What we need in Oxford is more home owners AND more Landlords!

I’ve been asked by a number of readers why I haven’t posted following the autumn statement by the Chancellor and in particular commenting on the surprise announcement about the plans to consult on a plan to ban ‘upfront tenant fees as soon as possible’.  Richard and I have been asked to comment by newspapers and so far, we’ve politely declined to comment.  And, here’s why….

Too many other commentators are jumping to doomsday conclusions and predicting the end of the property market as we know it, when they don’t yet know what is being proposed, or when the changes will come into force.

Will it be a tough transition for letting agents? – yes; is it likely to increase costs for landlords? – yes, probably; will it help or hinder the supply of affordable homes in Oxford? – at best it will be neutral, at worst negative.

As readers know I believe that the fundamentals of Oxford property remain strong for investors and owner-occupiers alike.  Capital growth is excellent and I believe will prove resilient come what may; average rental yields remain strong vs national benchmarks, although there is great variability between post-codes and property types (from 3.5% in some areas up to 8% plus for well located houses in multiple occupation).  Savvy investors recognise that they can no longer have a narrow set of investment criteria, instead broadening their horizons to build a portfolio that optimises capital growth and rental yield.

I was delighted to hear that house building is being prioritised via the £2.3bn housing infrastructure fund, and I hope that Oxford benefits early given its minimum requirement for 400 new houses a year (that’s around 3 times the current rate of building).  However, I feel the Government remains too fixated on the home-ownership dream, rather than taking a broader strategic approach that recognises that new rented social housing and new private rental properties are required as well as new homes to buy  – close to 7000 new rental homes are required in Oxford by 2025, way more than can be built no matter how much money is spent. 

Ahead of the detail that is required for informed comment, I am concerned that the government remains anti-landlord in the mistaken belief that the country needs fewer landlords and more home owners.  In fact, what we need in Oxford is more home owners AND more landlords. I believe some excellent landlords may be forced-out of the market by the sheer weight of Government anti-landlord policy, and that others may be put-off further investment as alternative investments become viable once more.  If that happens, the Government will be forced to back-peddle, but by then the damage may already be done. 

The Oxford to Cambridge high-tech highway was is great news, linking the nations pre-eminent knowledge economies.  But jobs need people and people need homes - to rent and buy.  Let's hope that the homes are made available!

Dear Philip Hammond….

Philip,

It’s Bill here.  I thought I’d drop you a line before your big day next week to make a few suggestions on behalf of Oxford’s landlords.  I’ll keep it brief, as I know you are busy, but come on mate you know these suggestions make a lot of sense.

1.       Reverse George’s stamp duty changes – as you know they’ve delivered only half of the expected £700m and they seem to have reduced the number of house sales.  Do something bold like halving the rate for stamp duty and offering a stamp duty holiday early in the New Year.

2.       Remove the 3% stamp duty surcharge on second homes – Oxford needs over 6,800 new rented homes by 2025 and since the surcharge introduction in April fewer homes have sold to landlords meaning we are falling further behind the curve now on both new house building and new rental homes.

3.       Scrap the planned tax relief changes – nationally 440,000 basic-rate tax payers will be forced into the higher tax bracket once these changes to landlord taxation come into force.  These Section 24 changes risk landlords having to pass-on extra costs to tenants in higher rents and further worsening the problem of rent arrears.  Oxford’s landlords have a history of balancing rent increases to look after their tenants, but stamp duty and section 24 risk undermining their returns entirely.

4.       Build more homes in Oxford.  We need 400 new homes per annum just to avoid worsening the supply crisis.  This is pushing Oxford prices ever higher, worsening the affordability gap between average house price and average income, and creating a knock-on higher demand for rental properties.

5.       Introduce a capital gains holiday to encourage landowners to release land for new home building.  At present due to high rates of capital gains tax, there is little incentive for owners to release land for development.  Work with local planners to identify ideal parcels of land and encourage the landowners to sell via the tax holiday.

Philip, as you know Oxford is ranked 5^th Nationally for gross value-added, and is experiencing strong population growth reflecting it’s attractiveness for people in terms of employment, cultural arts and its knowledge based economy.  Oxford’s landlords invest for the long-term, free them to continue to look after their tenants interests, to re-invest returns in the fabric of their properties, and allow them a reasonable long-term return on investment.  You won’t regret it!

