is Buy-To-Let Ethical?

​The Changing Landscape of Royal Tunbridge Wells’ Housing Market:

Exploring the Ethical Dimensions of Buy-to-Let Investment.

 The town of Tunbridge Wells has witnessed a profound transformation in its housing landscape over the last few years, and the surge in private renting has led to significant debates about the morality of the buy-to-let market. 

Let us look at the current statistics compared to 40 years ago to show the seismic shift. Looking at our local authority area of Tunbridge Wells Council. 

9,268 Tunbridge Wells Households are in the Private Rented sector now, representing 19.22% of all homes in our local authority area. 

Interesting when we compare this to the 1981 numbers for Tunbridge Wells. 

In 1981, 5,762 Tunbridge Wells Households were in the Private Rented Sector, representing 16.59% of all homes in the local authority area.

This has started prompting discussions about the role of the Baby Boomer Generation in exacerbating the housing crisis and the ethical implications of the buy-to-let phenomenon. 

This article delves into the factors contributing to Tunbridge Wells' housing challenges, examines the generational economic imbalance, explores the history of housing policy, dissects the impact of financial deregulation, and evaluates the moral questions surrounding the buy-to-let market. 

Generational Imbalance and Economic Disparities

The housing crisis in Tunbridge Wells has ignited a debate over whether the Baby Boomer Generation, aged between 59to 76, bears responsibility for the present situation. Born after World War II, this generation experienced unparalleled economic growth and prosperity during the 1970s and 1980s, benefiting from improved education, government subsidies, rising property prices, and technological advancements. However, critics argue that the success of Baby Boomers has contributed to a generational economic imbalance, leaving their children struggling with soaring rents and burdensome mortgages.

A Glimpse into the Past of the Tunbridge Wells Property Market

To comprehend Tunbridge Wells' current housing challenges, one must trace the key events that shaped its housing market. The mass construction of council housing during the 1950s and 60s, followed by the selloff of many council houses in the 1980s under Margaret Thatcher's Government, is blamed by many for their role in altering the market dynamics.  

To give you an idea of the number involved …

7,029 Tunbridge Wells Households are now in the Social Housing sector (Council Houses & Housing Association), representing 14.58% of all homes in our local authority area.

Interesting when we compare this to the 1981 numbers for Tunbridge Wells. 

In 1981, 8,163 Tunbridge Wells Households were in the Social Housing sector, representing 23.51% of all homes in ourlocal authority area.

As you can see, the numbers are not seismically different, are they? So, what are the other issues that caused this? 

The early 1990s witnessed skyrocketing interest rates (15% at one point), leading to widespread repossessions in Tunbridge Wells (and the UK as a whole). This was one of the catalysts that contributed to the underlying housing crisis of today.

Financial Deregulation and Buy-to-Let Investments

Another catalyst was risky lending practices in the UK and USA. In the early 2000s, UK Banks started introducing 100% mortgages and even riskier lending practices, with Northern Rock lending 125% mortgages (and we know what happened to them). 

All this lending was built on the back of ‘derivative swaps’ between all the world's banks (they would sell the debts (i.e. mortgages) between each other to make money). 

The problem was that many of these derivatives contained lots of safe, low-risk low-profit mortgages and some high-risk profitable ‘sub-prime’ USA mortgages. This had been caused by a change in the law in the USA in the mid-1990s with the easing of lending rules in the US through the Community Reinvestment Act in 1995, which allowed for sub-prime lending.

So, when the money markets started getting cold feet in 2007 because the banks didn’t know if their derivatives had a small or large number of high-risk sub-prime mortgages, the banks stopped lending to each other (because they were worried they wouldn’t be paid back as many of these sub-prime mortgages were defaulting in 2006/7 and being repossessed).

This had a ripple effect on the UK's housing market. The UK banks had much smaller funds to lend out (because they could borrow money from the money markets for the reasons above), so they stopped lending to high-risk UK borrowers (i.e. 95% first-time buyers), whilst at the same time they increased lending to lower-risk landlords with buy-to-let mortgages with a 25% deposit and a stable income.

Millennials and the Buy-to-Let Controversy 

The millennial generation, born between the mid-1980s and late 1990s, has been particularly affected by the surge in buy-to-let investments. These young adults, shaped by the digital revolution, need help entering the property market due to competition with buy-to-let landlords. Critics often portray Tunbridge Wells landlords as greedy individuals capitalising on the housing crisis, exacerbating the sense of social despair among millennials. However, as I wrote in the Tunbridge Wells property blog a few weeks ago, 64% of Tunbridge Wells landlords are not increasing their rents. (If you want to read that article – click here 

Role of Property Developers and Housing Shortage

In response to the growing housing demand, property investors have stepped up, acquiring dilapidated properties and repurposing them into habitable homes. This has provided a partial solution to the shortage of available housing, particularly for those who rely on rental properties provided by landlords and property developers. 

