Welcome to the third issue of Property Trends the monthly bulletin that focusses on property trends for residential property investors.
We are a few months into 2018 and it is very clear that changes in the residential property sector show little sign of slowing.
A parliamentary committee has been considering the planned legislation to ban tenant’s fees charged by letting agents. However, there have been arguments about whether landlords should be limited to demanding 4 weeks’ rent by way of security deposit.
Another bone of contention centres around “default fees.” Tenants’ groups are worried that the ability of agents to charge default fees for things such as unpaid rent could lead to backdoor tenants’ fees.
Elsewhere, the government has been talking about a raft of potential changes including: ending gazumping, speeding up the house-buying process, compelling estate agents to have professional qualifications, and making it easier for trading standards to ban rogue agents.
HIGH RISE FLATS – This month Rebel Property Coach, Dalton Barrett, does an opinion piece on the rapid growth of high-rise flats, especially in our big cities. Building high is seen as a solution to shortage of land in areas where people want to live. However, the rapid proliferation of modern tower blocks is by no means a clear win-win situation.
It has been asked before and it is worth asking again: going forward, could the shiny, new, high-rise flats of today present similar problems as post-war council blocks?
The issues surrounding high-rise flats will be covered in two parts. This month we look at how we got to this point. Next month we will look at the problems and possible solutions.
PROPERTY AGENTS – Rebel Property Coach takes a look at the possible future for property agents. The UK government clearly has its sights set on that sector of the property market. What seems to be on the horizon?
PROPERTY DIARY – Don’t forget to look at the “Property Diary” below – identifying recent or pending changes in the residential property sector.
WHAT’S WRONG WITH NEW HIGH-RISE FLATS?
In the housing sector, something very important is taking place and has been taking place for over a decade now. If you don’t live in one of our great cities, it is something you may have missed.
But if you live in places like London, Manchester, Birmingham or Liverpool, it is something you cannot miss – the huge number of modern tower blocks springing up seemingly on every spare plot of land in our main towns and cities.
The view of politicians
The political line is that this is great news – property-starved Britain is building high and densely in the very areas where jobs are and people want to live.
A brief look at the skyline of any of our great cities tells the obvious story – the vast majority of the new properties being built are flats in high-rise blocks.
The build to rent revolution
This preponderance of apartments is likely to grow even more as the “build to rent” revolution moves into full gear.
Revolution? Let’s call it a silent revolution. Those in the know, can see that the “housing shortage” is likely to be well and truly solved in the not too distant future once cash-rich multi-national commercial giants like insurance companies and supermarkets fully sink their teeth into the build to rent malarkey and start churning out even more build to rent units.
Build to rent is a sub-division of the building sector where properties are built to rent rather than sold. The owner and landlord is typically a large institutional investor or corporation and the block or development professionally managed with emphasis on high service levels.
According to the British Property Federation there are over 105,000 build to rent units either completed or in the pipeline; of which more than 50% are in London.
The vast majority of these units are high-rise flats. Developer Quintain’s Wembley Park development of 7,600 units is expected to include 5,000 build to let units. Check out online some photos of the development as it will look when fully developed, and there has to be some awe at the towering ranks of high-rise blocks surrounding the famous football stadium.
The dangers of high-rise
According to most estimates the UK needs between 200,000 and 250,000 new housing units each year for the next 20 years at least. The country has been missing its target for many years and so the big contributions of high-rise flats should on the face of it be welcomed.
However, it cannot be just about numbers. Properties are homes for people and determine numerous key variables such as community, quality of life, wellbeing, health and happiness.
The money aspect is also central. In the case of tenants, will the rents remain “affordable” and within their reach into the future? In the case of owner occupiers, will they be able to afford their mortgage payments as well as the service charges – especially as the blocks age and service costs increase?
Where homes are not right, the local society is not right; manifesting itself in low employment, anti-social behaviour and crime.
If we focus only on the numbers and how easily and cheaply we can reach our target we lose touch of the fundamental importance of housing – namely a safe and happy place for people and their families to fulfil their full potential.
The lessons of history
The reason for doubt lies in history. Putting people in huge tower blocks has not exactly been a great success socially. The local authority built post-war blocks and estates, especially of the more brutalist variety in poor areas, have not had a great history.
Many of them have been pulled down – strangely to be replaced by new ones in some cases; albeit smaller.
Rightly or wrongly, they often became known as bywords for social deprivation, unemployment, crime, vandalism and drug abuse.
Dubbed “sink estates”, having high levels of economic and social deprivation, they lacked the chance of success when used as a dumping ground for problem families and other societally challenged groups.
Many of them remain, and not too many will get a resounding endorsement from their residents. By in large, they continue to be some of the most deprived and problematic housing in the country.
So with so many question marks against high-rise blocks and estates, why are we building so many new ones in our great cities? Why are planners falling over themselves to grant planning permission to taller and taller residential towers?
The blocks and estates of today are often attractive-looking with a lot of attention paid to facilities and landscaping – but is that any sort of antidote for the many possible downsides?