Kind regards,

Bill

Private Renting set to grow by 6,800 Oxford households by 2025

During a property viewing recently, a landlord brought up the subject of a report he had read from the Royal Institution of Chartered Surveyors (RICS) and PricewaterhouseCoopers (PwC) that stated almost 1.8m new rental homes are needed by 2025 to keep up with current demand from tenants.

If RICS and PwC are correct, what does it mean for Oxford? The fact is, as a country, we are facing a precarious rental shortage and need to get Oxford building in a way that benefits a cross-section of society, not just the fortunate few. In my opinion the Chancellor of the Exchequer should to drop the higher stamp duty tax on buy to let purchases and ease the pressure on the rental market.

Of the 58,700 households in Oxford, currently 41,400 tenants live in 16,000 private rented properties. If we apportion the 1.8m households that RICS said will be needed equally around the Country, that means in nine years’ time, the number of rental properties in Oxford needs to rise by 6,800 (i.e. 42.8%),  taking the total number of rented properties in the city to 22,800.

That means Oxford landlords need to buy around 800 properties a year between now and 2025 to meet demand – because according to my calculations, an additional 17,700 people will want to live in those 'additional' Oxford rental properties.  So why is the government penalising landlords?

Thankfully the new housing minister Gavin Barwell has ensured Teresa May's new administration doesn’t have the singular laser-like focus of only home ownership to solve our housing issues. The private rented sector became a stooge under David Cameron's watch and still, with increasingly unaffordable Oxford house prices, many new Oxford households will be relying on the rental sector in the future for housing. I can only say, Westminster must put in place the measures that will allow the rental sector to flourish. Any restrictions on the supply of rental property will push up rents (bad news for tenants), further side-lining those members of Oxford society who are already struggling. Let's hope this new Government continues to see the contribution landlords make to an integrated housing strategy, buying precious time for house building to catch-up with demand.

Is the government about to introduce stricter affordability tests for buy to let borrowing by Oxford’s landlords?

Regular readers will know that I believe that the recent and planned increase in taxes on buy to let transactions have the potential to undermine the achievement of 6,800 additional rental properties needed in Oxford by 2025 (the stamp duty surcharge since April 2016 and the forthcoming restrictions on interest rate relief).

Today’s headlines suggest that the forthcoming autumn statement will grant new powers to the Bank of England to mandate similar stringent controls on buy to let lending to ensure mortgages are affordable in the event of interest rates rising.  This stress-testing has already been applied for owner-occupiers, but does it have the potential to exclude middle-class investors from the Oxford buy to let market in the future?

Under the plans, affordability checks will be introduced with borrowers having to prove they can make a profit of 25% from rental payments, even if interest rates rise.  For example, an Oxford investor with a £200,000 interest-only mortgage borrowing at a rate of 1.79% today would currently have monthly mortgage payments of £299.  However, should interest rates rise to 5.5% the mortgage payments will rise to £917 meaning that the borrower would need to charge rent of at least £1,146 per month to be approved for a mortgage in the future (probably from April 2017).

So what difference will this make to an Oxford landlord buying a new ‘average’ property as a buy to let?  As our readers know returns on Oxford property come from primarily two sources – rental yield and strong capital appreciation (i.e. properties are increasing in value strongly year on year).  However, the proposed stress test will only take account of rental yield, which typically builds over-time, reflecting the fact that Oxford property prices are high.  For an average property the landlord will buy at around £385,000.  Assuming he/she puts down a deposit of 30% and has a loan to value (LTV) of 70% he/she will borrow £269,500.  Today the mortgage repayments will be £396.  Under the new stress-test at 5.5% they would be £1,235 and require a rent of £1,544 per calendar month.  That is around £170 pcm above the current average rent achievable.  To match the new affordability criteria the landlord would need a further £28,875 deposit (or 37.5% of the purchase price).

For many professional landlords, their established portfolios providing a strong asset base, meaning these changes will make little difference.  But for local people wanting to invest their savings in property to achieve a decent return, it will make the entry cost that much higher, and for some may prove unaffordable.

Increasingly, I am being asked by landlords to help them plan their investments, targeting purchases to optimise yield or capital growth.  I believe the Government focus on buy to let makes advanced careful investment planning more important than ever.  For the Government to be undermining buy to let returns by removing mortgage interest relief and then to add on-top a further affordability test seems unfair, but with careful planning Oxford still offers great return on investment.

