How the credit crunch is hitting private tenants

We should be concerned that the emphasis of debate about the impacts of the credit crunch on householders is concentrating on savings and homeowners. I believe there is another sizeable and seriously vulnerable group and these are the private rented sector (PRS) tenants. Buy-to-let funding has helped the sector to expand rapidly over the past decade but the structure of the sector as it stands should give us cause for concern for the following reasons.

1. The PRS has grown hugely in recent years and was squeezing ownership. There are around 1m landlords now and the sector may have grown by 2m properties in the last 8 year. I think the figure of 11% of stock underestimates landlord holdings. At local level the PRS is a very significant tenure in very many places now, including regeneration areas such as those subject to housing market renewal. The housing market renewal pathfinders cited teh PRS as being “causal” or “characteristic” of the initial market decline.

2. Most of the landlords in this market are amateurs and many did not acquire property to be landlords but in order to gain capital yield. Their interest in services to tenants is minimal. Their agents are often even less interested, both landlords and tenants rarely have a good word for agents and several landlords I interviewed took over management themselves because agents are so poor. But very small or distant landlords are limited in their ability to take over management in this way where they are interested in service quality.

3. Many of these landlords will be just as vulnerable to repossession as marginal homeowners regardless of the extent of mortgage fraud in the sector.

4. Many will also seek to exit a market that is not yielding the short term capital gain they wanted. They will inevitably want to sell with vacant possession as vacancy increases the market value of the property. This is not necessarily an immediate danger in a totally failing market where little is selling, but when the overall market picks up their sales may accelerate, causing homelessness.

5. Tenants have effectively no security of tenure now once their initial shorthold tenancy expires. Possession has to be granted if the landlord seeks it and no reason has to be given.

6. Many tenants of the PRS are vulnerable in such circumstances and would count as a priority for rehousing when homeless thus putting more pressure on social housing availability.

7. Regardless of market collapse, financial pressure is likely to lead amateur landlords to minimise expenditure on repairs to help them sustain their repayments. This will worsen conditions for tenants considerably and tenants fear “retaliatory eviction” if they report disrepair to local authority PRS regulators.

8. At the opposite end of the market there are cash rich and sometimes unscrupulous landlords buying into the low quality stock even now where there are “bargains” to be had. The resulting decline in quality available to the tenants seeking housing could be significant.

I believe that this is a very opportune time to try to work with landlords, their representative bodies, buy-to-let lenders and other financiers of PRS expansion (only half the landlords we interviewed used buy-to-let mortgages), regulators and other interested parties to create the foundations of a far more professional and responsible PRS than the one developed under the currently unregulated and over-stimulated framework.

While the sector has to produce a business yield, the basis of the business should be the service to the customer not the price of the asset. Ways of improving conditions for customers could include increased security. Perhaps assured tenancies should be converted to three or five year terms with possession for the normal breaches of contract or otherwise shortened by one month's notice by the tenant or six months notice by the landlord. Landlords would thus have an incentive to seek and protect longer term tenants. Institutional investors should find this attractive in the residential sector as they do in the commercial sector where good tenants enhance portfolio value rather than reducing it.

I am not anti-landlord (I am currently a tenant myself) and I believe the PRS is a valuable element of our housing market. However my research has led me to believe that we need to treat it in a far more businesslike way to encourage and support the sector to be a responsible and responsive service industry. We would not allow any other essential service to be run so amateurishly (apart from banks possibly!).