Commenting on the figures, Robert Gardner, Nationwide's Chief Economist, said:
“After almost two decades of rapid expansion, the private rented sector (PRS) in England staged a modest retreat in the three years before the pandemic. Conditions appeared to stabilise in recent quarters, but, as we explore in this, the Mortgage Works’ (TMW) new Rental Market Review, the outlook is unusually uncertain in the wake of Covid-19.
“As well as the enormous uncertainty surrounding the near-term path for the economy, there is also scope for the pandemic to have profound effects on the pattern of economic activity and housing demand in the years ahead which could have important implications for the PRS.
Temporary fall back or a longer-term retreat?
“The share of households in the PRS in England edged down for the third year in a row in 2020, to 18.7%, from 19.3% in 2019 and 20.3% in 2017. The number of households in the PRS fell to 4.4 million, from 4.7 million in 2017.
“This represented a significant shift after almost two decades of robust growth. Indeed, the proportion of English households in the PRS rose from 10% to 20% between 2000
and 2017. The absolute number of households in the PRS more than doubled, from 2 million to 4.4 million over that period - more than twice the rise in the number of owner occupiers (which increased by 1 million over the same period), while the number of households in the social rented sector remained broadly flat.
“The shift reflects a combination of factors. Increased regulation, political uncertainty and tax changes (including the introduction of higher stamp duty rates on the purchase of additional properties from 2016 and a phased reduction to the tax deductibility of landlord expenses from 2017) dampened investor demand in the PRS. There was a 12% reduction in the number of rental properties owned outright between 2017 and 2020 and, while the number owned with a mortgage continued to increase, the rate of growth slowed from 8% in 2014/15 to 2% p.a. over the 2017-2020 period.
“At the same time, there was a commensurate rise in first time buyers, buoyed by robust labour market conditions, low mortgage rates and increased availability of higher loan to value mortgages (alongside the ongoing support from the Help to Buy scheme), helping those with smaller deposits - the main barrier for most first-time buyers - to buy a home.
What impact has the pandemic had to date?
“Economic shocks tend to dent housing market turnover, and first-time buyer activity in particular, as labour market conditions weaken, uncertainty deters major purchases, and credit availability often reduces as lenders become more risk averse. While weaker labour market conditions also impact tenant demand and rental growth, a decline in first-time buyer numbers can provide some offsetting support, as people stay in the rented sector for longer.
“But a pandemic is not a typical shock, and the policy response to Covid-19 has been unusually vigorous. Lockdowns led many people to reassess their housing needs, which boosted housing market activity even as the economy slowed sharply. Research we conducted in April showed that the pandemic had prompted more than a quarter of people (29%) to move or consider moving home[1].
“Interestingly, looking across tenure types, those in the PRS were most likely to be moving or considering a move, at 40% of those surveyed, compared with 32% of those owning their home with a mortgage and 20% of those who owned their home outright.
“Within the PRS, the desire to move as a result of the pandemic was prevalent across most regions, but was particularly marked in London, where over half of tenants were moving or considering a move, as shown in the chart above.
“Amongst those in the PRS either moving or considering a move, a desire for move to a different area was a key motivating factor, with around a third of respondents citing this. The majority were looking to move to a less urban environment, with nearly 60% looking to move to a smaller town or city or a village/rural location, compared to 16% moving to a larger town or city (where the remainder were unsure or looking to a similar sized settlement).
“Other reasons for moving included seeking better access to outside space, with around a quarter of respondents mentioning this, while 23% were seeking a larger property (see chart in the attached PDF).
Policy support boosted house purchase activity across the market
“House purchase activity was further spurred last year by the stamp duty holiday, continued low interest rates, and successful efforts on the part of government to limit the rise in unemployment through the furlough and self-employment income support schemes.
“Remarkably, despite the biggest shock to hit the UK economy for over 300 years, the number of mortgages approved for house purchases in 2020 (owner occupier and Buy to Let combined) actually exceeded the number approved in 2019, as shown in the chart in the attached PDF.
