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.

Oxford Buy-to-Let Return / Yields 3% to 7.1% a year

The mind-set and tactics you employ to buy your first Oxford buy to let property needs to be different to the tactics and methodology of buying a home for yourself to live in. The main difference is when purchasing your own property, you may well pay a little more to get the home you (and your family) want. When buying for your own use, you will often buy at the top end of your budget.

With a buy to let property, your goal is a higher rental return – a higher price doesn’t always equate to higher monthly returns – in fact quite the opposite. Less expensive Oxford properties can bring in bigger monthly returns. Most landlords use the phrase ‘yield’ instead of monthly return. To calculate the gross yield on a buy to let property one basically takes the monthly rent, multiplies it by 12 to get the annual rent and then divides it by the value of the property.

If an Oxford buy to let landlord has the decision of two properties that command the same amount of monthly rent, the landlord can increase their rental yield by selecting the lower priced property.

To give you an idea of the sort of returns in Oxford...

Now of course these are averages but they provide a fair representation of the gross yields you can expect in the Oxford area.

With the total amount of buy to let mortgages amounting to £199,310,614,000 in the country, landlords need to be aware of the investment performance of their property, especially in this era of tax increases and tax relief reductions.

However, before everyone in Oxford starts selling their upmarket properties and buying cheap ones, yield isn’t the only factor to consider when deciding on which Oxford buy to let property to buy.  Void periods (i.e. the time when there isn’t a tenant in the property between tenancies) are an important factor and those properties at the cheaper end of the rental spectrum can suffer higher void periods.  Apartments can also have service charges and ground rents that aren’t accounted for in the gross yields. Landlords also make money if the value of the property goes up. In Oxford, because property is expensive, landlords should consider the total return on investment, considering both the net yield (the gross yield less other expenses e.g. service charges) and the increase in property values.

In Oxford, for example, over the last 20 years, the average price paid for the four different types of Oxford property have changed as follows:

·       Oxford Detached Properties have increased in value by 269.5%  

·       Oxford Semi-Detached Properties have increased in value by 284.2%

·       Oxford Terraced Properties have increased in value by 274.3% 

·       Oxford Apartments have increased in value by 261.8%

It is very much a balancing act of yield, capital growth and void periods when buying in Oxford. Every landlord’s investment strategy is unique to them. If you would like a fresh pair of eyes to look at your portfolio, be you a private landlord that doesn’t use a letting agent or a landlord that uses one of my competitors – then feel free to drop in and let’s have a chat. What have you got to lose? 30 minutes and my tea making skills are legendary!

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.

Oxford rent rises predicted after brief lull

Rents in Oxford for new tenancies fell by 0.4% in the last 12 months (i.e. not existing tenants experiencing rental increases from their existing landlord). When we compare that current rate with the historical rental inflation in Oxford, an interesting pattern emerges:

·       2016 - Rental Inflation in Oxford was 5.1%

·       2015 - Rental Inflation in Oxford was 9.4%

·       2014 - Rental Inflation in Oxford was 3.2%

The reason behind this change depends on which side of the demand/supply equation you are looking from. On the demand side (from the tenants point of view) there is the uncertainty of Brexit and the fact that salaries are not keeping up with inflation for the first time in three years. Critically, this means tenants have less disposable income to pay their rent. As an aside, it is interesting to note that nationally, rent accounts for 29% of a tenant’s take home pay (Denton House).

On the supply side of the equation (landlords point of view) Brexit also creates uncertainty. However, the biggest issue was a massive upsurge of new rental properties coming on to the market in late 2016, caused by George Osborne’s new 3% stamp duty tax for landlords in the first part of 2016. This meant a lot of new rental properties were ‘dropped’ on to the rental market all at the same time. The greater choice of rental properties for tenants curtailed rental growth/inflation. A slight softening of Oxford property prices has compounded this.  Figures from The Bank of England suggested that first time buyers rose over the last 12 months as some were more inclined to buy instead of rent. Together, these factors played a part in the ongoing moderation of rental growth.

The lead up to the General Election in May didn’t help: after all people don’t like doubt and uncertainty.  Whether it be ‘hard’ or ‘soft’ Brexit negotiations (and with the Election result the Tories might have to be ‘softer’ on those negotiations) the simple fact is, we aren’t building enough properties for us to live in. Both in Oxford, the South East and the wider UK, long-term population trends imply that rents will soon once again be growing faster than inflation again. Look at the projections by the Office of National Statistics.

Tenants will still require a vibrant and growing rental sector to deliver them housing options in a timely manner. As the population grows in Oxford, any restriction to the supply of rental properties (brought about by poor returns for landlords) cannot be in the long-term best interest of tenants. Simply put, rents must go up!  But, with rents already accounting for 29% of a tenants’ disposable income, the ability for most tenants to absorb a rent increase does exist.  It is for this reason, that I believe Government policy which is increasing costs for landlords (removal of mortgage interest rate relief; stamp duty surcharge; and, ban on fees charged to tenants) is short-sighted and poorly considered.

Average Rents Paid by Tenants in Oxford rise to £2,490 per month

Back in the Spring, there was a surge in Oxford landlords buying buy to let property in Oxford as they tried to beat George Osborne’s new stamp duty changes which kicked in on the 1^st April 2016. To give you an idea of the sort of numbers we are talking about, below are the property statistics for sales either side of the deadline in OX2.

Jan 2016 – 42 properties sold

Feb 2016 – 27 properties sold

March 2016 – 91 properties sold

April 2016 – 19 properties sold

May 2016 – 23 properties sold

Normally, the number of sales in the Spring months is very similar, irrespective of the month. However, as one can see, this year was a completely different picture as landlords moved their purchases forward to beat the stamp duty increase. You would think that even with a basic knowledge of supply and demand economics, rents would be affected in a downwards direction?

However, there appears to be no apparent effect on the levels of rent being asked in Oxford - and more importantly achieved - and this direction of rents is not likely to reverse any time soon, particularly as legislation planned for 2017 might reduce rental stock and push property values higher. The decline of buy to let mortgage interest tax relief will make some properties lossmaking, forcing landlords to pass on costs to tenants in the form of higher rents just to stay afloat. Even those who can still operate may be deterred from making further investments, limiting the growth in available rental stock at a time of severe property shortage.

But it’s not all bad news for tenants. Whilst average rents in Oxford since 2005 have increased by 22.6%, inflation has been 38.5% over the same time frame, meaning Oxford tenants are 15.9% better off in real terms when it comes to their rent (which is a sizeable chunk of most people’s monthly household budgets)

Year	Average Rent in Oxford per month
2005	2030
2006	2077
2007	2123
2008	2193
2009	2227
2010	2196
2011	2249
2012	2300
2013	2334
2014	2369
2015	2421
2016	2490

I found it particularly interesting looking at the rent rises over the last five years in Oxford, as it was five years ago we started to see the very early green shoots of growth of the Oxford economy.  Following the Credit crunch (2011), rents in Oxford have risen by an average of 2.4% a year – fascinating don’t you think?

The view I am trying to portray is that while renting is often portrayed as the unfavorable alternative to home ownership, many young Oxford professionals like renting as it gives them flexibility in their life. Overall, tenants have had a good deal with below inflation increases in rents over recent years. As Government policy targets landlords financially, it is likely that there will be a period of higher rent increases across Oxford, as landlords off-set the additional costs being imposed on them.  The data suggests a small rebalancing between tenants and landlords is overdue, and can be accommodated without driving rent above the medium term inflation trend.