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With Lincoln Tenants Deposits Totalling £7,371,230, how will ‘Lifetime Deposits’ Change the Lincoln Rental Market?

The Government’s scheduled publication of their White Paper for the Renter’s Reform Bill, which incorporates proposals to forbid Section 21 evictions and introduce ‘Lifetime Deposits’, has been suspended until 2022.

The additional time is required to give a chance to create a level playing field to reforms for both landlords and tenants in the private rented sector in England.

In this article, I want to look at these lifetime deposits. How could the Lifetime Deposit Scheme work, and how could they benefit both Lincoln landlords and Lincoln tenants?

When a tenant moves between rented homes, they need the deposit for their new home before being released from their old home.

The average deposit for a Lincoln rented

home stands at £830.

This means finding that amount of money at the time of moving home can be difficult for many tenants; thus, they become stuck in their existing rental.

Therefore, Westminster wants to propose in this White Paper a new deposit choice for tenants. A deposit is transferred from the old landlord (letting agent) to the new landlord (letting agent), thus making life simpler as the tenant doesn’t need to save for an additional new deposit every time, they move home.

Now, of course, it’s vital that any new ‘deposit scheme’ does not dissuade Lincoln landlords from making valid claims for damage to properties. Landlords cannot be expected to give up their right of recourse to a security deposit until such time that they are satisfied there will be no need to claim it.  

So how would Lifetime Deposits work?

There would need to be some form of system safeguarding that the new Lincoln landlord is protected by a whole deposit, even if the deposit on the old Lincoln home comes into dispute.

This will be critical and central to Lincoln landlords having conviction in the Lifetime Deposit Scheme. That could be something like an interest-free loan for the tenant on the crossover between the properties.

Another advantage to the scheme is that ‘lifetime deposits’ could be used for tenants to build a deposit for a house for the future.

What about the existing system of deposits?

The rules regarding the amount of deposit held by a Lincoln landlord were changed a couple of years ago, where only five weeks’ worth of rent can be held as a deposit.

The deposits Lincoln tenants have had to save for certainly raises the cost of renting a Lincoln home.

Some say this extra burden puts another nail in the coffin of the dream of homeownership for many Lincoln renters. To give you an idea of the level of deposits held for Lincoln rental properties…

The total of all the tenants’

deposits in Lincoln are £7,371,230.

Yet the other side of the argument contends that if the Lincoln tenant misses more than one month’s worth of rent, the landlord is immediately out of pocket, even before they’ve got the costs of solicitor and any improvement works from the tenant trashing the place.

Does a deposit of just over one month provide Lincoln landlords with a decent level of protection against unpaid rent or damage to the property? When you consider…

The total value of all the privately rented properties

in Lincoln is £1,997,336,900.

Before I conclude my thoughts to the initial question of ‘lifetime deposits’, the need for decent landlord insurance to ensure you are adequately covered as a Lincoln landlord is vital.

So, what are my thoughts on ‘Lifetime Deposits’?

It is my opinion the common need for Lincoln tenants to stump up a ‘two-fold deposit’ is not helping many Lincoln renters when it comes to moving home. It’s clear the standard cash down deposit is not fit for purpose for the 21st Century.

One might suggest the Government’s quest for the ‘lifetime deposit’ could open the door to other deposit alternatives that have come onto the market for tenants in the last few years.

Some landlords don’t require a deposit yet are compensated by asking the tenant to pay a higher rent to cover the risk. Also, there are companies that offer insurance backed deposits where the tenant pays one week’s rent to an insurance firm, and the insurance firm pays out if a loss is incurred by the landlord.

Interestingly, other countries are already offering deposit loans and guarantee schemes. Could this be something for the British Government to contemplate?

We must wait until at least the spring of 2022 for the Renter’s Reform White Paper to be published. Then every stakeholder involved (tenants, landlords and agents, et cetera) can look at it in the cold light of day and decide how this will affect the way they view the landlord/tenant/agent relationship.

Many will say the bigger issue isn’t ‘Lifetime Deposits’ in the White Paper, but the removal of no-fault Section 21 evictions. The removal of Section 21 is something the current Government have pledged to bring in during this parliamentary cycle (i.e., before Q4 2024). 

I am not concerned about removing no-fault Section 21 evictions, but what will replace it to ensure there is suitable redress for landlords if the tenant doesn’t pay the rent?

Of course, a handful of Lincoln landlords will decide to sell their rental portfolio because of the White Paper. The same happened in 2016 when the increase in landlord taxes were announced. 

However, this will reduce the supply and availability of Lincoln rental properties,

meaning rents will rise (classic textbook supply and demand),

thus, landlords return, and yields will rise.

Yet, because tenants still can’t afford to save the deposit for a home and we are all living longer, the demand for rental properties across Lincoln will continue to grow in the next twenty to thirty years. The reason being we are still not building enough homes to accommodate our growing and ageing population. This means we will turn to more European ways where the norm is to rent rather than buy in their 20s and 30’s.

