Harrogate has been called a lot of things, but the most relevant to our business is “Teflon Town” The idea being that despite what else happens throughout the property market nationwide, Harrogate, as part of the Golden Triangle, seems to remain relatively unscathed.
The latest bad property weather to hit England is concentrated onto the Private Rented Sector (PRS). Let’s look now at the principle reasons for this distress;
The Private Rented Sector (PRS) as we know it today, came into effect in 1996, following the birth of the Buy To Let ( BTL) mortgage. The BTL mortgage was pivotal to the formation of the PRS because it allowed the “man in the street” to invest in property by leveraging bank finance.
Prior to this, rental properties had mainly been purchased outright for cash. The introduction of the BTL mortgage meant that much smaller amounts of upfront cash was needed – typically just 15% deposits throughout the 2000’s.
This made investing in property much more accessible to many people and the modern PRS was born. 2017 will mark the 21st anniversary of the PRS – a true coming of age – and we also believe it will be an important year of change for the sector in England but not here in Harrogate.
The Impact of Section 24 on Experienced Landlords
In brief, reforms of Section 24 mean that PRS landlords must pay tax on that part of the rent that has been paid to the lender as mortgage interest and that the Inland Revenue will tax that money as if it was still in the property owners’ bank account.
This reverses the longstanding fundamental in England that “ income less costs equals profit” and it’s only the profit which should be taxed.
Some experienced professional landlords will not be able to incorporate in a financially viable manner, and will sell up their properties. A number of these landlords will be of the age where retirement beckons and the implementation of Section 24 (in April 2017) will accelerate their plans to exit and retire.
The highly leveraged landlords of the South East will be most affected by Section 24, and may sell off some of their BTL properties as the deadline approaches. This demographic picture of English landlords represents only around 3% of total number of landlords, but between them, they hold a very significant number of rental properties, so any sell off will have an impact, particularly if the landlord has built their portfolio within a specific area.
The Impact of Section 24 on Amateur Landlords
Many amateur or indeed accidental landlords seem to not have Section 24 reforms on their radar. It’s a worry.
This large majority of landlords – which accounts for 97% of the landlord demographic are mainly living in some ignorance of how Section 24 will impact on them. Sadly a good number of these landlords will only wake up to the implications Section 24 when they file their 2017 tax returns.
Some will find that they are pushed into a higher tax bracket, and that they no longer qualify for child tax credits, and other benefits.
Some Landlords will seek to pass their extra costs to tenants by increasing rents, whilst others will simply think of exiting the market because BTL business will be no longer be as financially attractive.
More Money Needed at the Point of Acquisition
The 3% SDLT (Stamp Duty) surcharge means that landlords have to find a significant amount of additional money upfront when purchasing property and this may act as a barrier to some investors, particularly for higher value properties.
Some may choose not to invest further in the sector, some may buy far less rental properties than if they didn’t have to pay the stamp duty and some prospective landlords may find the 3% surcharge just one step too far, and not invest at all.
The increasing mortgage stress tests instigated by the major lenders have the effect of landlords having to find much larger deposits. These deposits are now typically around 33-40%, but varies significantly from area to area.
The new Universal Credit (UC) system is not only putting landlords off letting to tenants in receipt of UC, but early reports suggest that there are substantial rent arrears, meaning that a significant portion of the £9 billion paid in housing benefit annually, never makes it to landlords, but is spent elsewhere by the tenant.
Research has shown, one year on from the roll-out of UC in England, that 79% of Council Tenants in receipt of Universal UC are in rent arrears.
Legislation, Compliance & Anti-landlord Sentiment
Landlords are being hammered by increasingly onerous legislation, compliance requirements , and costs to include landlord licensing. This is not only deterring new entrants into the PRS sector, but is reducing the profit margins of the existing Landlords and discouraging them from investing further.
Additionally, the Anti-PRS-Landlord position of much of the media is making landlords almost as unpopular as Estate Agents. PRS landlords are of course an important part of the Britain’s housing infrastructure, in fact many more PRS Landlords are needed, not fewer.
Whilst we appreciate that all of the above does not make for especially happy reading. It is important to understand that the overall U.K. property market is very strong and is under-pinned by powerful fundamentals and these will ensure that it remains robust in the long term view.
In the shorter term – the latest research by the Centre for Economics and Business Research predict that rents are set to rise by 28% over the next 10 years due to continuing high tenant demand.
In turn, we expect that rents in Harrogate will show even bigger increases. Most property commentators judge that the PRS is set to grow and it is estimated that by 2026 around 7.2 million households will be inside the PRS, a growth of around 66%. Most property commentators also expect BTL mortgage rates to remain at our current historically low level.
If you wish to discuss the above or are interested in the Property market in Harrogate then please come along and see us and enjoy a free no obligation chat about the services we provide.
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