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Dwindling numbers of first-time buyers will fuel expansion in the private rented sector (PRS) over the next decade but at the moment growth in the PRS is slowing.

Government intervention to put off landlords entering the market or expand their portfolios, through tax and regulatory changes, has contributed to a slowdown in the growth of the PRS.

But in the longer-term, a prolonged absence of first-time buyers in the housing market will support a growing PRS, according to the eighth edition of Kent Reliance’s Buy to Let Britain report.

In the last quarter, the value of the PRS stagnated at £1.4 trillion.

The report blames the slowdown on a combination of higher stamp duty costs, reforms to the tax treatment of mortgage interest and tighter lending rules.

In the past year, the number of households in the PRS increased by only 3% to 5.7 million, far slower than the rate of increase seen over the past decade.

According to a survey of 1,043 landlords run in association with BDRC Continental, only 1% more landlords increased rather than shrunk their portfolios in the last three months.

Data from UK Finance shows the number of outstanding buy-to-let mortgages increased by just 1.5% a year, one sixth of the rate seen three years ago, as house purchase demand has slowed.

Tenant demand has also eased with 19% of landlords reporting that tenant demand increased in the last three months. Meanwhile 23% saw demand fall but this was heavily influenced by London, where political and economic uncertainty is having a large effect in prime areas.

Fall in first-time buyer demand will sustain PRS

While landlords have seen softer tenant demand in recent months, first-time buyer activity is still a long way from recovering to its pre-recession levels, despite a raft of government support measures. This has contributed to the long-term growth of the PRS, and is set to do so in the future.

In the last decade, two million fewer first-time buyers have been able to buy a home with a mortgage than in the 10 years prior to 2008. This compares to the PRS growing by 2.2 million households over the same period. Many are frustrated buyers unable to get on the housing ladder as people continue to struggle with affordability issues, high house prices and insufficient housebuilding.

UK Finance data shows that 363,000 first-time buyers used a mortgage to buy a home last year, which is 94,000 fewer than the typical number seen in the ten years prior to the financial crisis.

Without a sustained recovery in first-time buyer activity, Kent Reliance says this means 940,000 fewer first-time buyers will purchase their first home over the next decade than in the 10 years before the financial crisis.

ONS forecasts suggest an additional 2.4 million households will be created in Great Britain over the next 10 years. Conservatively, assuming first-time buyer numbers recover somewhat, and private renting continues to account for a little over a fifth of households, rental housing supply will still need to cater for an additional half-a-million households.

More professional landlords

Three out of 10 (31%) of landlords now make a profitable, full-time living from property investment, compared to 26% three years ago, while amateur landlords have started to leave the market.

Landlords are increasingly operating as a business, and more of them buying property are doing so as a limited company, allowing them to continue to offset mortgage interest costs against tax.

Kent Reliance’s data shows that in the first quarter of 2018, 72% of mortgage applications for purchase were via a limited company – more than twice the level seen two years ago, and up slightly from 70% in 2017.

Andy Golding, chief executive of OneSavings Bank, which trades under the Kent Reliance and InterBay brands in buy-to-let, commented: “Landlords were left reeling after the introduction of tighter regulation and higher taxes, while the spectre of Brexit is already weighing on the housing market. This has naturally deterred investment into the private rented sector, especially from amateur speculators.

“Political opinion may be set against the PRS, but without it, the housing crisis would be deeper still. First-time buyer numbers, despite recent fanfare, are a long way from pre-recession levels and with household numbers growing, and new housing starts inadequate, it is the PRS that will continue to pick up the slack. Policy should recognise that, and support growth in supply across all tenures.

“A housing market with dwindling supply of rental accommodation yet growing demand would, without a significant rise in affordable housing, provide the worst of all worlds for tenants: higher rents, with less choice and security, hampering their ability to save to buy a home.”

Source: Mortgage Finance Gazette

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