A quarter of Oxford buy to let landlords to quit?

According to a survey of 1,000 buy to let investors by the Residential Landlords’ Association (RLA), around a quarter are saying they will quit the private rental sector because of tas changes planned for April.

The planned restrictions on claiming mortgage interest relief as a cost of business which will be introduced from April 2017 is undermining the financial viability of buy to let investments.

Regular readers will know that I have identified that Oxford requires some 6,800 new homes in the private rented sector over the next 9 years, and that the Government’s raid on buy to let landlord’s risks a period of great disruption for tenants if landlord’s turn to short-term holiday lets as an alternative, or if they sell their properties to owner-occupiers who can afford them. 

The impact could be a reduction in the supply of private rented properties in Oxford at the very time a further 6,800 are needed.  That could mean nearly 18,000 people being unable to live in Oxford the UK’s 8^th fastest growing City!

For how long can the Government focus solely on the availability of homes for owner-occupiers to purchase rather than all facets of supply – social housing, private rented homes and owner-occupied homes.  Each aspect of the housing mix needs developing, and undermining any one could have severe and unexpected consequences.

What makes a place a good bet for Buy to Let, and how does Oxford stack-up?

Since the millennium, the proportion of households renting privately has grown from 10% to 19%.  But which towns and cities should investors look to for high levels of rental demand and future rental growth? Which demographic and economic indicators are best at predicting performance? 

The Dataloft PRS Squared Index monitors key indicators for 50 towns and cities across the UK to help predict performance and identifies four key indicators:

1.     A strong local economy is best judged through local earnings and job growth. The airport towns of Luton and Crawley (for Gatwick) have seen the strongest earnings growth over the last few years.  In Oxford, Kidlington is performing well reflecting the investment in Oxford Parkway station.

2.     Nurturing new businesses can be judged in multiple ways, for example Cambridge, Aberdeen and Aldershot are top of the league for new patents per head of the population. Oxford ranks fifth in UK for gross value-add (GVA) with its top 100 employers accounting for 60% of employment.

3.     Demographic growth data tells us a lot about the scale and strength of the rental market. Is the population growing? How about the number of young professionals, the Holy Grail for rental demand?  University towns do well on this measure, particularly those with strong research facilities that hold onto students well beyond graduation. Cambridge and Oxford rank highest for locations with a young demographic (aged 20 to 44 years), with 32% of Oxford’s population being aged between 18 and 39 yrs.

4.     Affordability is another crunch factor for rental demand. In places where house prices are particularly high relative to earnings, more people will stay longer in the rental market. London is our nation’s primary example of overstretched affordability, but Oxford rivals London, taking over 50% of household gross earnings to meet mortgage payments for the average house price.  At present some 30% of the population live in rented accommodation

Dataloft has devised a 4-part framework for assessing and weighting the complex web of factors that affect rental demand. Oxford performs strongly vs each criteria, confirming Oxford’s long-term attractiveness for landlord investment.  However, the continued strong property price growth and some reduced growth in rents means that rental yields can take time to build, meaning that savvy landlords carefully plan their investments prior to targeting investments to achieve their financial objectives.

House Prices in Oxford rise by more than 18% in the last 18 months

Over the last six weeks, property values in the Oxford City Council area rose by 6.2%, to leave annual price growth also at 6.2%. These rises compare well to the national figures where property prices across the UK saw an uplift of 0.42%, meaning the annual property values across the Country are 8.3% higher.

Looking at the figures for the last 18 months shows Oxford house prices are 18.1% higher, compared to the national average figure of 13.6% higher.  Over the last 18 months, in the Oxford City Council area, the best performing type of property was the semi, which outperformed the area average by 0.78% whilst the worst performing type was the apartment, which under-performed the area average by 1.42%.

That difference doesn’t sound that much, but remember two things, this is only over eighteen months and the ‘spread’ of 2.2% (the difference between the semi at +0.78% and apartments at -1.42%) converts into a few thousand pounds disparity, when you consider the average price paid for a semi-detached property in Oxford itself over the last 12 months was £480,000 and the average price paid for an Oxford apartment was £310,000 over the same time frame.

