but catch up by 2020 with a forecast of prices falling by 1% in 2017, up 0.5% in 2018, up by 1% in 2019, by 3% in 2020 and then 4% in 2021.

Greater London is predicted to do well with growth of 1% in 2017, some 2% in 2018, then 3% in 2019, 5% in 2020 and 7% in 2021 but the prime central London market will not see as much growth with the JLL prediction showing prices likely to be flat in 2017 then 1% in 2018, 3% in 2019, 5.5% in 2020 then a slight reduction to 5% in 2021.

According to Neil Chegwidden, head of JLL residential research the real key to the outlook for the property market is the widespread positive attitude adopted within the UK. ‘Much will depend on the trade agreements negotiated, but with greater certainty the economic outlook should brighten along with consumer and business confidence as we head into 2019,’ he said.

‘We expect the UK housing market to be more subdued over the next two to three years. However, it will remain reasonably active with little chance of meaningful price corrections. Assuming Brexit negotiations are not too detrimental, we could see a rebound in London housing markets in 2020, before the rest of the country follows,’ he explained.

One concern on the horizon is that house builder activity could pull back from current rates of construction. ‘Although levels of new housing delivery were still woefully low prior to the referendum at least the direction of travel was positive and encouraging. This will now fall back again. We are predicting England starts to drop to 134,000 units next year,’ Chegwidden explained.

‘In London, we expect the house building slowdown to be more marked. Not only is London’s economy more vulnerable to Brexit but the housing market is also more reliant on investors, both domestic and international, and is hence more susceptible to buyer confidence,’ he pointed out.

But he also explained that the short term London supply prognosis implies that prices should bounce back when confidence returns. ‘The work stream of new supply should then pick up, albeit slowly.

While central and local government policies will be pro-development, we question whether they will really be able to outweigh the more cautious approach adopted by house builders in response to weaker market forces. Most worryingly, both the UK’s and London’s housing shortages will be even more acute by this point,’ he added.

The report also points out that the forthcoming five year UK economic outlook is particularly uncertain and much depends on the nature and detail of the EU exit. JLL’s base economic forecast assumes a hard Brexit with access to the single market sacrificed in favour of immigration controls.

‘Despite this, the economic prognosis is not too detrimental for the UK. There is clearly downside risk to this quite benign outlook, if trade agreements and financial sector passporting rights are not favourable. However, this base assumption also implies that there is significant upside potential too, so the economy could prove more robust next year and could also expand faster thereafter,’ it concludes.