2020 will undoubtedly go down as one of history’s most unpopular years and in many ways the new year picks up where the last one left off, with the UK still subject to varying restrictions that have a profound impact on our lives.
The picture isn’t completely bleak, however. With a second, easier-to-distribute vaccine now being used in the fight against Covid-19, there is a growing sense of hope that we will soon see a return to normality.
The continued impact of Covid-19
The unprecedented nature of the pandemic has made it difficult to predict its ongoing impact with any real certainty.
A variety of views remain on the future of house prices, but I think many in the industry would agree that the virus will still be shaping demand for rented property for some time to come.
Covid-19 made us reconnect with our homes and consider how and where we want to live. Whilst the Stamp Duty holiday unlocked a generation of pent-up demand from home movers, Coronavirus also fuelled a wave of rent moves as people drifted from urban areas, driven by a newly increased desire for access to greenery and home working space.
I suspect that the third national lockdown will mean this will continue for some time to come.
There are also the more practical elements to consider. The furlough scheme is scheduled to cease at the end of April and the various government-backed business loan schemes will be available until the end of March, which is likely to impact employment.
It is unlikely that the tightening of criteria in the homeowner market will unravel soon and some lenders are actually tightening criteria for self-employed borrowers further.
This means that whilst the desire to buy is strong, the ability to do so is inhibited. The private rented sector (PRS) provides the answer for many.
With negotiators agreeing on an eleventh-hour deal, we now have a better idea of how we will interact with our former EU partners.
Although it will take some time to see how the wider economy will fare now access to the single market comes with various stipulations, I think we may have been given a glimpse of how Brexit will impact the PRS.
With migrants almost three times more likely to reside in PRS properties compared to people born in the UK, the steep decline of EU nationals arriving in the UK since the 2016 referendum could have dealt a significant blow to PRS demand.
This is not something we have seen, however, as net migration to the UK in the year ending March 2020, stood at 313,000 people. This is almost twice the amount recorded for the year ending June 2016.
While net migration from the EU has fallen post referendum – 189,000 in the year to the end of Q2 2016, to just 58,000 according to the latest statistics – inbound arrivals from further afield have made up any shortfall.
Immigration was a key Brexit battleground but not the only issue that could impact PRS demand.
After the UK’s decision to leave the EU, a number of multi-national companies indicated that they would consider relocating UK based operations to the continent if any deal would hamper exports. With the deal resulting in no additional tariffs on inter-continental trade, we are yet to see any downward pressure on localised PRS demand through major employers exiting the UK.
Those on the leave side of the debate may also highlight the potential for an inverse of this effect if the UK uses Brexit as a springboard to forge new and strengthen existing trade alliances in markets outside of the EU.
It is apparent that the transition stage is still very much in its infancy and we will know more once both parties have had more time to adapt, but these examples of shifts show that Brexit presents both opportunities and threats for landlords.
We have already seen portfolios modified in response and I expect this to continue into 2021 and beyond.
End of the Stamp Duty holiday
Since being announced as part of the chancellor’s Summer Statement, the Stamp Duty holiday has provided welcome stimulus to the housing market.
Figures published HMRC show December 2020 saw a record high of 129,400 residential property transactions, 31.5% higher than December 2019, marking a continuation of the rising purchase numbers we have seen since the scheme’s introduction.
Buy-to-let landlords have used the holiday to add property to their portfolios, diversifying in response to a market altered by Covid-19.
The Stamp Duty scheme has also encouraged a record number of landlords to move existing stock into Limited Company status. There were 41,700 new companies formed in 2020, an increase of 23% on 2019. Buy-to-let incorporations were the second most common type of company founded in 2020, second only to firms selling goods online or by mail order, and this is something that will continue in the first quarter of 2021.
Lenders and intermediaries are set for a busy three months as they look to complete deals before the deadline. The question then is, what next?
Looking back to the introduction of the Stamp Duty surcharge for buy-to-let back in April 2016, we will see a similar surge in completions as people rush to take advantage of the savings on offer, followed by a decline in the second quarter of the year.
However, I’m confident that business for new purchase will gradually return over the rest of the year to more normal levels.
A shift towards remortgage business
A glimmer of hope for lenders and intermediaries in the post Stamp Duty Holiday market is the remortgage opportunity.
The introduction of the buy-to-let Stamp Duty surcharge in April 2016 coincided with increase in the popularity of five year mortgages.
In 2014 five-year fixed rate deals accounted for an average of 1,462 buy-to-let mortgages per month. This grew to 2,602 in 2015 before rising to 3,386 ahead of the March 2016 introduction date.
Borrower propensity to opt for this longer-term product was further boosted when new PRA underwriting rules resulted in an average of 6,456 five-year fixes being written in 2017.
This year will see a proportion of these deals mature which will cause competition amongst lenders and provide market stimulus which will be well timed to coincide with the end of the market post Stamp Duty holiday.
Data recently released by Moneyfacts shows an increase in product availability, with over 2,000 buy-to-let mortgages available for the first time since March 2020.
While this could be indicative of increasing confidence due to things such as a Brexit deal and the Covid-19 vaccination programme, it could also suggest that lenders are already gearing up for this shift towards remortgage business.
Richard Rowntree is managing director of mortgages at Paragon