Memorandum by The Paragon Group of Companies
PLC (CRED 38)
SUMMARY
1. The Paragon Group of Companies PLC welcomes
the opportunity to submit evidence to the Communities and Local
Government Select Committee's inquiry into housing and the credit
crunch. The inquiry is timely given the difficult conditions that
currently prevail in the wider housing market and, against this
backdrop, the growing importance of the Private Rented Sector
(PRS), and of buy-to-let investment, in providing alternative
housing for those who are putting off house purchases.
2. Paragon is the UK's leading specialist
provider of prime buy-to-let (BTL) mortgages to professional and
investor landlords. We launched our first specifically targeted
buy-to-let mortgages in 1995 and over the last 13 years have increasingly
specialised in this market. Paragon currently has 40,000 landlord
customers and services 90,000 individual accounts, with £11
billion of assets under management. We are a leading member of
the Council of Mortgage Lenders, playing a central role in its
BTL working group, and also of the Intermediary Mortgage Lenders
Association, Association of Residential Letting Agents and National
Landlords Association. Our roles in the market and within our
industry bodies have given us significant market and policy experience.
3. The key points of our submission are:
— In the context of a marked slowdown
in house sales and limitations to the availability and growth
of social housing stock, private landlords are providing an increasingly
vital source of affordable and flexible accommodation for many
people.
— While the modern PRS already provides
a housing option that a substantial proportion of the population
proactively choose as their preferred form of tenure, it is now
also becoming a much more important source of housing for people
who are unable or unwilling to purchase a home, especially given
low levels of consumer confidence.
— The implications of the economic
climate for the Government's social house-building targets have
brought the role of the PRS into greater focus. Despite the economic
downturn, experienced private landlords remain well-equipped to
meet the housing needs of people who are no longer looking to
the owner-occupier sector but cannot find accommodation in the
social sector.
— Alongside measures to assist existing
and prospective homebuyers, the DCLG's housing policies should
also encourage private landlords to maintain and increase their
commitment to the private rented sector. Any steps to reform the
regulatory framework of the PRS, particularly in light of the
recent Government-commissioned review of the sector, must ensure
that a fair balance between the interest of landlords and tenants
continues to exist. Otherwise there is a risk that landlords may
be discouraged from remaining in the sector.
— It is equally important that the
Government's wider efforts to support the banking sector and revitalise
the market for mortgage finance do not overlook the need to maintain
a healthy buy-to-let market. BTL lending over the last decade
has underpinned the expansion of the PRS and played a key role
in driving up property and management standards. Ensuring that
it can continue to do so is critical given the growing importance
of the PRS.
— Demand for privately rented properties
remains strong so, while the lack of liquidity in capital markets
has affected all lenders to one extent or another, the prime BTL
sector continues to perform well. It is absolutely vital that
the Government's bank recapitalisation programme, and its interlinked
desire to restore banks' lending availability to 2007 levels,
encourages lending against prime BTL assets and does not group
BTL with non-performing sub-prime mortgages or other lending activity
considered at-risk.
— In this respect it is vital that
policymakers recognise and are completely clear about the distinction
between prime BTL lending and speculative property investment.
These activities are very different from one another and must
not be confused.
— The products of prime BTL lenders
are aimed at experienced professional landlords—these are
typically financially sophisticated individuals who invest in
property for the long-term, are guided in their purchase decisions
by proven levels of rental demand and are often lowly-geared.
Property speculation, on the other hand, has been fuelled by property
investment clubs who target investors seeking capital appreciation
to achieve short-term gain. While these purely speculative practices
should be discouraged, a vibrant BTL sector is absolutely critical
to a healthy PRS and must be protected and encouraged, particularly
at the present time.
An increasing role for the PRS in the current
economic context
4. Despite a tendency for housing policy
to focus on home ownership and affordable housing, the PRS has
assumed a critical role in the modern housing market. The sector
has gone through a period of considerable change and modernisation
over the last 20 years. This process has seen it increasingly
bridge the gap between social renting and owner-occupation and
make a major contribution to housing and regeneration in the UK.
5. The modern PRS is already the tenure
of choice for a number of key groups within the population. Demographic
trends such as rising student numbers, demand for housing flexibility
from young professionals and sustained economic migration to the
UK have driven up demand for private rented accommodation, and
BTL investment has enabled the PRS to respond. BTL has played
a key role in broadening opportunities to rent privately and,
by increasing competition amongst landlords within the PRS, it
has helped to widen choice and drive up standards in the sector.
6. Since the introduction of BTL, there
has been a steady improvement in the quality of the PRS stock.
The DCLG's English House Condition Survey found that the percentage
of non-decent homes that are privately rented has decreased by
over 30% since BTL was formally launched in 1996. Furthermore,
the long-term commitment of professional landlords and the comparatively
low default rate in the BTL sector underlines the stabilising
influence that BTL investment has exerted on the wider housing
market.
7. In the current economic climate, with
uncertainty pervading the wider housing market, private landlords
are providing an even more vital source of accommodation for many
people. As the credit crunch and the economic downturn has taken
hold, market data suggests that building rates are slowing, mortgages
for first-time buyers are becoming less available or affordable
and strains on the social housing stock are increasing. Earlier
this year the Local Government Association argued that the economic
slowdown and the credit crunch could result in two million households,
or five million people, on the waiting list for social housing
in less than two years.