Three big questions
The reason why we are so keen on covering our cities with acres of tightly packed high-rise blocks lies in the irrationality of the housing debate. It is a debate that is wrapped up in un-tested assumptions and arguments which crumble easily under benign interrogation.
Three big questions fuel the debate and consequent policies:
- Is there a shortage of building land?
- Is there a housing shortage?
- Are house prices unaffordable for first time buyers?
The answers and arguments are not consistent. There is not a clear national position. Different sectors and groups have their own agenda, choosing facts and figures which align with their interests.
The government – whatever its persuasion – is no better. Rather than committing to a clear, consistent position, it tends to flip-flop depending on which media narrative is dominant or which interest group is “winning the debate.”
First: Is there a shortage of building land?
No, not really.
In tightly-packed, popular city and town centres up and down the country, it may look like there is a shortage of land. In those particular places, there is an actual shortage of building land. Accordingly, land prices go up, building costs go up and house prices go up.
But looking at the country as a whole, the position is by no means clear-cut. UK population density is high. According to the World Bank, the UK’s population density in 2016 was 271 people per km2 – making it the third most densely populated country in the EU.
However, less than 10% of the UK is actually built on. About a half of its land mass is rural, and areas around major urban centres are protected from being developed on account of being designated as “green belts.”
The low percentage of land actually built on indicates that (even after taking account of land for essential things such as farming, industry, leisure and conservation), there is a huge amount of land which could be inexpensively developed – providing low rise, low density, people-centred homes in healthy, community-based and attractive locations.
What is causing developers to build relatively expensive homes on postage stamp sized brown field city centre sites are the green belts – our secular equivalent of the sacred cow.
If more green belt land was judiciously built on, more houses rather than flats could be built and our urban landscape would not be so badly scarred by disproportionately large, samey and ugly modern tower blocks.
Of course, even a whisper of cutting back green belts draws vehement anger from many groups, usually the same ones who complain about rural deprivation and how cities hog the bulk of regional investment – apparently oblivious to the unenviable conditions in which many city dwellers have to live.
In its Housing White Paper last year, the government like countless previous governments, side-stepped the issue of building on green belt land by coming up with uninspiring initiatives such as targeting carparks near railway stations for building.
The commitment to conserve green belt land is a laudable and highly desirable objective and should never be abandoned. However, there are only so much people that we can pack into our over-crowded towns and cities.
The artificial land shortage caused by the rigid defence of green belts is increasingly being questioned; it seems only a matter of time before politicians of all colours show some courage and tackle the issue head-on.
Second: Is there a shortage of housing?
Yes, in some places.
There is a shortage of housing in a relatively few very successful parts of the country like the best areas of London and Manchester. Shortages of supply lead to higher prices.
However, there is no significant shortage in many parts of the country as evidenced by relatively affordable house prices in places like Scotland, the North East, the North West and Wales.
In many places there are streets with numerous boarded-up or empty homes no-one wants. True, you won’t find many in the South East, but there are plenty of them in the North.
Research by the Liberal Democrats, reported in January of this year, found there were over 11,000 properties in the UK which had been empty for over 10 years.
Durham topped the empty homes table with 6,500 empty homes. It was followed by Leeds 5,724; Bradford 4,144; Cornwall 3,273; and Liverpool 3,093.
A report by the Telegraph in February 2017 suggested that at any one time the number of vacant homes or surplus homes is thought to be as high as 1.4 million; furthermore, that total had almost doubled over the previous 20 years. Surplus homes included holiday homes, permanently empty homes and homes waiting for people to move in.
In April of last year, government figures suggested there were over 200,000 homes sitting empty for more than 6 months. The towns with most empty properties were all in the North with the exception of Birmingham.
The conclusion is that there is no absolute shortage of homes. There is a relative shortage. Simply put, the North often has too many homes; the South often has too few.
It doesn’t need a lot of digging to realise that the fundamental issue is the distribution of jobs and opportunities across the country and where people can make a living and want to live.
The fact of under-used housing in many Northern towns is evidence that they require high levels of investment to provide the jobs which will support demand for housing in those areas.
Three: Are house prices unaffordable for first time buyers?
Yes they are, in some places.
It all depends on where you are in the country and your circumstances.
The BBC’s house price affordability calculator is very revealing. This is what it revealed in January of this year:
(You can find the calculator by searching for ‘house price calculator’ on the BBC’s website: www.bbc.co.uk)
For a first time buyer seeking a two bedroom accommodation, having a
deposit of £20,000 and able to afford a mortgage of £600 per
month, 57% of the country was found to be affordable.
For a first time buyer with a deposit of £10,000 and able to afford a mortgage of £500 per month, 31% of the country was affordable.
However, for balance, these figures have to be compared to an article in the London Evening Standard in January of this year which indicated that in 2017 the average first time buyer in the capital needed a deposit of just under £93,600.
There are other expensive parts of the country – places like Edinburgh, Cambridge, Oxford, York and Bath.
What is clear is that the picture is not black and white – but certainly not as bad as the dominant narrative may suggest.
There is no blanket unaffordability across the country. There are many expensive regions, towns and areas.
