Tenant right to sue landlords

The Ministry of Housing, Communities & Local Government yesterday announced that it will support a Private Members Bill proposed by Karen Buck MP, which would enable tenants in England and Wales to take legal action against their landlord if their rental property is in poor condition. Secretary of State for Housing Sajid Javid MP has backed Homes (Fitness for Human Habitation and Liability of Housing Standards), which is expected to have its second reading on Friday. The bill states: that all landlords (both social and private sector) must ensure that their property is fit for human habitation at the beginning of the tenancy and throughout; and where a landlord fails to do so, the tenant has the right to take legal action in the courts for breach of contract on the grounds that the property is unfit for human habitation As part of attempts to drive out rogue landlords and raise property conditions, the government has already introduced a range of powers for local authorities. April 2018 will see both the introduction of a database of rogue landlords and property agents convicted of certain offences and banning orders for the most serious and prolific offenders. I believe that this future legislation is targeting genuine rogue landlords, however, landlords should keep an eye on how this develops.  There is already a discernible trend of tenants being more willing to complain, raising complaints with The Property Ombudsman, even where the causes of their complaint (often damp and mould related) is caused by condensation resulting from their own way of living.  Proactivity is the order of the day - provision of advice to rectify condensation, treat mould and manage ventilation and inspection to monitor its implementation is key.

What do Oxford’s landlords, and tenants need from the budget this week?

As usual there is no shortage of sensational headlines about the importance of the budget for the Government, and for key Departments including Health, Work & Pensions and Defence.  However, for Oxford’s tenants it is the headlines about house building that are the most important, and Oxford’s embattled private landlords it will hope that the budget doesn’t pile further pressure and expense on them.

In Oxford, whilst prices achieved for sold houses has continued to rise (with most recent data confirming a 6% rise in achieved prices over the last 12 months when compared to the prior year), the total number of transactions (the number of houses successfully sold having been put on the market) has fallen by 17% to just 2,702.  It is this statistic that should worry everyone.  I believe that the fall in the number of transactions is in part due to lower levels of house purchase by private landlords, which in turn means that future supply of new rental properties is not growing to keep pace with demand.

Regular readers of my column will know that I have identified a growing level of demand in Oxford for small family homes for rent.  As ‘first-time’ tenants start to plan their families and out-grow their homes, they have a requirement for 3-bedroom properties in areas with nursery places, good transport links and easy access to supermarkets and other shops.  In Oxford, this is currently under-supplied in the rental sector, with many suitable properties instead targeting multiple tenants rather than families.

Without such provision, and with 3 bed properties remaining prohibitively expensive to buy, these young families will either need to look outside of Oxford or look for affordable new build within Oxford.

Over the last 12 months in Oxford just 82 new build properties were sold, that’s just 3% of total transaction in the same period.  Of those new build, 51 were larger detached properties and just 12 the terraced or semi-detached homes which tenants with young families are most likely to target.

This double-whammy - a lack of new investment by Oxford’s private landlords and a dearth of suitable new build - will create a pinch-point for Oxford’s private renters at a time when demand for rental properties has never been higher.  The lack of supply is clearly responsible for house prices remaining buoyant at a time when total transactions have fallen so dramatically.  Oxford is a supply-constrained market, and as a result as landlord costs increase they are likely to result in higher rents.

Following the introduction of a stamp duty surcharge for owners of multiple properties, and the restriction on landlords’ ability to off-set the costs of borrowing when calculating their income tax, the Government has no fewer than 15 ongoing consultations in parliament which could further affect the private rented sector, but not help to deliver more new homes that Oxford so desperately needs.  Instead, they will make landlord compliance more difficult, increase the costs that landlords’ have to bear and, further discourage good ethical landlords from investing further in Oxford at a time when their investment is most needed.

Agents remain a little pessimistic about the lettings market

Around one fifth of all households in England and 14% of households in Scotland and Wales live in private rented accommodation. Using results from the monthly Royal Institute of Chartered Surveyors survey of agents, above I look at how agents view the current state of the rental market. Much like the sales market, the quarterly (seasonally adjusted) figures from the RICS survey suggest a subdued rental market.

