Most of the fallout from the Pandemic has been postponed in the UK. But then what?
By Nick Corbishley, for WOLF STREET:
The British public was recently treated to an exemplary example of what Wolf Street likes to call “extend and pretend forevermore.” At the end of last week, the UK government extended its ban on tenant evictions by four extra weeks. First launched in late March, the ban was supposed to last three months, but it was extended by an additional two months in June. Now, it’s been extended til late September.
In other words, tenants will have been safe from legal eviction for six months so far this year. The government also lengthened the minimum period of notice a landlord has to give before evicting a tenant from two months to six months.
Extending the eviction ban and the notice period offers a lifeline of sorts for tenants who are unable to pay their rent in the wake of the lockdown. Their landlords cannot evict them but the rent is still owed. And while extending the ban and the notice period may remove the immediate threat of eviction, in many cases all it really does is postpone the inevitable while shifting the locus of immediate financial stress from the tenants to the property owners. And the property owners are not happy.
“While the announcement could be seen as good news for tenants as it gives them the security of having a home, especially during a time when so many have been affected by the financial impact of the pandemic, it begs the question – what about the landlord?” asks Paul Offley, Compliance Officer at The Guild of Property Professionals.
In some cases, Offley warns, it could take far longer than six months for landlords to complete the eviction process, particularly if the tenant decides to stay on even after the eviction period has lapsed. During the notice period, landlords may no longer qualify for forbearance — or as Brits breezily call it, a mortgage holiday — which is scheduled to come to an end in late October, though it too could be extended. During the six-month period landlords will still be legally bound by Health and Safety regulations pertaining to their property, even if they have no rental income coming in to pay for repairs.
How many landlords are in this situation?
Two million people in the UK — roughly one in 33 people — currently own homes they rent out. The vast majority of them are small buy-to-let landlords with one or two properties. Many have mortgages to service on the properties they own.
For over three decades the UK witnessed a huge buy-to-let boom, as investors and pensioners took advantage of favorable tax conditions to play the property market. After the GFC, as interest rates fell and yields on conservative investment products such as UK gilts gradually disappeared, more and more money flowed into property. Then, three years ago, the government reversed policy amid concerns that buy-to-let landlords were crowding out first time buyers: little by little, the tax conditions became less favorable, prompting many landlords to sell up. The boom ended.
Now, some of those who didn’t sell up face the risk of not being paid by their tenants. According to a poll of 1,058 private renters in England conducted by YouGov for the homeless charity Shelter, the number of renters in arrears has almost doubled since lockdown, from around 226,000 to around 442,000 — over 5% of the country’s 8.7 million renters.
A recent poll by the National Residential Landlords Association (NRLA) suggests the number could be higher: 87% of the landlords surveyed said their private tenants had paid their rent as normal throughout the pandemic so far. An additional 8% said they had agreed a reduced rent, a rent-free period, or made some other agreement with their tenant. The remaining 5% of tenants are behind on their rent without the consent of their landlords. In other words, according to the NLRA, 13% of tenants in the UK are not paying their full rent.
In the UK, like much of Europe, most of the fallout from the Pandemic has been postponed, thanks primarily to the government’s furlough scheme, which has kept 9.6 million jobs on life support. Businesses have been able to claim 80% of a staff member’s regular monthly salary, up to a maximum of £2,500. The money is passed on to the employee and can also be topped up by the employer.
Many furloughed workers have continued to earn the lion’s share of their salary despite the fact they’re not working. This has allowed many of them to continue making their rent payments. But that may not last much longer. The government has already begun scaling back the furlough program’s provisions and is scheduled to scrap it altogether at the end of October. Unlike most of its European counterparts, it says it sees little sense in keeping workers in so-called “unproductive jobs” any longer than strictly necessary.
The government could execute another last minute U-turn, but if it doesn’t — and my guess is that this time it won’t — unemployment will quickly soar, much like it did in the U.S. in the early days of the Pandemic. Businesses that can no longer afford to pay their staff or lay them off will hit the wall. And the real upheaval in the rental market will start, as more tenants stop paying their rent, quite possibly at the same time that their landlords’ mortgage holidays end.
Landlords are edgy. Some are calling for the government to directly bail out renters so that the renters can then bail them out. In Wales, an even more ingenious scheme has been hatched: the government essentially gives struggling private sector tenants that have arrears dating back to the Pandemic a loan so that they can pay their landlords the arrears they owe. The taxpayer funds go directly to the landlords, who are made whole, while the struggling tenants get to take on thousands of pounds of fresh debt.
The plan, scheduled to kick off next week, has already drawn plaudits from landlords and real estate agencies in England, who are clamoring for much of the some across the border.
“A loan system of the type operating in Wales will help to protect tenants by ensuring they can continue to pay rent and reduce the risk of evictions,” said Dorian Gonsalves, chief executive of the residential property lettings agency Belvoir. “In the long term a loan system to subsidize the rental market and protect tenants may ultimately be less costly for the government than a potential increase in homelessness, especially as councils will struggle to rehome people due to a shortage in social housing.”
But before landlords in Wales and England get ahead of themselves, they might want to consider that a very similar scheme was launched four months ago in Spain, where rental delinquencies are a much bigger problem, and it’s been a complete flop. Just 1.3% of tenants have shown an interest in applying for the government-backed loans — a fraction of the estimated 15% of tenants who are no longer paying rent.
In most cases, the reason is simple: having lost their job or business and facing the bleakest economic panorama of their lifetime, tenants are struggling to see the point of taking on piles of fresh debt to pay months of rental arrears when they can’t even rustle up today’s rent. Not everyone, it seems, wants to play the extend and pretend forevermore game. By Nick Corbishley, for WOLF STREET.
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