Ethical Dimensions of Buy-to-Let Investments

The ethical considerations surrounding the Tunbridge Wellsbuy-to-let market are complex and multifaceted. On the one hand, Tunbridge Wells buy-to-let landlords have filled a void in the Tunbridge Wells housing market, providing much-needed shelter to many Tunbridge Wells tenants. On the other hand, concerns arise regarding exploitative practices by a handful of rogue landlords and the potential commodification of a basic human need – shelter.

The bottom line is, as the population of Tunbridge Wells grows, there needs to be more properties being built for everyone to have a decent roof over their head. The rogue landlords of Tunbridge Wells need to be put out of business. Finally, tenants should expect a more regulated rental market (which they have achieved over the last few years), with greater security for tenants, where they can rely on good decent Tunbridge Wells landlords providing high standards for their safe and modernised home. 

Addressing the Crisis and Moving Forward

To alleviate Tunbridge Wells' housing crisis, a multifaceted approach is necessary. Fairer regulations for landlords, enhanced tenant protections, and incentivising property development could contribute to a more balanced housing market. Exploring innovative models from European countries, where renting is more prevalent, could provide insights into creating a system that ensures decent and affordable housing.

Final Thoughts

Tunbridge Wells' housing market has undergone substantial changes over the years, with the rise of private renting and the proliferation of buy-to-let investments playing a pivotal role. The generational economic imbalance and ethical concerns associated with the buy-to-let market have sparked passionate debates about the responsibility of different generations and the moral implications of housing as an investment. 

As Tunbridge Wells continues to grapple with housing challenges, collaborative efforts between policymakers in local and central Government, developers, Tunbridge Wells landlords, and tenants are essential to creating a housing landscape that is fair, ethical, and accessible to all.

So, my final question is to you, the reader of this article. 

Only you can decide if buy-to-let is immoral, but let me ask this question first.

If these Tunbridge Wells buy-to-let landlords had not taken up the slack and provided 3,506 extra homes in the last 40 years for people in the area, where would these tenants be living now?

During the height of council house building in the 1950s, UK local authorities were building, on average, around 147,000 council houses a year. In the last decade, UK local authorities have only averaged building around 1,400 council homes a year.

It would cost Tunbridge Wells Council £445.3m to build all those 3,506 buy-to-let homes today that local landlords have funded themselves 

(a figure that assumes the council build on land they own).

That building sum would take up 100% of our local authority's budget for the next eight to ten years.

All this conjures up many questions such as: 

•  Is the buy-to-let practice immoral or in fact necessary? 
• Should, as recently voiced, landlords be restricted to one rental property each?  
• What would our housing landscape be like without rented accommodation? 
• Of the 9,268 Tunbridge Wells households that are in private rented accommodation, how many of those have little or no option other than to rent, so where would they be if there was no private rented sector? 

These are my thoughts; tell me yours!

 

The Emergence of Accidental Tunbridge Wells Landlords in a Slowing Housing Market?

A Tunbridge Wells landlord remarked to me the other day that he felt that there were more 'posher' up-market properties coming up for rent in the last six months compared to a couple of years ago.

I stated that this was the case, and it wasn't all down to the recent rental growth – it was the growth of the upmarket 'accidental landlord'.

With the local housing market showing signs of a slowdown and predictions of further house price declines, I am starting to see the return of the ‘accidental landlord’, but in a somewhat different form to what they were in 2008/9.

An ‘accidental landlord’ becomes a landlord unexpectedly or unintentionally. This often occurs when homeowners rent out their property instead of selling it due to a slowing housing market, a change in personal circumstances, or other unforeseen reasons.

While the sales market in the area has experienced a period of strength in recent years, activity has started to slow down from the levels seen in 2021/2. In contrast, there has been soaring demand for rental properties. 

To give you an idea of the growth of rents.

The average rent for homes coming on the market in the Tunbridge Wells area in 2021 was £1,348 per month, whilst in 2023, it has been £1,503 per month.

Some homeowners, fearing not achieving their desired selling price, might opt to retain ownership of their properties and instead rent them out until market conditions improve. 

Back in 2008/9, this trend was particularly evident in the middle market segment.

However, in 2023, many property commentators are suggesting if ‘accidental landlords’ do start to emerge, it will be in the upper quartile property segment (i.e., the top 25% of properties by value), where many homeowners bought in the post Lockdown race for space of 2021/2. 

Looking at the figures, they could be correct.

The upper quartile rental market starts in just over the £1,500 per month range in Tunbridge Wells.