Nationally, agents report a marginal increase in tenant demand over the quarter but at its lowest rate for nearly twenty years. Over the same period, landlord instructions declined, with a net balance of agents reporting a fall in listings. The story was reversed in London where a small net balance of agents reported a rise in listings but a fall in tenant demand. Affordability remains a key pressure on the London market.

Agents expect rental growth to be low over the coming months and in London agents continue to expect rents to fall. Back in October 2016, a net balance of 28% of agents expected average rents to rise over the following quarter but by July 2017 the net balance expecting rental growth in the next quarter was just 10% - the lowest level since mid-2009. For the sixth consecutive month agents across London expect prices to fall, with a net balance of agents across both the South East and Scotland also anticipating decreases.

While agents’ expectations are low for the short term, the outlook improves over the longer term. Nationally rents are expected to rise by just under 2% over the next year, but rise to an average of just over 3% per annum by 2022.

In Oxford, this National picture has been mirrored.  Rent increases at tenancy renewal has been muted and well below the 2 to 3% average growth of recent years.  Demand since April 2017 through to the end of July 2017 has been below the level achieved in the same period last year.  However, August has been strong month, with demand strong and the number of relets returning to the level experienced in 2016.  Overall, the market has become more ‘last minute’ with applicants looking to move in to properties within 4 weeks of making an offer, which is causing some landlords to get rather nervous as it is a change on the more usual 6 to 8 weeks between offer and move-in.

Whilst demand in August has been good, rent increases continue to be subdued.  There are signs that August demand will push in to September, further indicating that prospective tenants have waitd as long as they dare before committing to a new tenancy.

Is the Oxford Property Market stalling?

Everyday thousands of column inches are being used to make comment on the UK housing market.  As is usually the case, the headlines are overwhelmingly full of foreboding – after all good news doesn’t sell!  But, what is the true picture for Oxford?

Oxford remains the UK’s least affordable city for residents to buy a house, with an average house costing over 16 times average income.  So Oxford is prime for the building of new homes right?  Well, no!  Over the last 3-month period new build homes in Oxford accounted for just £1.27m of £217m value of homes sold in the City – that’s just over half of 1%!  And, therein lies the real challenge for Oxford, which now has 45,000 people commuting daily many traveling because they can’t afford to live closer to their workplace in the City.  This in turn is causing road congestion, rail congestion and long bus journeys.  It is driving a new growth segment in the Oxford rented sector – that being professional Houses in Multiple Occupation (HMO) – shared houses for young professionals who can not afford to buy or rent their own property, but no longer want to live like they did as a student.

So, house sales are booming then?  Well, no!  The table below shows data for key Oxford post codes, over the last 12 months, compared with the 12 months previously.  The analysis shows that whilst prices have continued to rise for the most part, transaction volumes a down significantly, suggesting that more people are staying put, with fewer people being able to buy a home in the City.  To date, prices have held-up strongly, because the reduced supply is balancing-out any reduced demand for new homes.  However, in April Hometrack UK City index reported that Oxford had slipped into negative house price growth, with the May 2017 report just tipping into positive territory at 1.6% year on year (YoY) growth vs. 8.2% YoY growth in May 2016.

Postcode/Town	Average value (£)	% change in value	Number of transactions	% change in transactions
OX1	460,407	12%	214	-48%
OX2	538,814	2%	490	-29%
OX3	406,212	7%	372	-37%
OX4	345,006	6%	578	-27%
OX5	344,416	-1%	366	-9%
Bicester	329,745	6%	1,077	-13%
Banbury	292,016	7%	2,756	-16%
Abingdon	328,638	6%	3,873	33%
South East England	307,611	9%	30,325	-51%

An important part of the Oxford property market is accommodation for the City’s 30,000 students.  With Universities announcing increases in tuition fees, and a net reduction of 4% in student applications with applications from the EU down over 5%, the City may experience a surplus of student accommodation, reversing the under-supply of recent years.  Together with the ban on fees charged to tenants by landlords and their agents which will be introduced by the Government, the City’s student landlords are certain to experience greater competition when attracting tenants, and an increase in costs.  The best way for such landlords to compete will be to invest in their properties offering better fixtures, fittings and décor, reflecting feedback from their agents about what students demand.  For many, it may be more sensible to re-fit and re-configure their property to appeal to the growing market for professional sharers mentioned above.  This sector demand en-suite facilities, large double bedrooms and well fitted, large communal kitchens.

