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The buy to let market in Luton has been going through a transition over the last five years with Luton landlords starting to feel the pinch in terms of new legislation and regulation. In the article we look at the historic nature of the Luton property market and what lies ahead for its future in terms of its opportunity for Luton buy to let landlords
Investing in a Luton buy to let property has become a very different sport over the last few years.
In the glory days of the five years after the turn of the Millennium, where we had double-digit house price growth, mortgage companies (notably Northern Rock, HBOS and their ilk) desperate to get on the buy to let mortgage bandwagon with rates so low it would make the belly of a snake seem high and an open mildness to give loans away with not so much more than a note from your Mum and with hardly any regulatory intervention… anyone could make money from investing in property – in fact it was easier to make money than fall off a log! Then we had the unexpected flourish of the property market, with the post credit crunch jump in the property market after 2010, when everything seemed rosy in the garden.
Yet, over the past five years, the thumbscrews on the buy to let market for British (and de facto) Luton investors have slowly turned with new barriers and challenges for buy to let investors. With the change in taxation rules on mortgage relief starting to bite plus a swathe of new rules and regulations for landlords and mortgage companies, it cannot be denied some Luton landlords are leaving the buy to let sector, whilst others are putting a pause on their portfolio expansion.
With the London centric newspapers talking about a massive reduction in house prices (mainly in Mayfair and Prime London – not little old Luton) together with the red-tape that Westminster just keeps adding to the burden of landlords’ profit, it’s no wonder it appears to be dome and gloom for Luton landlords … or is it?
One shouldn’t always believe what one reads in the newspaper. It’s true, investing in the Luton buy to let property market has become a very different ballgame in the last five years thanks to all the changes and a few are panicking and selling up.
Luton landlords can no longer presume to buy a property, sit on it and automatically make a profit
Luton landlords need to see their buy to let investments in these tremulous times in a different light. Before landlords kill their fatted calves (i.e. sell up) because values are, and pardon the metaphor, not growing beyond expectation (i.e. fattening up), let’s not forget that properties produce income in the form of rent and yield. The focus on Luton buy to let property in these times should be on maximising your rents and not being preoccupied with just house price growth.
Rents in Luton’s private rental sector increased
by 1.31% in the past 12 months
Rents in Luton since 2008 have not kept up with inflation, it is cheaper today in REAL TERMS than it was 11 years ago and some landlords are beginning to realise that fact with our help.
Looking at the last few years, it can be seen that there is still a modest margin to increase rents to maximise your investment (and it can be seen some Luton landlords have already caught on), yet still protect your tenants by keeping the rents below those ‘real spending power terms’ of the 2008 levels.
Buy to let must be seen as a medium and long-term investment ….
Rents in Luton are 3.23% higher than they were 3 years ago and property values are 13.34% higher than Jan 2016
…and for the long term, even with the barriers and challenges that the Government is putting in your way – the future couldn’t be brighter if you know what you are doing.
Investment is the key word here… In the old days, anything with a front door and roof made money – yet now it doesn’t. Tenants will pay top dollar for the right property but in the right condition. Do you know where the hot spots are in Luton, whether demand is greater for 2 beds in Luton or 3 beds? Whether town centre terraced houses offer better ROI than suburban semis? With all the regulations many Luton landlords are employing us to guide them by not only managing their properties, taking on the worries of property maintenance, the care of property and their tenants’ behaviour but also advising them on the future of their portfolio. We can give you specialist support (with ourselves or people we trust) on the future direction of the portfolio to meet your investment needs (by judging your circumstances and need between capital growth and yields), specialist finance and even put your property empire into a limited company.
If you are reading this and you know someone who is a Luton buy to let landlord, do them a favour and share this article with them – it could save them a lot of worry, heartache, money and time.
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Many mature readers of this Luton property market blog will remember buying their first home as 20 or 30 somethings, probably in Luton many years ago, yet read the newspapers now and feel it is all doom and gloom for todays’ first-time buyers.
So, I wanted to look at the facts, instead of newspaper headlines.
Back in 1995, the average Luton first time buyers house cost £26,190, whilst official figures state today it is £157,500
So, looking at today’s property prices, it could be perceived that owning a home is beyond the reach of most Luton first time buyers and that renting is the only way for younger members of Luton society to have a roof over their head .. or is it?