• In the first seven months of 2021 (Jan to Jul) in the Tunbridge Wells area – an average of 34 properties a month came onto the market for rent at £1,500 per month or more.

• In the first seven months of 2022 (Jan to Jul) in the Tunbridge Wells area - an average of 45 properties a month came onto the market for rent at £1,500 per month or more.

• In the first seven months of 2023 (Jan to Jul) in the Tunbridge Wells area - an average of 60 properties a month came onto the market for rent at £1,500 per month or more.

(Tunbridge Wells area being TN1 to TN4).

Many of these could afford to be patient in pursuit of optimal selling conditions. The rise of ‘accidental landlords’ can be attributed to various factors, such as limited property appreciation, increasing mortgage costs, and robust demand for Tunbridge Wells rentals, making renting out properties an attractive alternative.

‘Accidental landlords’ are also created through other diverse circumstances.

Irrespective of what is happening in the economy and Tunbridge Wells property market, births, deaths and marriages continue. There will always be some new couples who decide to rent out one of their properties after moving into a shared home, while others inherit properties through the passing of parents or grandparents. 

The current average tenancy length of 51 months provides these new Tunbridge Wells landlords with just over four years to allow property values locally to recover before re-evaluating the market. However, stepping into the role of an accidental landlord carries specific implications that homeowners need to be mindful of.

Understanding the tax implications is a crucial aspect that ‘accidental landlords’ should grasp.

Transitioning to landlord status may result in the loss of specific tax benefits, including stamp duty relief, and necessitate payment of income tax on rent. Furthermore, upon selling the Tunbridge Wells rental property, landlords may become liable for capital gains tax on the profit made from the sale, as it is no longer considered their primary residence and I implore you to take advice from an accountant.

To mitigate the impact of tax changes, some Tunbridge Wells landlords have chosen to incorporate their properties into Limited Companies. Corporate structures offer potential tax relief on mortgage costs and the opportunity to pay lower Corporation Tax rates than individual income tax rates. However, incorporating properties involves additional expenses, such as stamp duty and capital gains tax on existing properties transferred to the company. 

Individual landlords with only one property may find incorporation less advantageous, but it could be a viable option for those planning to expand their buy-to-let portfolios.

Investing in property maintenance is a crucial consideration for Tunbridge Wells' 'accidental landlords'.

Well-maintained properties are more likely to retain or increase their value over time. Retrofitting properties to improve energy performance can also benefit tenants and future buyers, helping reduce utility costs and enhance overall comfort.

Accidental landlords must diligently handle this critical area: appropriately protecting tenants' deposits. Please safeguard deposits adequately to avoid significant compensation claims, with landlords potentially losing up to three times the deposit amount. To protect against such risks, landlords must ensure compliance with deposit protection schemes and provide tenants with essential documents, including Energy Performance Certificates, the Government's "How to Rent" guide, and current gas safety certificates.

Misunderstandings can inadvertently arise to renting direct to family or friends, leading to legal disputes.

Even though you know the tenant, it still could be wise to employ the services of a letting agent to establish clear terms in writing at the outset of a tenancy to avoid potential conflicts and protect the rights of both landlords and tenants. This becomes particularly relevant as the Renters Reform Bill, set to introduce significant changes to the private rental sector, including tenancy length and the process of regaining possession, is awaiting approval.

My overriding message to every ‘accidental landlord’ is that they must be aware of the tax implications, consider incorporation a potential strategy, invest in property maintenance, protect tenants' deposits, and establish clear terms to avoid disputes. Additionally, there are over 170 pieces of regulations regarding renting your property out. Also, it's essential to stay informed about forthcoming changes in renters' rights introduced by the Renters Reform Bill. 

In conclusion, with the Tunbridge Wells housing market experiencing a slowdown, I suspect an increasing number of Tunbridge Wells homeowners are considering becoming ‘accidental landlords’ by opting to rent out their properties instead of selling.

You must weigh the risks of renting your Tunbridge Wells home and the potential rewards.

I know of many stories of local homeowners who waited five or six years after the Credit Crunch to hit their ‘target price’ for their existing home, only to realise it cost them tens of thousands of pounds in costs and the price they had to pay for their new home. On the other side of the coin, I know plenty of ‘accidental landlords’ in Tunbridge Wells who used the fact that they became an ‘accidental landlord’ as an opportunity to build an impressive rental portfolio over the last 15 years.

If you are uncertain or do not possess all the facts, don't hesitate to contact me to discuss your plans. Then I can give you appropriate level-headed advice to make the right decision. By taking proactive steps and understanding the risk and rewards of being an ‘accidental landlord’ in Tunbridge Wells, you can navigate the property market successfully, even during uncertain times in the housing market.