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!

 

Royal Tunbridge Wells Rents Smash Through the £1,500 Barrier

Are Tunbridge Wells Landlords Profiteering?

The private rented sector for both Tunbridge Wells landlords and Tunbridge Wells tenants is facing immense challenges, with a shortage of available homes for rent putting renters under significant pressure. 

And you can see why when the average UK rent in 2021 was £1,381 and in 2023 it has been £1,706, an increase of 23.53%.

Let’s look closer to home in the Tunbridge Wells area.

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.

(Tunbridge Wells area TN1 to TN4).

You can see why people are accusing landlords of "widespread profiteering".

But as always, the devil is in the detail.

This increase in average Tunbridge Wells rent is for new tenancies,

not tenancy renewals.

A new tenancy is when a brand-new tenant moves into a home, whilst a renewal is when an existing tenant renews the lease with their existing landlord.

Government data shows that most landlords are not exploiting the mortgage crisis, with 64% of landlords maintaining and 4% decreasing rents to shield renters from the impact on renewal of their tenancy agreement, dispelling the notion that they are exploiting the situation.

Looking at the same Government data, of the landlords setting rents for new tenants, just under half of landlords (45%) stated they increased the rent compared to the previous tenancy with the old tenant, whereas a third (35%) kept the rent they charged at the same level, and surprisingly 1 in 12 (8%) decreased the rent.

Therefore, whilst the average percentage growth in Tunbridge Wells for new tenancies is 11.5%, the overall average for all tenancies is only 4.4% for Tunbridge Wells.

And 4.4% is much lower than the rate of inflation. 

Contrary to popular belief, landlords' profit margins have significantly dwindled in recent years. The profits for private landlords are at their lowest since the Credit Crunch due to rising mortgage rates and limited tax relief. This demonstrates that private landlords are not profiteering during the cost-of-living crisis. 

Now some of you will say, Tunbridge Wells house prices have risen in that time. Yes, that is the case, yet not by the rate of inflation, so in fact in ‘real’ terms, their investments have gone down in value.

Landlords are often portrayed negatively in the media but are in fact making considerable efforts to provide safe and secure housing for millions of tenants.

Landlords face growing costs, including increased mortgage payments and the negative impact of a tax system that discourages investment in the rental market. These challenges are further exacerbated by ongoing uncertainty surrounding reforms to the law regarding landlords. 

With limited options available, landlords must choose between leaving the private rented sector, increasing rents as a last resort, or absorbing mounting costs. However, the latter is nearly impossible for most individual landlords who lack deep pockets. To address these challenges, the Government must provide crucial support to the rental market.

To alleviate the burden on renters, the Government should reconsider current taxes which are designed to discourage landlords from providing more rental homes. It is vital to ensure that the supply of rental properties does not further diminish, as Tunbridge Wells tenants simply cannot bear the consequences of a dwindling market and it will lead to further housing hardship.

Without proper government support, both renters and landlords will continue to face challenges, caught between a rock and a hard place.

Housing is such an important thing (rather like the NHS), and I would urge all parties, to move beyond rhetoric and take positive action to support the private rented sector. 

I know many Tunbridge Wells landlords who are making sincere efforts to shield Tunbridge Wells renters from the mortgage crisis, and it is crucial their contributions are recognised.

By fostering an environment that encourages investment and providing support to renters, the Government can help alleviate the strain on both landlords and tenants and ensure a sustainable and fair rental market for all.

These are my thoughts, what are yours?

Inflation - Every Royal Tunbridge Wells Landlords’ Saviour

Some of you reading this will be old enough to remember the 1970s – the bell-bottom trousers, the huge collars, frayed jeans, disco glitter balls, maxi dresses, midi skirts but above everything else - HYPER-INFLATION.

With inflation currently standing at 11.1%, many of us envy the last few years when we have been lucky to experience sub 2% inflation.

But in the 1970s, the UK had proper and persistent double-digit inflation for seven of the ten years of that decade.

The average annual UK inflation rate for the 1970s was 12.3% per

year, with prices rising by 25% in 1975 alone.

The inflation was caused by several things, including oil prices quadrupling in the 1973 Oil Crisis (sounds familiar, doesn't it?), powerful unions, a high level of growth and investment in the 1950s and 60s, meaning it was easier for the British economy to experience inflationary pressures in the 1970s and the property market then was not immune to these inflationary pressures.

