While some speculate that the cost-of-living crisis could see an upturn in tenant arrears, Richard Rowntree, Paragon's Managing Director for Mortgages, explains how the health of the sector is underpinned by strong demand, something that is likely to remain amidst current economic conditions.

The colder, longer, darker nights that herald the onset of Autumn match the mood of the nation as our economic worries grow. Businesses and consumers alike are facing challenging months ahead as the reality of energy costs and other inflationary pressures bite.

Like many sectors of the economy, landlords will face some pressures. Landlords are experiencing record levels of tenant demand, but it’s inevitable that tenant arrears will increase. Operating costs, such as maintenance, are also increasing.

However, I feel that the private rented sector (PRS) will again show its resilience. Yes, the headwinds are there but the PRS has always demonstrated counter-cyclical and defensive qualities; in times of economic downturn, the sector has historically performed well.  

We know that people largely prioritise paying for housing costs and nice-to-have expenses, such as TV subscriptions, takeaways and holidays abroad, are the more likely casualties of tightening purse strings.

Much of the media coverage on the PRS has focused on 20%+ hikes in rents in certain markets, but it’s important to remember that these indices capture new tenancies and that the overall private rental inflation recorded by the Government is a more modest 3%.

Landlords, on the whole, try to work with their tenants to keep them in their home. The record level of tenancies being renewed – the big stay put as Propertymark called it – is testimony to this, plus our research shows evidence of landlords working with tenants who may experience financial difficulties.   

Even if we do see an increase in tenant arrears, lessons learned from the Global Financial Crisis mean that mortgage underwriting is today more stringent, and landlords are not as highly geared as the late noughties.

Analysis from Moneyfacts revealed how mortgage rates have risen more steeply in the residential market compared to buy-to-let following the Bank of England’s successive increases to the base rate of interest. 

This is because landlords present less risk to lenders owing to the ability of their properties to provide income. This is especially true of the professional end of the market where larger portfolios mean that if one tenant falls behind with their rent, other income is usually enough to cover the shortfall.

Our most recent research shows that landlord profitability has remained stable. Even though the research shows that landlord confidence has faltered, this is primarily in the outlook for the UK economy rather than the prospects for landlords’ own lettings businesses.

I think central to this outlook is strong demand for privately rented homes. Even though property purchase prices have started to cool, this is following the sharpest increases in over a decade. When we also consider that the pressure on household finances comes at a time when the cost of borrowing continues to rise, particularly in the residential space, we see that the ability to get on the property ladder will be hindered for many.

Many indices, including our own, show tenant demand at significantly higher levels than in recent years at a time when supply of rental homes is constrained. It is estimated that around 10% of landlords have left the sector in recent years, with legislative reforms and changes to Energy Performance Certificate requirements potentially exacerbating this situation.

Fewer landlords reduce choice for tenants and lower levels of supply amidst high demand will only serve to further increase rents, so it is our responsibility to do what we can to protect our customers.

Alongside campaigning for regulation that protects landlords as well as tenants, one way we can aid our customers is by minimising the impact of ‘payment shock’.

Increases in the cost of funding for lenders has resulted in rate rises and means that customers reverting on to SVRs will see higher monthly repayments compared to those of their previous fixed rate mortgage. 

We’ve been proactive in trying to minimise this, advising customers to speak to their brokers about switching to a new product, something we now allow up to six months ahead of their fixed rate mortgage maturing. Brokers can take a similar approach and by contacting clients and discussing their options well in advance can help to save them money while generating business.

Richard Rowntree
Managing Director for Mortgages

This article first appeared in Mortgage Introducer.