This means new buy-to-let landlords will be attracted into the market, buy properties for the rental market in Lincoln and enjoy those higher yields and returns. Isn’t it interesting that things mostly always go full circle?

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Is the Lincoln Property Market Running Out of Steam?

In recent articles on the Lincoln property market, I have been talking a lot about house prices over the last 12 months and 5 years in Lincoln.  

When it comes to newspapers talking about the property market, the headline most people look at is what is happening to house prices.

However, as 2 in 3 (65.1%) of Lincoln home sellers are also home buyers, the price is almost irrelevant. Let me explain.

If your property has gone down in value – the one you want to buy has also gone down in value – so you are no better or worse off (and if you are moving up market – which most people do when they move home – in a suppressed property market the gap between what yours is worth and what you will buy gets lower … meaning you will be better off).

Many property commentators (including myself) consider a better measure of the health of the property market is the transaction numbers (i.e. the number of people selling and buying).

Let’s look at the numbers for Lincoln.

The average number of properties sold in Q1 (Jan/Feb/March) between 2008 and 2020 was 110 properties per month, whilst Q1 in 2021 saw 124 properties sell on average per month (boosted by the March stats where an eye watering 149 homes sold). This meant …

12.4% more houses sold in the Lincoln area in Q1 2021

than the 14-year average

The average number of properties in Q2 (April/May/June) between 2008 and 2020 was 121 properties per month, whilst Q2 in 2021 saw only 93 properties sell on average per month, meaning …

23.6% less houses sold in the Lincoln area in Q2 2021

than the 14-year average

Finally, whilst the exact stats for Q3 2021 for our local authority won’t be published by the Land Registry for a couple of months, I can make certain calculated assumptions from the national data published by HMRC. The number of property sales for our local authority area in Q3 (July/August/September) between 2008 and 2020 was on average 129 properties per month. However, using the HMRC data, I calculate there will only be 93 properties sold on average per month in Q3 2021. This means …

27.9% less houses sold in the Lincoln area in Q3 2021

than the 14-year average

One of the two main drivers of activity in the housing market in the latter half of 2020 (meaning Q1 figures were better than the long-term average) was the battle for space, with many Lincoln buyers seeking larger properties to work from home. The second was the short-lived tax relief measures such as the cut to Stamp Duty Tax meaning property prices were at an all-time high.

But what also might surprise you is the number of people buying for the first time.

1 in 4 mortgages since lockdown have been

for first-time buyers (25.12%)

Lincoln first-time buyers, buoyed by parental help with their deposits, the Government’s 5% deposit mortgage and ultra-low borrowing costs, have also helped to push house price growth since the start of 2021. In fact, if you split down house price growth between second time (third time etc) buyers and first-time buyers, the national annual house price inflation for first-time buyers is 9.2% compared to 8.1% for the second or third etc buyers. 

Yet, the Q2 and Q3 2021 Lincoln property market was worse than the long-term Lincoln average (in terms of property transactions)

The question is – should we be worried?

The UK economy continues to deliver a benevolent framework to the British housing market. 

The labour market has outstripped expectations with the millions expected to join the dole queue at the end of furlough failing to materialise and with the number of job vacancies on the rise.

Of course (and I mentioned a lot in my recent posts), the Bank of England is projected to increase interest rates to dampen inflation in the coming months, with further small rises predicted over 2022, so I do expect the demand for property to cool off as mortgage borrowing costs increase. 

Normally such rises in mortgage costs would mean less property would sell, yet nothing over the last couple of years has been normal.

Many Lincoln property homeowners have held back putting their property on the market in the last 6 months because they were afraid, they would sell their own home but not find another to buy – thus making them homeless (nothing could be further from the truth – yet that is what a lot of people incorrectly believe).

If the Lincoln property market slows and interest rates rise, mortgage costs will still be incredibly low by historical standards.

Also, if the obstacle of raising the 5% deposit can be overcome by first-time buyers plus a confidence that existing homeowners won’t be made homeless because of a cooling property market, many more people could be tempted to enter the property market by placing their property for sale first …

… thus, opening the market to more buyers – which in turn will drive up transaction numbers back to their normal 14-year average. However, raising a deposit is likely to remain the primary obstacle for many.

If you are a Lincoln homeowner or first-time buyer and want my thoughts on the future, then please do drop me a line.

2022 is going to be an interesting year ahead for the Lincoln property market – only time will tell if this will be a brief respite or is it running out of steam?

Please tell me your thoughts on what you think will happen.

AUDIO VERSION – http://ow.ly/ol9u50GORHn

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BASE RATE RISE?

The base rate of interest is set to rise in the ‘coming months’ as the Bank of England acts to control the UK economy.

The Bank voted to keep the base rate at its historic low of 0.1% in November, but with inflation 3.1% and predicted to rise to as much as 5% in the first half of 2022, a rise is likely.

Any rise will impact mortgage borrowing costs, although with an estimated 80% of borrowers on fixed rate deals, no significant adjustment to the housing market is anticipated in the short term.