The average Tunbridge Wells house rose from £8,352 to £43,263

between the start of 1970 and the end of 1979.

That would be the equivalent of an average local house going from today’s price of £521,091 to £2,698,807 in 2032.

The existing climate of rising prices (inflation) is affecting everyone, from filling up the car with petrol to doing the weekly ‘big shop’. Looking specifically at the buy-to-let market, Tunbridge Wells landlords are suffering from rising costs and prices like everyone else, including a substantial increase in labour price inflation as skill shortages have pushed up the cost of using all the trades.

Other worries include whether tenants can pay their rent with the cost-of-living crisis. Also, there is a rise in interest rates which increases landlords' mortgage payments and professional fees, including accountants, and landlord insurance rates continue to climb.

So, is inflation all bad for Tunbridge Wells landlords?

Most economists say that inflation is bad for the economy. 

The absence of steady and stable prices makes consumers and businesses hold off making decisions to buy things, and when that happens, the economy stalls. Look at what happened in Germany in 1923, where you needed a carrier bag of cash to purchase a loaf of bread. Today, Zimbabwe has annual inflation of 269% a year, and Venezuela has 156% annual inflation, meaning their economies are on their uppers.

Thankfully, nobody is predicting British inflation will reach those levels.

Yet would it surprise you that inflation can be good news for landlords?

Property has grown above the rate of inflation over the last 50 years. It means that your hard-earned savings invested in property will increase in value over and above the inflation rate, which will safeguard your wealth during these periods of high inflation.

However, knowing where we are on the economic cycle makes it easy to spot when house prices are lower in the short term (in real terms), thus buying yourself long-term 'extra' profit.

The average Tunbridge Wells property today is worth £521,091. Roll the clock back to the autumn of 2007, and it was £351,287.

Quite a gain (and no profit) until you look at inflation.

It appears people who bought in 2007 have made money when they have lost it in 'real terms.

What do I mean by that? What exactly does ‘real terms’ mean?

Everyone knows that £100 today doesn't buy what £100 could have bought you ten years ago and much less than 20 years ago … that's the effect of inflation.

‘Real terms' means the price value after adjusting for inflation and expressed in constant Pound Sterling, reflecting buying power relative to another year. For example, the ‘actual’ price of a Mars bar in 2000 was 26p, yet its ‘real price’ (expressed in today's prices) is 74p. Why 74p? Because 74p is what a Mars Bar costs today. 

What price in the past has the same spending power today? So, looking at the £351,287 average price for a local house in autumn 2007 (as mentioned above), one would need £585,172 today to buy the same amount of ‘retail goods and services’ (e.g., cars, food, Mars Bars, holidays etc.) - that is what 'real terms' mean.

That means even without any house price falls (which many are predicting),

average house prices in Tunbridge Wells are £64,081 cheaper in ‘real terms’ today than in 2007.

Calculation: £585,172 (autumn 2007 Tunbridge Wells house price expressed in today's spending power terms – i.e., in 'real terms') less £521,091 (today's average actual house price in Tunbridge Wells) equals £64,081.

The other significant advantage of inflation for landlords is buy-to-let mortgages. Most landlords use a buy-to-let mortgage to buy their property investment. Let me give you some scenarios which explain why this is the case.

Firstly, let's assume there was no inflation (like in Japan in the last couple of decades). If a landlord took out an interest-only buy-to-let loan of £200,000 10 years ago, then in 10 years, that buy-to-let mortgage, which would need to be paid off, would still have a ‘real value’ of £200,000.

Secondly, let’s assume the same landlord took out an interest-only buy-to-let loan of £200,000 10 years ago (2012). In the last decade, there has been 31.4% inflation, so that buy-to-let mortgage would have a ‘real value’ of only £137,200.

Now inflation won’t be in double digits for the long term in the UK (higher interest rates and a recession will put pay to that), yet let's say the inflation rate for the next ten years was 4% per annum.

In this scenario, the ‘real value’ of the £200,000 buy-to-let mortgage falls to less than half its original real value of £91,278.

So, if one thinks about it, inflation could be just the thing that landlords need to shrink the ‘real value’ of their buy-to-let mortgage. As the saying goes, every cloud has a silver lining.

On the back of double-digit percentages, growth rises in rents, and everything stated in this article, inflation could be the silver lining!