A reality check on rents

LAST week’s article didn’t make for comfortable reading – and neither will this one.

Soaring house prices are being fuelled by increased levels of borrowing and buy-to-let mortgages are generating a similar effect in the rental market. High Street banks offer buy-to-let facilities up to a maximum of 75% of the purchase price, although the majority are capped at 60%.

The average house price in Guernsey is within a smidgen of £600,000 and three such examples sold in June were an end-terrace cottage at Jerbourg and two 1970s semi-detached houses on large estates in St Peter Port, one at Mont Arrive and the other at Les Ozouets.

If a prospective landlord purchased one of those properties with a 60% loan-to-value buy-to-let mortgage the interest rate would be in the region of 5%. To pay the interest repayments alone would require a rental income of £1,500 per month, or an unfeasible £3,000 per month if the interest rate doubled to 10%, which could happen if the Bank of England continues to increase its base rate to counter raging inflation. This is not an exaggeration because although mortgage interest rates remained historically low for 11 years pre-pandemic, many of us remember when they leapt to 17% in 1980 and reached 15% in 1992 when the UK withdrew from the European Exchange Rate Mechanism on ‘Black Wednesday’.

So, rental income is paramount to buy-to-let mortgages, not that the examples I’ve shown are anywhere near enough. The new landlord of the average-priced house has to pay income tax on the rental income and insure and maintain the building, and although tenants pay parish rates the landlord as owner has to pay Tax on Real Property and continue to do so for any periods the property is unoccupied, when there is no rental income whatsoever.

Neither does this allow much if anything for repaying the capital sum borrowed. Woe betide the new landlord if the housing market collapses and his average-priced house falls into negative equity, as properties did nationwide between the late 1980s and 1994. This was brought on by houses becoming unaffordable because interest rates kept rising.

The reason for my parody of Senna the Soothsayer from the TV series Up Pompeii! is twofold. There are pitfalls and repercussions with disproportionate levels of lending in both the freehold and rental markets that have proven in the past to stem from its own excesses and it’s time for unwelcome regulation if the mortgage industry cannot curb its own exorbitance.

Secondly, although Guernsey may not have seen such high costs and low availability before, there have been equally critical housing issues in the past.

At each such juncture the States was called upon to act decisively and last week I referred to Deputy Gavin St Pier’s proposal for a debate on a ‘tax on second homes’, although I failed to see how that could help tenants here and now. This was amid alternative calls to reintroduce Dwellings Profits Tax, which was introduced in 1975 as rapid rises in house prices, particularly in the Open Market, saw properties being resold at substantial profits within a few months and even on occasions within the same month.

I’ve written before about DPT curbing speculation by imposing a 100% tax on unquantifiable profits from selling a dwelling within 12 months of its purchase, or five years if not owner-occupied. The law was introduced to curb raging inflation but did not reduce house rents and prices.

Part of the current problem is that the rental market has become transient during the past 20 years due chiefly to the financial crash of the late noughties. Tenants no longer wanted three- or five-year leases that were once standard. Tenancies of 12 months swiftly became the norm as those employed all the way up to management level didn’t know if they would even have a job in 12 months’ time. Rents could be negotiated and were rarely increased in accordance with the terms of the lease. Landlords feared a rapid turnover of tenants, incurring additional costs and often enduring vacant weeks or months without rental income.

By 2012 rental prices began reaching a new high, as first-time buyers struggled to get on the property ladder and opted to rent. Nonetheless the trend for 12-month tenancies was embedded in tenants. They liked the control and flexibility allowed them under minimum length tenancies. But market conditions have radically changed and landlords now have control, thanks inadvertently to antiquated leases.

Many such leases, for example, include what has long been a commonplace clause that rents increase in line with either the rate of inflation or rental market values, whichever is the greater.

Some go further by adding that on no account will the rent be reduced at the time of being reviewed. This was added by legal offices on behalf of landlords when the UK rate of inflation dropped to levels that the country risked entering periods of deflation, such as in 2009 and again 2015.

The tables have since turned and rent controls continue to be called for locally. Under the banner of a Fair Rent Plan, Jersey last week announced nominations for a chairman and members of a Rent Control Tribunal.

I know for a fact that many Guernsey landlords don’t increase rents to the levels they are legally entitled to. Some do, however, either through need or greed and some even use it as a lever to remove difficult tenants. These instances make the headlines but remain rare among the 6,812 privately-rented homes in the island, one-quarter of Guernsey’s entire housing stock.

Rent controls make for good politics but bad economics and it will cause long-term injury to our private rental sector if those landlords who purport merely to be making hay while the sun shines are in reality profiteering and force the heavy hand of regulation across the board.