100% mortgages (so no deposit needed to be saved) were rife in the 2000’s and Northern Rock were famous for their 125% mortgages (i.e. you borrowed 25% more than what you were paying for the house, again with no deposit). Yet when the credit crunch hit in 2008 such mortgages disappeared overnight – ending the dream of homeownership for many. Yet would it surprise you to hear that 95% mortgages (i.e. the first-time buyer would need to save a 5% deposit) have been available since late 2009 and 100% mortgages (i.e. no deposit) were made available in 2016.
It is £145 per month cheaper to buy a typical Luton first-time buyer home than to rent the equivalent property.
Prospective Luton first-time buyers could make a saving of £1,745 per year on average if they moved from renting to owning. My calculations assume that first-time buyers raise a deposit of just 5 per cent and make mortgage payments over 35 years with the Barclays 95% mortgage with a fixed interest rate of 2.48 per cent interest. At this level…
Today, the average deposit needed by a
Luton first-time buyer is £7,875
Those able to raise that deposit, would pay £555 pm on average in mortgage payments, while the average rent for the same property would be £701 pm and the household income to support such a mortgage would only need to be from £33,250 pa.
Of course, buying your first home is a massive financial commitment and investment with up-front costs to ponder on, yet long-term the financial benefits can be substantial. With annual savings of £1,745 a year, this can really mount up over time and, of course, once the mortgage is paid off, one will have a valuable asset.
Yet, the elephant in the room is the raising of the 5% deposit
Well most first time buyers, even most of you who are now in your 50’s and 60’s may have used the Bank of Mum and Dad to help with the deposit, yet it’s only fair that most parents still expect their offspring to contribute to the deposit and this is where it comes down to choice. I have spoken to many of my friends and family to reconfirm my initial thoughts that it comes down to priorities and choices in life. To save the deposit mentioned above, sacrifices are required to save that amount of money.
According to a survey in 2018, the average millennial goes out two nights a week and spends on average £63.36 per night out, that’s nearly £6,600 per year - a very expensive hobby. Nearly a third of millennials surveyed had smashed their mobile phone in the last 12 months. Then there is the obsession of having the latest tech, with the need to constantly be upgrading one’s mobile phone. In fact, the cost of the brand new iphone11, recently released, is just shy of £900. Even those on contracts can expect to pay upwards of £80 per month for the newest phone upgrade, yet if they kept their old phone after two years, a sim only deal with the same minutes and data would set them back no more than £25 per month … it comes down to choices. Save for a deposit and reduce your expenditure on socialising and mobiles etc and have a valuable asset at the end of your mortgage or continue as you are.
I am not here to make a judgement – everyone is free to make their own choices in life – all I am doing is highlighting the real situation - so you are aware of the full story.
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Freehold or Leasehold .. which is best? Well, when buying a property in the UK there are two main types of ownership – freehold and leasehold and, when boiled down, they mean the following...
Freehold: The person who owns the freehold of a property owns the property and the land it stands on.
Leasehold: As a leaseholder you do not own the land the property is built on. A leaseholder essentially rents the property from the freeholder for a number of years, decades or in some Victorian terraced houses, for centuries.
All apartments have to be sold as leasehold properties because of the very nature that you have a neighbour above or below you (so both of you can’t own the land) with the length of the lease being over 100 years (even more sometimes).
However, with some apartments – particularly Victorian and Edwardian houses converted into numerous apartments – which are sold on the basis that the leasehold apartment owner also owns part of the freehold (with other leaseholders in the same building), having what is known as 'share of freehold'. Similarly, the Government also brought in legislation a number of years ago for more modern apartment blocks built in the 20th century where it allowed leaseholders to club together and have the right to purchase the freehold together.
In this week’s article on the Luton property market we look at the leasehold and ground rent scandal that has fallen over the whole of the country leaving many first-time buyers unable to sell their home. In the article itself we look at the possible implications for local people having unsellable homes.
Now we must stress, there is nothing wrong with leasehold – it’s been a useful type of homeownership since Norman times, it’s just that with a leasehold comes a potential extra responsibility. If there are four apartments in a block, who pays for the leaking roof when all benefit from a watertight roof? Who pays for the bad foundations, when all benefit from good foundations? Who pays for building insurances? .. the list goes on – so clauses are added to the leasehold agreement to ensure everyone is protected and pays their fair share of the joint costs of the building with service charges and a nominal ground rent (ground rent is a nominal rent, commonly quite low, often in the region of £50 per year to the freeholder of the property).
