Demand for rented homes set to soar

The Monetary Policy Committee’s recent hikes in interest rates are expected to discourage many aspiring first time buyers from getting onto the housing ladder, but will have a much more positive impact on hundreds of thousands of buy-to-let landlords who provide rented accommodation to those who are unable or unwilling to purchase their own home.

Latest research from Paragon Mortgages reveals that rental yields achieved by residential investors have remained steady at 6% for the past eight months. The New Year has started on a positive trend, and the buy-to-let market is set to remain strong as rising interest rates put increasing pressure on hard-pressed first time buyers.

John Heron, managing director of Paragon Mortgages, says: “The private rented sector fills a key role in the housing market by providing decent, affordable accommodation for a growing number of households. In particular, people who need flexibility before they settle down or who are unable to afford to purchase their own home tend to resort to privately rented accommodation. With high property prices and rising borrowing costs, more and more would-be home owners will choose to live in rented homes for longer while they save a large enough deposit.”

John Heron says: “With landlords’ average gearing standing at less than 40%, down from 48% five years ago, the vast majority of those who are on variable rate mortgages are well equipped to take this and any further interest rate rises in their stride. Landlords who have recently taken out mortgages have done so on fixed rates and so will not be impacted by the rate changes in any event. Only a small minority of landlords have entered the market recently with full cost variable arrangements and in these cases it is our experience that landlords plan effectively for increases in interest rates and draw on both rental and other income. The same does not apply to first time buyers, many of whom will shelve their plans to enter the housing market, discouraged by high prices, rising borrowing costs and a loss of confidence.”

“The good news for them is that there is a ready stock of rental properties available to them, although they will find themselves in competition with a growing number of inward migrants and other long term renters – which may create some upward pressure on rents.”

According to Paragon Mortgages’ research, tenant demand is at its strongest level ever (since the survey began): 32% of landlords say that tenant demand is growing or surging. Unsurprisingly, many of these landlords are actively growing their portfolios to meet this increase in demand, and they plan to expand their holdings by an average of 2.6% over the next 12 months. Rental yields will remain stable or possibly edge up, with landlords expecting them to stand at 6.1% in a year’s time.

“It may make good headlines to speculate that rising interest rates will cause investors to take fright and offload their property holdings, but both past experience and recent anecdotal evidence from landlords show that the truth is very different. In the early 1990s, when the overall housing market experienced a significant downturn, buy-to-let experienced its biggest ever growth period as the private rented sector stepped in to meet demand from individuals, couples and families who needed a roof over their heads but were nervous about home ownership. Much more recently, ARLA’s latest landlord research indicates that only 2.1% of landlords would sell if house prices fall and, indeed, that six out of ten landlords plans to buy more properties over the next year.”

Sally Laker, Managing Director at Mortgage Intelligence, agreed,: " Although certain industry commentators have been wary of the recent rate rises and the potential effect they could have on the market, it is unlikely that the buy-to-let sector will suffer. With a variety of socio-economic factors, along with on-going affordability constraints contributing to the demand for rental property, professional landlords will want to take advantage of this and many will be looking to increase portfolios. Professional investors consider costs, such as rate rises, a business expense and are unlikely to be spooked by any further interest rises."

John Heron concludes: “All the evidence suggests that the current environment is a positive one for the private rented sector: buy-to-let is not part of the problem, but a significant part of the solution. Nevertheless, we would always advise caution to new entrants to the market, who should make sure they understand the market thoroughly and discuss their plans with their financial adviser – look before you leap.”