Can we remove the barriers to longer-term tenancies?
Published: 22 January 2013 | Author: Bernard Clarke
Recent comments in a speech by Labour leader Ed Miliband on aspirations to improve the long-term security of people renting in the private sector raise important issues on which we have been working closely with landlord and tenant groups.
In a wide-ranging speech to the Fabian Society earlier this month, the Labour leader referred briefly to the desires of some tenants for greater certainty about their long-term living arrangements. "We will seek to give greater security to families who rent and remove the barriers that stand in the way of longer-term tenancies," Mr Miliband said.
This article looks at how such an aspiration may affect lenders. We favour a policy approach that delivers an adequate supply of affordable housing in a range of tenures that meets the needs of consumers. Lenders fund housing in the social and private rented sectors, as well as helping to finance home-ownership, so this debate is of direct relevance to us.
First, we recognise that, over the last decade, private renting has played an increasingly important role in the housing market, providing flexibility and choice for households either unable to access home-ownership or preferring to rent. The sector has grown strongly, with the proportion of households in the sector rising from 10% in 2000 to 17% 11 years later. Over the same period, the proportion of people living in owner-occupation has declined, while access to social housing has also become more difficult.
UK stock of dwellings by tenure, 000s
Buy-to-let mortgages have made a significant contribution to the growth of the private rented sector. Fifteen years or so after their launch in the late 1990s, there are now almost 1.4 million buy-to-let loans, worth £164 billion. Individual landlords have done much to increase the quality of housing in the private rented sector.
The views of campaigning bodies and political parties...
In recent months, a number of campaigning bodies and political parties have raised questions about whether the typical tenancies of six to 12 months currently offered to most of those renting in the private sector provide the security and stability that some tenants would like.
Last year, we were encouraged that the housing charity Shelter’s report on the subject, A better deal - towards more stable private renting focused on the need for better incentives for landlords to help bring about a change in attitudes.
We accept that the implications of longer-term tenancies need to be explored but any resulting changes must reflect the needs of landlords and the lenders who fund them, as well as those tenants who would opt for a longer-term tenancy. And it should be remembered that many tenants will continue to prefer a shorter tenancy of six or 12 months because it better suits their needs.
We are working to understand the barriers to longer-term tenancies…change can only come if everyone’s interests are protected
Lenders are involved in this debate because the typical terms and conditions of buy-to-let mortgages permit landlords to offer assured shorthold tenancies of between six and 12 months. But, obviously, they do not require a subsequent change in tenant: these requirements do not impose any restrictions on the period of time a particular tenant may rent a property. A study published last summer by the National Landlords Association (NLA) showed that more than half (54%) of tenancies last between two and three years, while in almost one-third of cases the tenant lived in a property for more than four years. So, the inclusion of this condition does not of itself force up turnover in the rented sector.
One reason why this term appears in mortgage contracts is because there is an apparent lack of demand for longer-term tenancies from landlords.
However, despite the absence of demand from landlords, we have been working with members and other representative bodies to understand what steps are needed to present private tenants with greater security, if they want it (while not eroding the flexibility that makes private renting attractive to others).
Alongside individual lenders, we are working to understand the practical barriers that have traditionally prevented longer-term tenancies from becoming more widely available. Any change will only come if it can be done in a way that protects everyone’s interests.
One of the most important issues for lenders and landlords is the impact of rent arrears when a tenant has a longer-term agreement. An NLA study last summer found that, in the preceding 12 months, almost half of landlords (49%) had experienced missed payments by tenants, which is perhaps not surprising at a time when household budgets are under pressure.
Were longer-term tenancies to lead to the build-up of higher mortgage arrears over time, they would become more difficult to manage, not least because a lender’s ability to obtain vacant possession would be impeded. Part of the solution may be provided by break clauses, over and above what is standard in an assured shorthold tenancy of six or 12 months. There will also have to be different terms and conditions in these cases. For longer-term tenancies to be attractive to all parties, lenders, landlords and tenants would also need to investigate fair and transparent ways of reviewing rent while the agreement runs its course.
The lending industry acknowledges the aspirations for longer-term tenancies and will continue to work with landlords, tenants and policymakers in determining how they could be made more widely available. Lenders may take the view, for example, that longer-term tenancies might be an option for experienced buy-to-let landlords. But let us not assume that these will instantly become the norm: for many groups of private tenants, the shorter and more flexible terms associated with existing six- and 12-month tenancies are likely to remain the preferred option.