Whilst houses tend to be sold as freehold as it's a more unambiguous set-up, given there is only one property on the land. Contentiously however, in the last 10 to 15 years this has not always been the case with new-builds as some new homes’ builders have sold the leasehold to the buyer and retained the freehold. There is nothing wrong with that, it’s just in some cases (not all) they also added some oppressive clauses to the lease of the property they were selling, which could be the next PPI scandal - albeit for property.
Government reports have emerged recently that suggest 12,000 leaseholders in the UK are facing ground rents – which they pay to the freeholder – that double in cost, usually every 10 years, but occasionally more frequently.
Builders started to add clauses into leasehold property sales with ground rent being set at £300 and £400 a year, yet it doubled every ten years. Though unwary first-time buyers were habitually told that their 500 and 999-year leases were practically freehold, the clauses inescapably meant that the ground rent would spiral to ridiculous levels meaning the average ground rent would be £23,750 a year by 2070 and £379,900 a year by 2130, making the properties practically unsellable today, with owners often left unable to re-mortgage too.
So, how many people are affected by this in our local area?
Well, using Government data, our research suggests that in Luton 207 householders have bought a detached house, semi-detached house or town house (which would normally be freehold) as leasehold. Not all these have onerous lease clauses, yet some do. I know it doesn’t sound a lot, yet that is potentially 207 lives ruined with houses they can’t sell - making them prisoners in their own property.
The good news is the Government is on the case and serious about sorting this issue out as they have proposed a ban on the future sale of houses as leasehold, as well as cutting ground rents to zero. Yet stern questions remain about the future of homeowners in existing leaseholds. Westminster wants the builders to set up compensation plans, and we will say many (not all) have stepped up to the mark and started to sort this, although some campaigners have said the schemes are not fit for purpose, let’s hope they are wrong.
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Yes, that number is staggering isn’t it ….
In this week’s article on the Luton property market, I consider what effect the lack of bungalows and affordable sheltered accommodation is having on the older homeowners in Luton, how it’s affecting everyone in the housing ladder and where opportunities might lay for savvy Luton property investors to make some money due to the imbalance of supply and demand.
Of the 16,145 households in Luton where the head of the household is 65 years or older, an astounding 12,403 (or 76.8%) of those are owned, which is just above the national average of 74.1%, which sounds great – yet nothing could be further from the truth.
I chat with many Luton pensioners who would like to move but cannot, as there is a scarcity of such properties for Luton mature people to downsize into. Due to their scarcity and high demand, Luton bungalows on average get a 12% to 22% premium per square metre premium over two storey properties. To add insult to injury, a recent NHBC reported that only 1% of new builds in the Country were single storey bungalows (compared to 7% in the mid 1990’s).
Luton OAP’s are sitting on £3,211.1m of equity in these Luton homes
In a survey conducted a couple of years ago by YouGov, they established that just over one third of homeowning people aged 65 and over in the Country were looking to downsize into a smaller home. Yet, the Tory’s over the last nine years have appeared to target all their attention on first-time buyers with stratagems such as Starter Homes to safeguard the youngsters of the UK not becoming perpetual members of ‘Generation Rent’. Equally though, this doesn’t address the long-lasting under-supply of suitable retirement housing essential to the needs of the Luton’s hastily ageing population. Lamentably, the Luton’s housing stock is tragically unprepared for this demographic shift to the 'overextended middle age’, and this has created a new 'Generation Confined’ quandary where older people cannot move.
Also, those older Luton retirees’ who do live in the limited number of Luton bungalows are finding it difficult to live on their own, as they are unable to leave their bungalow because of a lack of sheltered housing and ‘affordable’ care home places.
Meaning those older Luton retirees can't leave their Luton bungalows, younger Luton retirees in their larger 2 storey family houses can't buy those Luton bungalows (occupied by the older retirees) and those Luton people in the 30’s and 40’s can't buy those larger 2 storey family houses (occupied by the younger retirees) they need to for their growing families ... it’s like everyone is waiting for everyone because of the bottleneck at the top.
