Why buy-to-let lending is a force for good in private rented sector standards
Since the Government updated its Decent Homes Standard in 2006, we’ve seen significant advances made in property standards. Paragon Bank Managing Director of Mortgages Richard Rowntree comments on how buy-to-let lending has contributed to this improvement.
In the UK, great strides have been made in improving the standard of homes over the past two decades. This positive change has been evident across all tenures and the Private Rented Sector (PRS) has certainly contributed.
While we acknowledge that more needs to be done and support policy that leads to further improvement through an accountable PRS, I feel we should also recognise the commitment made by many landlords to providing tenants with good quality homes.
Our new report, Driving standards in the private rented sector, documents some of the improvements made over this period, leading to newer, larger and warmer homes in the sector.
You can download the report here:
In 2006, the year the Government’s Decent Homes Standard was updated, less than half of PRS homes were classed as decent. This now stands at around three quarters.
Despite this endeavour, the PRS has been outperformed by the owner occupied and social sectors when we look at non-decent properties by absolute numbers.
Growth in decent homes
At the last count, non-decent PRS homes numbered 1.01 million after falling from 1.21 million since 2006. During the same period, the owner-occupied sector has seen the number of non-decent homes decrease from 5.31 million to 2.54 million, while the number of social sector non-decent homes is just over half a million after a reduction from 1.13 million.
There are many motivators to making improvements to property. Homeowners can enhance the space in which they live and, discounting some of the weird and wonderful modifications that appeal to very few when selling the home down the line, a welcome side-effect is adding value to the property.
For buy-to-let landlords who own legacy properties, this incentive is much less likely to exist and we feel this could be a contributor to the stagnation of some PRS stock.
The difference in number and proportion of decent stock suggests that the improving standard of rented homes was driven by a rise in property brought into the sector – a 31% increase since 2009 brought the total to 4.7 million properties by 2019 – and this has helped to diminish the percentage of non-decent stock.
It should also be noted that these landlords, who are active in the market, often will invest in their existing property too, annually spending a combined £4.7 billion on maintenance and improvements, according to data from insurance firm LV.
Whether adding new properties to the sector or enhancing existing stock, buy-to-let lending has been a force for good and the improvements in standards seen over the last 15 years correspond with a significant increase in lending between 2006 and 2019 – the number of outstanding buy-to-let mortgages has risen from 835,000 to 1.9 million.
Overall, 1.3 million buy-to-let loans for new house purchase have been written since 2006, but it’s important to consider overall lending because failing to do so could discount significant numbers of landlords who remortgage existing loans or take out a further advance to raise funds for renovations to their rental properties.
In addition, as well as financing improvements made to homes already in the PRS, lenders can be at the forefront of the quality control of property being brought into the sector, identifying issues such as insufficient space, poor condition and safety concerns through stringent underwriting and property assessment.
And landlords will be increasingly turning to lenders for support in their role in solving the sustainability puzzle too.
Energy efficiency improving
Unlike the number of decent homes, the PRS is ahead of the owner-occupied sector in terms of the energy efficiency of its stock (both are behind the social sector), as measured by the Standard Assessment Procedure (SAP) rating. Despite this, it seems that privately rented property is the priority in the Government’s ambitious target of making the UK’s housing stock carbon neutral by 2050.
Under Government proposals, all new property being let for new tenancies in the PRS must have an energy performance rating of at least C by 1 April 2025. By 2028, that applies to all let property.
Like many sectors, financial services needs to identify its response to what is now being considered by some as a climate emergency. Although this will take many forms, we can help by developing products that incentivise investment in sustainable housing, either through the purchase of homes that are built to more energy efficient specifications or retrofitting of things like insulation.
This shows that although it may appear from the outside that the responsibility for improving standards of PRS homes sits squarely on the shoulders of landlords, lenders have played an important part so far and will continue to do so as demand for good quality housing is matched by a need for society to minimise our negative impact on the environment.