Why recent policy changes won’t stop the growth of renting
Landlords are buying fewer homes. Since the introduction of the 3% Stamp Duty Land Tax (SDLT) surcharge in April 2016, landlords have sold 50,000 more homes than they bought. And now, they make up a smaller part of the market. Investors bought 12.3% of homes in 2017, down from 16.4% in 2015.
Despite landlords selling more homes than they bought, the private rented sector continued to grow in the 12 months after the introduction of the stamp duty surcharge. Between April 2016 and 2017 the number of households renting increased by 164,000, 3% more than 2016. This is one reason why we forecast the sector to continue growing and reach six million households by 2025. By 2022, 20.5% of households will be renting in Great Britain, up from 19.4% today.
This may come as a surprise when investor activity has fallen, but there are greater forces at play. Higher demand for rental accommodation is being driven by longer term changes in demographics and the housing market, many of which aren’t unique to the UK. House prices consistently growing above incomes has meant we’ve seen a steady decline in home ownership and growth in demand for renting.
There are many routes homes can take to the rental market
Often homes that their owners have previously lived in find their way onto the rental market. Couples who decide to move in together, relocate for work or simply keep a home as an investment are common reasons. We tend to see a larger number of these homes move into the rental market when price growth and activity slow in the sales market. In 2017, we estimate that 80,000 homeowners who tried to sell their home decided to put those sales on hold and rent their property out instead.
Many landlords also inherit property. Statistics from the ONS show at least 200,000 homes change ownership through inheritance each year. Many of these homes will be sold or used by their heirs, but recent research from UK Finance shows that 16% of landlords acquired their property without a purchase, which would include inheritance.
In recent years we’ve seen the growth of a new part of the rental market too, the professional build-to-rent market. Generally, blocks of flats purpose-built to rent, owned and operate by large institutional investors, like pension funds. Build-to-rent only accounts for a small part of the market today, but we estimate there are more than 100,000 units in the pipeline and more to come.
These three sources of rental property, which are not dependent on individual landlords purchasing new homes, explain how the sector can expand while landlord purchase numbers are sluggish.
The sector is also anchored by substantial amounts of housing wealth, insulating it from change
There is an incredible amount of wealth tied up in housing. Cash owners outnumber those who need a mortgage, and their numbers have increased for 23 out of the last 25 years.
The same is true for our forecasts for growth of the number of households renting, as most individual landlords have no debt on their rental property. 65% of investor purchases were made with cash in 2017, that’s £21 billion worth of property. This volume of cash has largely been built up through high house price growth over the past 25 years.
The mass of cash in the market alongside increasing institutional interest is acting as an insulation to changes in policy. Creating a firm foundation on which the sector can continue to grow, particularly as the demand for rented homes will continue to rise.
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