For those wanting to see the complete stats for Luton as whole …
Luton’s (and the rest of the UK’s) property prices have soared over the last 50 years because the number of properties built has not kept up with demand. With restrictive planning regulations, migration, people living longer and excessive divorce rates (meaning one family becomes two) we need, as a Country, 240,000 properties to be built a year since the Millennium to just stand still.
At the turn of the Millennium, the Country was constructing on average 180,000 to 190,000 households a year, that figure dropped in the five years after the Credit Crunch to 135,000 and 145,000 households a year. Although we built 217,000 last year, we still have all those 19 years to make up for.
The answer …. allow more land for starter homes, bungalows and sheltered accommodation because land prices are stifling the property market as the large building firms are more likely to focus on traditional houses and apartments than bungalows (because they make more money from them).
My thoughts for the savvy Luton property investors – until the Government change the planning rules and allow more land to be built on – Bungalows, especially ones that need some TLC after someone has passed away bungalows are a great bet for flipping and even potential rental returns for future property investment as more and more OAP’s will be renting in the decades to come?
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In the late Spring, the Government announced that they were planning to end no-fault evictions for tenants living in private rented accommodation. In this article we look at the impact for Luton homeowners, Luton tenants and Luton buy-to-let landlords.
In the late spring, the Government announced that they were planning to end no-fault evictions for tenants living in private rented accommodation.
I have had a number of Luton landlords contact me anxious that removing a tenant from their Luton buy-to-let property in the future had possibly become a lot more problematic. Yet, at the launch of the consultation on the changes to the piece of legislation relating to no-fault evictions (called the Section 21 amendments), the Government wanted to assure British landlords that they would be protected by the bolstering of the existing Section 8 legislation. The current Section 8 allows landlords grounds for recovery of their properties for reoccupation of the landlord, non-payment of rent and other legitimate factors.
17,203 Luton landlords are affected by this
potential change in the law
Yet, it is comforting for Luton landlords and tenants in the fact that most competent letting agents very rarely have to evict a tenant. In the worst-case scenarios the tenant needs evicting (normally because rent hasn’t been paid) or because the landlord is either selling their buy-to-let investment or moving back into their property. Look at the consultation - it has been indicated that those grounds will not be removed from section 8 powers during the government’s consultation and the talk is they will be bolstered and improved. To put the removal of Section 21 notices into some context…
Only 22,527 section 21 notices made it to Court last year, out the 4.5million private rented households
Scotland banned no fault evictions (i.e. their own version of a Section 21) two years ago, and the model suggested by Westminster is similar to that of the new Scottish system. Landlords, tenants and agents have had to adapt north of the border, and there hasn’t been the mass exodus of landlords from the market since then.
Yet the call in the lettings and legal profession is … if the Government is intent on making these changes, we need well-funded courts which specialise in housing and tenancy matters (like there are for family law and children). Especially when the landlord manages the property themselves (without an agent), the issue of eviction comes about from a breakdown in communication between landlord and tenant. The courts could use their mediation skills to make it simpler and faster for tenants and landlords to obtain quick and available justice instead of the existing drawn out procedures under Section 8, which helps no one (not even tenants). This is important as the demand for Luton rental properties is growing and people need a home to live in – fact.
Luton needs an additional 819 buy-to-let properties per year
for the next decade to meet the demand from Luton tenants
As an agent in Luton, I know most Luton landlords consider buy-to-let in Luton as a long-term investment, with the average landlord looking to retain their buy-to-let property for at least 10 years and beyond. Talking to other agents around the country, over 90% of Section 21 notices are made by the tenant, not the landlord. Removing the Section 21 notice could affect tenants more than landlords.
Replacing Section 21 with a process that requires a landlord to firstly have a good reason, and secondly go through due process, will likely remove the more unprincipled landlords from the property market. That is great news as those unprincipled landlords will either sell their properties to new buy-to-let Luton landlords, or to tenants who want to buy them. So, it could be a small win for people looking for a new Luton home, and a disappointment for unprincipled landlords simply looking for a cash cow ‘have no care about the property or tenant’ investment vehicle.
If you are a Luton landlord and want to know more about this, whether you are a landlord of ours, a Luton landlord with another Luton agent or a self-managing landlord, feel free to drop me a line or pick up the phone (I don’t bite) to chat about the implications of this and other legislative changes that are on the horizon.