“Detailed data for recent months is not yet available, but a range of data suggest that investor demand remained solid over the past six months. Overall, c37,000 Buy to Let mortgages were completed in the second half of 2020, similar to the same period of 2019. Moreover, in January 2021 Buy to Let completions were running 20% above 2020 levels (before the pandemic struck), no doubt boosted by the prospect of the end of the stamp duty holiday (subsequently extended to the end of September in the March Budget).
House prices rebounded strongly after the impact of the first lockdown passed
“The surge in housing market activity, together with limited stock on the market, resulted in a sharp acceleration in house price growth last year. Indeed, despite economic activity declining by c10% in 2020, house prices ended the year 7.3% higher on our measure (and 7.7% higher on the ONS measure, which includes BTL and cash purchases). After slowing modestly in March 21, price growth rebounded to 7.1% in April after the stamp duty holiday was extended.
Rental growth remained subdued
“ONS data suggests that annual rental growth in the PRS in most parts of England outside of London remained broadly stable last year, at around 1.8% (see chart in the attached PDF). Rental growth in the capital was weaker than in the rest of England, as has been the case since 2017, though that was after a prolonged period of outperformance.
“Taking a longer-term perspective, outside of London, rental growth was subdued for a prolonged period, running below the rate of inflation for much of the past 15 years. This is illustrated in the chart below, which shows how rents have evolved in different UK regions in real terms, i.e. after taking account of inflation.
“Nevertheless, this doesn’t necessarily mean that affordability has improved significantly for many, since incomes also fell in real terms for a number of years after the financial crisis. Indeed, survey data suggests that UK households continue to spend more on housing costs than many other developed economies (including those in the PRS). For example, Eurostat data indicates that c38% of households in the UK private rented sector spent over 40% of their disposable income on housing costs in 2019, compared to an average of 28% of households across the EU and c18% in Germany and France.
Outlook - clouded
“The outlook for the wider economy remains extremely uncertain, where much will depend on how the pandemic and the measures contain it evolve, as well as the policy measures put in place to support the economy.
“Rapid progress of the vaccine programme holds out the possibility of a robust rebound in economic activity in the second half of the year. Nevertheless, most forecasters expect unemployment to rise towards the end of the year as the furlough scheme winds down and it takes some time for the economy to generate sufficient jobs to absorb displaced workers. If this comes to pass, this may impact tenant demand and exert downward pressure on rental growth and housing market activity more generally (where the end of the stamp duty holiday at the end of September 2021 is also likely to exert a drag on the latter).
“Financial markets continue to imply low policy rates in the years ahead, which would be likely to support investor demand, but there is significant uncertainty surrounding the future path of interest rates. With the economy still operating around 7% below its pre-pandemic level in early 2021, the threat of inflation appears limited at this stage. However, the pandemic has impacted the supply side of the economy as well as the demand side, and it is unclear how the balance between demand and supply, and hence inflation will evolve.
“For much of 2020, financial markets priced in the prospect of negative Bank Rate in the years ahead, but by mid-March 2021 market pricing implied modest rises had become more likely. Similarly, after touching new all-time lows in 2020, longer term interest rates have increased noticeably in recent months – 5-year swap rates were near zero in late January but increased to c50bps by mid-March (see chart in the attached PDF).
“There is also uncertainty surrounding the nature and timing of measures that the government will adopt to repair the public finances. Changes to property taxation, pensions and/or capital gains tax could further impact investor appetite (in either direction) in the years ahead.
“As well as the uncertainties surrounding the broader economy, it is also unclear the extent to which shifts in housing demand will persist, and the extent to which people will act on them in the years ahead. If demand permanently shifts away from more densely populated locations and property types, this could have an adverse impact on the PRS in aggregate, given that the privately rented housing stock is more concentrated in urban locations (as illustrated in the chart in the attached PDF) and in flats and terraced properties.”