So how has each property types performed? Over the last 18 months in Oxford:

·       Overall Average:          +18.1%

·       Detached:                      +18.1%

·       Semi Detached:            +19.0%

·       Terraced:                       +18.6%

·       Apartments:                  +16.4%

When I looked at the month-by-month figures for the area, you can quite clearly see there is a slight tempering of the Oxford property market over these last few months. I have mentioned in previous articles that the number of properties on the market in Oxford has increased this summer, something that hasn’t happened since 2008. Greater choice for buyers usually means that top prices won’t be achieved on every Oxford property. You see, some of that growth in Oxford property values throughout early 2016 may have come about because of a surge in house purchase activity, an indirect result of the increase in stamp duty on second homes from April, thus providing a temporary boost to prices.

Overall, I believe that sellers need to pull out the stops to ‘dress’ their house for sale, to ensure that it is presented as strongly as possible in a more competitive market.  To help I recently published an eBook ‘The Ultimate Guide To Sell Your Home – How to sell quicker for more in Oxford. 

How do university cities compare for property investment?

Because of their international reputations for academic excellence and rivalry, Oxford and Cambridge are often compared to each other.  With Oxford university recently confirmed as the top UK and Global University rankings, Oxford currently has the bragging rights, but does that hold true for property investors?

Most property investors invest close to where they live or in a single geographical location that they feel they know well.  Investors become loyal to an area, particularly where their investments have experienced a period of strong performance.  In any area there is an ebb and flow of investment returns, and property investment rewards long-term investment.  As property prices and rental values rise over time, rental yields improve, progressively supplementing capital growth to drive up returns.  The new stamp duty supplement on second homes and next year’s changes to the tax treatment of mortgage interest payments, the costs of new investments are higher for landlords, and should be taken account of when forecasting investment returns.  These changes look most likely to dissuade speculative investors.  Professional investors will forecast returns over 5 and 10 years and will compare those return to alternative investments available to them.  But should they also consider widening their investment geographically and broadening the type of property in which they invest?

At face value Oxford and Cambridge are comparable property markets.  Over all OX (Oxford) post codes the average earnings of people is £22,987 vs. £21,731 over all CB (Cambridge) post codes.  Across the same post codes the average property value in OX post codes is £385,300 and in CB post codes £369,500.  So on face value bragging rights remain with Oxford!  Or do they?  A key measure of a property market is the price to earnings ratio – for owner occupiers the lower the ratio the more affordable the market is.  For an investor landlord, markets are often more attractive where the ratio is high.  That’s because fewer residents can afford to buy a property, increasing demand for private rented homes.  At the aggregate level, Cambridge has a price to earnings ratio of 17 with Oxford at 16.8.  So virtually identical right?

I thought I’d dig a little deeper and narrow the comparison to the central post codes for each City as it is those post codes that most interest buy to let investors and where demand is strongest.  Here the picture diverges.  In Cambridge the average earnings in the central post codes is £30,906 compared to Oxford at £20,076.  That’s 52% higher average earnings in Cambridge.  The average property price in Cambridge is £488,520 vs Oxford at £453,560.  That’s just 8% difference.  So the difference in the price to earnings ratio is substantial with Cambridge being 16.0 vs Oxford at 22.6.  This identifies a stark difference in the affordability of property between the Cities, and goes someway to explaining the continued attractiveness of Oxford to investor landlords.

Over recent years Cambridge has offered investors with a superior return on investment.  As I wrote recently, the latest LendInvest survey shows that Cambridge has offered substantial increases in the capital value of properties over the last 6 years (9% vs 5.8% for Oxford), mirroring the increases that Oxford experienced between 2008 and 2014.  Oxford has continued to offer the better rental yield (5.5% vs 5.1% for Cambridge), but overall Cambridge has offered the better short-term returns 14.1% return on investment vs. 11.3% for Oxford.  However, the affordability ‘gap’ in Oxford points to a better more stable long-term investment proposition.

Increasingly, I am being asked by my landlord clients to advise them on how they should alter their portfolio to optimise their medium and long-term returns in Oxford.  The best portfolios give exposure to the breadth of Oxford demand, including the student market and the growing number of young professionals who want to live and work in the City.  I then work with these clients to assist them to source new properties and divest property as necessary to re-shape their portfolio.  This demonstrates the need for professional investors to properly plan their portfolio and accurately forecast investment returns.