However, for a buyer with a reasonable deposit of £20,000 and the ability to afford a mortgage of £600 per month, most parts of the country are affordable based on the BBC calculator. If two or more persons are buying, the affordability is likely to be even greater.
True, house prices are often unaffordable – in some parts of the country. Overall though, the picture is nowhere near as bad as certain parts of the media and interest groups would suggest.
The case for throwing up large numbers of small, box-like flats at usually unaffordable prices in popular, high-density, city-centre locations is most definitely not proved.
Against the background of this and other muddled thinking, which has shaped policies for years, we are at the point where the stand out policy of the government for solving the “housing problem” is to target car parks near railways stations to build high density units – in other words, more modern tower blocks.
But will modern tower blocks be the homes people want, and above all need?
In Part II of this article, next month, I will look at the problems endemic in high-rise apartments and possible solutions.
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Rebel Property Coach
THE FUTURE FOR PROPERTY AGENTS
As all the main political parties have made property and housing one of their main policy considerations, more and more areas of the property market are coming under scrutiny.
The position of property agents is an area under consideration by the government. The government has promised a crackdown on “rogue operators.”
There are plans for estate agents to hold professional qualifications. Many people may be surprised that there is no requirement for them to do so at present and the change has been welcomed by various interest groups.
Estate agents will be required to be transparent about their fees. For instance, they will need to disclose if they are receiving a referral fee for referring a client to a solicitor or mortgage broker.
Estate agents are typically involved in the selling of property. It is not entirely clear if letting agents, who are typically involved in the letting of property, will also be affected by the proposed changes. However, it is reasonable to expect that they will.
It is also proposed to regulate managing agents so as to speed up the conveyancing process and make it more efficient and acceptable to buyers and sellers.
Where they have to provide leasehold information on the disposal of a property, they will need to do so for a fixed fee, within a set timescale and, preferably, electronically.
Further, they will need to disclose any referral fees they receive.
Making the conveyancing process better
The planned changes in relation to estate agents and managing agents are part of a wider stated objective of the government to overhaul the conveyancing process. Other planned changes include:
- Searches to be available within 10 days
- Encouragement of “reservation agreements” to combat gazumping
- Encouragement of buyers and sellers to be more prepared for the conveyancing process.
It should be pointed out that these provisions are part of a “Plan of Action” by the government. Whether legislation will take place, and when, remains to be seen.
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Rebel Property Coach
PROPERTY DIARY 2018
Here are some key matters those in the residential letting sector should be aware of in 2018:
Energy Performance certificates
From 1st April 2018 landlords (residential and commercial) must not renew a tenancy or grant a new tenancy where the EPC rating is below E, unless there is an exemption.
From 1st April 2020 a residential landlord must not continue to let a building with has an EPC rating below E unless the landlord gets an exemption. In the case of commercial property, the compliance date is 1st April 2023.
Breach by a landlord can lead to a penalty of £5,000 to £150,000
Extension of HMO licensing
From 1st October 2018 the definition of a HMO will be widened to cover any property occupied by five or more people forming two or more households.
The new definition will apply to many two-storey student houses which previously were not affected.
The owners of all affected properties will need to prove that they are ‘fit and proper’ to hold a licence and the properties will need to meet strict minimum requirements aimed at improving overall standards and safety of lettings.
If you own a property to which the new rules may apply, it is obviously sensible to plan now for the likely financial expense of compliance.
Year 2 of the restriction of mortgage interest relief
This year, we will be into the second year of the phased reduction of mortgage interest relief for BTL landlords owning property in an individual capacity. There will be further upward pressure on their tax bill as a greater share of their profit becomes taxable.
Such landlords, if they have not yet done so, would be well advised to seek expert advice as to whether it would be beneficial to hold their properties in a limited company structure – which retains the tax benefit of full deduction of mortgage interest
Limited company mortgages
Expect the number and affordability of BTL mortgages to limited companies to improve further in 2018. In November of last year, one of the big high street lenders Nationwide (through its BTL arm TMW) began a pilot to lend to limited companies.
As more and more BTL investors are operating through limited companies, other major players can be expected to join TMW, increasing competition and reducing the cost of corporate mortgages, both in terms of interest and fees.
Ban on leasehold houses
The government has decided to ban the controversial practice of selling new houses as leaseholds – often with rapidly escalating ground rents. The practice caused public outcry when exposed by the media as little more than a device to add additional income streams for developers and builders.
It is expected that home buyers will no longer be obliged to pay a ground rent.
The changes will require legislation, and that seems likely later this year.
Ban on letting agents’ fees
It now seems that the planned ban on letting agent’s fees (payable by tenants when looking for a property to rent) announced in 2016, will not take place until 2019.
Rebel Property Coach
DISCLAIMER: This bulletin, which is provided for information purposes only, is fully intended to be accurate but no representation as to its accuracy is intended. It does not provide legal or any other advice to be relied upon. All liability to all persons acting or not acting on anything in this bulletin is disclaimed. NOTE: Where you require advice to rely on in any matter, it is best practice to consult and retain a suitably qualified expert in the relevant field.