In summary, Oxford prices have held-up to date, but show signs of weakening.  Oxford remains top of the charts for unaffordability, and the continued lack of new-build affordable homes is pushing demand to outlying towns and villages.  Demand for rented accommodation is changing, and the City is suffering reduced demand from foreign nationals wishing to live and study in the City.

Who will look after Oxford tenants’ interests after the tenant fee ban?

As is well known to regular readers, I am opposed to the government’s plans to interfere in the private rented sector by introducing a ban on fees charged by letting agents to prospective tenants.  Earlier this week, I attended the Association of Residential Letting Agents (ARLA) annual conference.  During a moderated debate, Baroness Hayter of Kentish Town (a Labour peer) expressed the view that it was inappropriate for letting agents to act for both their landlord clients and their prospective tenants.  She made comparison with the legal profession to illustrate her point.

When challenged by the question who will act for the tenants, the Baroness stated that they could act for themselves.  A response, which demonstrated how removed she has become from the realities of the private rented sector.

In Oxford, like many other University cities, tenants for private rented homes are drawn from a wide spectrum of socio-economic background, nationality, age and, experience.  Many are new to renting, and don’t properly understand the law, their obligations, the landlord’s obligations and how to ensure that they minimise the likelihood of deposit deductions at the end of their tenancy through their actions throughout the tenancy period.  Many have limited financial means, and many have guarantors who ultimately bear the financial responsibility for their tenancy.  Many guarantors do not understand their own risk and how that risk can be mitigated by the tenant’s action during a tenancy.

Good letting agents recognise that the more they help prospective and current tenants to recognise their obligations to look after the property, being attentive to routine matters such as ventilation, cleaning, refuse management and general condition, the more they are acting to protect themselves financially.  This advice is reinforced during a tenancy via regular property inspections identifying actions that if taken now, to avoid them worsening and resulting in damage. Such agents also have an obligation to advise prospective tenants prior to the start of their tenancy to ensure that they request any specific furniture or provision they require to be made by the landlord as a condition of signing an assured short-term tenancy agreement, and to ensure that the landlord specifically commits to such provision prior to them signing.  Good agents will assist tenants to understand the deposit protection and deposit return process, detailing the factors that can result in deposit retentions, so tenants are equipped with the facts they need before they are committed to a contract.  All landlords and their agent are obliged to ensure prospective tenants have a right to rent, checking their legal status to reside in the UK and ability to enter into a contract.  And, good agents insist that a tenant can afford the required rent requiring their credit, income and employment status to be confirmed.

So, are these agent activities purely to benefit the landlord?  Or, do they benefit both parties?  It is clear to me that that an agent’s services are of material benefit for both landlord and tenant.  For some tenants, particularly foreign nationals visiting and renting in the UK for the first time, young first-time renters and young families needing to stretch themselves to accommodate growing families, the agent’s services can be of particular value.

So, if as Baroness Hayter suggests, letting agents should act purely for the landlord, who will act for the tenant?  Will tenants see the value to taking separate advice?  Will they be able to afford to pay for 3^rd party advice? And, will agent services change subtly over-time, becoming less consensual and a little more adversarial?

Will more landlords choose to skimp on affordability checks due to the cost transferring to them?  If yes, it seems likely that both landlords and tenants will suffer as more tenants over-stretch themselves and struggle to pay rent.

Of course, there is no firm answer to these questions, but my own experience suggests that prospective tenants will not pay for advice from a 3^rd party.  Whilst good landlords and their agents will recognise the value of the services provided to tenants, some will no longer recognise the importance of tenants understanding their obligations and being well-informed of the risks involved prior to entering a tenancy agreement.  If I am correct, there will be an increase in arrears, repossessions, and deposit disputes/retentions, which will far outweigh the financial impact of fees for tenants.

Is this the best time-ever to be a tenant?

The government’s English Housing Survey shows that the reality of the private rental sector is far from the one that some (including many in parliament) portray i.e. one of disgruntled tenants in conflict with greedy uncaring letting agents and landlords.

The National Landlords Association, analysed the EHS’s latest findings, showing that in 2015-16 in England the private rented sector accounted for 4.5m or 20 per cent of households; predominantly occupied by people aged between 25 and 34. 