Compared to the Global Financial Crisis in 2008/09, when the base rate was often more than 5%, the rate by the end of 2022 is expected to be a maximum of 1%.

Raising the base rate encourages people to save, not spend. This should slow the increase in prices of household goods.

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How far would you go to help your child get on in the world?

Many Lincoln parents move area to ensure their child gets into the best primary school, or to fund their university costs. Many of you reading this have even helped your children with the deposit for their first home from savings.

However, I have come across many Lincoln people in their 50’s and 60’s who have good jobs and incomes, yet don’t have the savings to give to their children to help them buy their first home. It doesn’t help when you consider…

the average value of a Lincoln home has risen by 16% in the last 5 years, from £192,650 to £223,450.

I am therefore seeing increasing numbers of parents who are willing to re-mortgage their own Lincoln home or start a new mortgage (when they own their Lincoln home outright) — to get their children onto the Lincoln property ladder.

So, whilst the Government is trying to turn Britain’s 20 and 30 somethings from ‘Generation Rent’ into ‘Generation Buy’, the Bank of Mum and Dad are mortgaging their retirement to pay for it all. Yet it need not be cost prohibitive borrowing the deposit as you still have access to interest only mortgages.

With an interest only mortgage, your monthly mortgage payment covers only the interest on your mortgage, not any of the original capital borrowed. This means your mortgage payments will be lower than on a repayment mortgage, remembering though at the end of the term you will still owe the original amount you borrowed from the mortgage provider.

1 in 14 new mortgages are interest only and 1 in 5.5 existing mortgages are interest only mortgages, they are extremely popular.

Anyway, many Lincoln homeowners might be worried about having that level of debt in their golden years. However, many plan to pay off the mortgage when they downsize as they get into their 60’s and 70’s.

I talk to many Lincoln homeowners, who are asset rich but cash poor and desire to help their children onto the Lincoln property ladder. Their attitude is their children will inherit their property when they pass away, so it seems practical to give them that money to work harder for them earlier in their life when they need it to buy their first home.

Can you get a mortgage, even if you are retired?

A lot is dependent upon your age and financial position. The mortgage companies will see if you have adequate funds for your retirement and emergencies plus leaving enough equity in the property to enable you to downsize in the future. Like all things, you need to take advice from a qualified mortgage arranger.

So, that then begs the question, is there enough equity in Lincoln homes to borrow against?

In the late 1980s and again in the early 2000s, many Brits saw their homes as a cash machine. Numerous homeowners re-mortgaging at the end of their mortgage’s preliminary term (usually after the initial 2, 3 or 5 years), but when doing so increased their mortgage to enable them to buy a nice car or fancy holiday. Yet, by increasing the borrowing, it created negative equity in the early 1990s and stopped many homeowners moving home between 2009 and 2013 because of their lack of equity.

Therefore, I must ask, have we borrowed too much this time round?

Looking at Lincoln and the specific postcodes LN1 to LN6 combined…

In 2016, the average Lincoln homeowner had a mortgage of £79,687 and today it is £92,343, a rise of £12,656.

Looking at these numbers, one might think we are again over-extending ourselves, yet as regular readers of my blog about the Lincoln property market will know – I like to drill down and look at all the figures.

Initially, I was worried about these stats, until I considered the equity Lincoln people have amassed over the same 5 years.

In 2016, the average equity held in a Lincoln homeowner’s property (whilst still having a mortgage) was £112,963, yet today that stands at £131,107, a rise of £18,144.

Even though mortgages have increased, Lincoln homeowner’s equity has risen even more, meaning as we stand today, mortgaged and owned-outright properties, there is…

£16,670,851,431 of equity held in all Lincoln homes.

Whilst the total value of mortgages has increased slightly since 2016, as a percentage, this has gone down meaning Lincoln homeowners and Lincoln landlords have increased their equity in the last five years.

It can quite clearly be seen that the financial insecurity sparked by the Credit Crunch crisis of 2008/9 has created a generation of Lincoln homeowners and landlords who are savers and improvers rather than movers and excessive borrowers, using excess cash to invest in their property and pay down debt or to excessively borrow on their equity growth.

Only 16.35% of the total value of Lincoln property

is borrowed money with a mortgage.

This is great news for every Lincoln homeowner and Lincoln landlord because irrespective of whether the ‘Post Lockdown Bounce’ is short or long-lived, it shows the Lincoln property market is in a better state to ride out any storm that it might encounter than ever before because less people will be in negative equity or have prohibitively high mortgages.

Before I finish, I fully appreciate money and inheritance is a sensitive subject for many families.

My message to all the Lincoln parents is, just because your children aren’t talking about the subject, it doesn’t mean it’s not on their mind.

The lead must come from you, as a Lincoln parent to ensure the wealth held in your bricks and mortar can be used to your family’s advantage, when they need it most.

If you do, your children will thank you for it and they may even do the same for their children, then, they will do the same for their children’s children … creating a legacy that will go on for generations.

Audio Version – https://lincolnpropertypodcast.buzzsprout.com/1870157/9498795