Comparison to 10 years ago is informative. In 2005-06, 24 per cent of those aged 25 to 34 were private tenants, whereas by 2015-16 this had increased to 46 per cent, confirming the importance of the private rented sector as part of an integrated housing strategy. The NLA says that over the same period, the proportion of 25 to 34 year olds buying with a mortgage decreased from 53 per cent to 35 per cent.  It is believed that this is a combination of tougher requirements for deposits and affordability criteria implemented by lenders and, a shift in consumer preference towards the flexibility of renting.

Tenancies are also longer than many believe, according to the EHS data. The survey finds the current average time a tenant lives in their home to be over four years.   

Perhaps most surprising of all is that as a proportion of household income rent has fallen in the past 12 months; on average households spent 35 per cent of their total income on rent.  

Energy efficiency is also continuing to improve.  The share of rental properties in the F and G efficiency bands are down from 10.6 per cent in 2013-14, to just 6.3 per cent in 2015-16. 

Within the context of these figures, the best way to speed up improvements in the private rental sector will not be through more legislation and demonising landlords, but through funding the enforcement of existing laws and recognition in the tax system of the vital role landlords play.

Based on this evidence, government policy to hit landlords financially is misguided and unnecessary.  The move to ban fees paid by tenants to letting agents is not designed to reduce tenant expenditure (as that is already reducing as a proportion of income), but instead is purely a populist policy to gain votes.

Why a ban on tenant fees is the last thing Oxford’s tenants need

Let’s be honest, Oxford is an expensive place to rent.  In fact, beyond the very high cost parts of London it has the largest gap between average income and house prices in the UK.  With this in mind the Chancellors recent announcement on tenant fees would surely be welcomed as good news right? Maybe not when the implications are truly considered.

To pass a credit reference check, a tenant must be able to prove that they can afford the rent which is determined based on their annual income. Typically, this is calculated by a tenant’s annual income being 30 times the monthly rent i.e. for a rent of £1,000 per calendar month, the tenants’ will need to prove that their combined income is at least £30,000 per annum.

Whilst the actual multiple required might vary between landlords, the basic principle above is the ‘acid test’ for affordability.  If, the tenants are below the required level of income, some landlords will allow them to pay a proportion of the annual rent in advance to ensure that subsequent monthly payments fall within the affordability threshold.

At Martin & Co Oxford, an average property has a rent of £1,196 per calendar month.  Using the measure above that requires the tenants to have a joint income of £35,880 per annum.  At the time of writing the average income in Oxford is around £26,500 meaning that most couples require two incomes to rent an average Oxford home making it difficult for them to afford.

For tenants, is it preferable to pay a fee of £300 at the start of their tenancy or for the rent to rise by 5% per annum?  Already rents in Oxford rise on average by 3% per annum according to trend data from the last 5 years.  So, in 2017 the average rent of £1,196 per calendar month mentioned above can be expected to rise by £36 per month.  Should rents rise by a further 2%, as many predict will happen as a result of the ban on tenant fees, that increases to £60 per month or £720 in total i.e. £288 per annum above trend.  So, at face value, tenants will be slightly better-off – they save £300 in tenant fees, and pay £288 more in rent, meaning they are £12 to the good.  But is that preferable?  To qualify as being able to afford a property at the new higher rent those same tenants will need to earn an additional £1,800 per annum - an increase of 5% yet incomes in Oxford are rising at nearer 2% per annum.  So, anything that results in the affordability gap widening further risks tenants failing to qualify for new tenancies, or having to find much larger lump sums in advanced rental payments to make-up any income shortfall.

The current model where a tenant pays £300 at the start of their tenancy is preferable for many as it is a sum which they can afford, and it falls outside of the assessment of their ability to afford the rent during the term of the tenancy.  In the example above where income increases by 2% and rent increases by 5%, they will fall short by £1,082 per annum.  In this situation they will either be deemed unable to afford the property, or be required to pay the shortfall up-front, or be required to find someone prepared to stand as a guarantor.  When considered in this way, for many tenants a known and defined up-front fee is always preferable.

Our concern as one of the main agents in Oxford is the affect that the ban will have on both tenants and landlords. We want landlords to continue to be able to invest in property providing homes for people when Oxford is most in need, and we want tenants to be able to be successful in applying for properties that they want to make their home.