8. In this context, more people are looking
to the PRS to meet their housing needs. Rather than stimulating
a decline in demand for BTL mortgages, we are finding that the
downturn in the broader housing market—and the consequent
decision by many potential homeowners to put off house purchases
until the market settles—is driving up demand for privately
rented property. While the current lack of liquidity in markets
is limiting landlords' ability to invest in new stock to meet
rising demand, the appetite to invest is still very much in evidence.
9. Our own data shows that there is strong
tenant demand in the PRS, which is placing upward pressure on
rents and maintaining robust rental yields. The wider opportunities
to privately rent brought about by BTL investment mean that people
who would otherwise be forced prematurely towards home ownership—and
be severely financially stretched as a consequence—now have
greater scope to defer home purchase until later in life and instead
rented privately.
SPECIFIC POLICY
CONCERN
10. Paragon strongly believes that the role
of the PRS in responding to housing demand should be protected
and encouraged by Government and given more weight within its
broader housing policy, particularly at a time when private renting
is increasing in significance.
11. We were therefore encouraged that the
recent review of the PRS by Professor Julie Rugg and David Rhodes
of the University of York recognised the important role of the
sector in meeting a wide range of housing needs and recommended
that landlords of all sizes should be encouraged by Government
to grow their businesses. The view that privately rented property
is in some way inferior to other housing options was always misplaced
and we hope the review will help dispel it for good.
12. The DCLG's response to the effect of
the credit crunch has largely been focused on putting in place
measures to assist individuals who are struggling to meet their
mortgage loan commitment, to widen home ownership opportunities
through an extension of shared equity arrangements and speed up
social home building. While we understand the motivation for these
policy responses given the tightening of household budgets and
growing evidence that people are finding it harder to keep up
mortgage repayments, the Government should also look to harness
the role that is already being played by private landlords as
another strand of its housing policy responses to the credit crunch.
13. There are clear restrictions on the
ability of the social sector to be expanded sufficiently quickly
to meet the demand of all people who are, for whatever reason,
unable or unwilling to enter or remain in the owner-occupied sector
at the present time. Landlords typically operate within a tight
geographical area, allowing them to understand trends and needs
in particular areas and invest in properties to meet identified
tenant demand. We would therefore urge the Government to examine
how the PRS could be engaged more closely in meeting local social
housing need through the further development of schemes such as
choice-based letting.
Mortgage Finance
14. Given the importance of the PRS in the
housing market, it is critical that the Government's broad responses
to the current difficulties in the banking sector—which,
in parallel with restoring stability, are designed to revive lending
to businesses and homeowners—do not overlook the significance
of the BTL mortgage market. A thriving BTL market is necessary
to ensure that the PRS can continue to meet housing demand and
assist in further driving up standards in the sector.
15. Sir James Crosby is, at the request
of the Chancellor of the Exchequer, currently reviewing what market-led
initiatives might be necessary to improve the functioning of secondary
and primary markets in UK mortgage-backed securities. His interim
assessment, issued in July, gave a downbeat assessment of the
immediate prospects for these markets. Reopening them is the single
most important issue facing the sector at the moment.
16. While Paragon faces similar funding
constraints to other lenders who have in the past used these markets
to raise funds, the fundamentals of the BTL sector remain extremely
strong. It is crucial that policymakers do not confuse BTL with
sub-prime lending; on the contrary, BTL is a strong, secure asset
and must be treated completely separately from sub-prime in the
Government's response to difficulties in both the banking and
housing sectors.
17. The Treasury recently agreed commitments
with certain banks receiving support from its recapitalisation
scheme that require them, amongst other things, to maintain their
lending to homeowners and small businesses at 2007 levels in return
for an injection of capital. While the precise nature of these
lending commitments is not clear, there have been some suggestions
that the assisted banks may be required to exclude lending against
certain at-risk assets, for example non-performing sub-prime mortgages.
While there is a clear need to ensure that there is no return
to some of the irresponsible lending practices seen at the sub-prime
end of the owner-occupier mortgage market in recent years, it
is vital that prime BTL lending is not grouped together with sub-prime
mortgages or speculative property trading, as is sometimes the
tendency of commentators in the media.
18. An accurate understanding of genuine
BTL lending, and of the crucial role of investment in the PRS
by professional landlords using BTL products, must inform any
Government action directed at reviving lending levels. Speculative
property investment is very different from genuine BTL investment
but the two activities are often confused. Speculative property
investment, often encouraged by property investment clubs, typically
involves people paying large sums of money to subscribe to investments
in new build or off-plan properties at "discount" prices;
the focus is on the prospect of re-selling to make short-term
profits. Mainstream BTL lenders, in contrast, focus on the long-term
investment potential of private rented property and their products
are aimed at investors who have a similarly long-term investment
horizon; the most recent landlord survey by the Association of
Residential Letting Agents, published in September 2008, found
that most landlords expect to keep their property portfolios for
an average of 16 years.
19. Maintaining the availability of prime
BTL lending to experienced private landlords is essential for
a healthy and diverse PRS, and must form part of the Government's
response to current funding constraints. The Government must avoid
stifling responsible BTL lending to experienced landlords in any
efforts it makes to stamp out irresponsible lending practices
in the sub-prime sector or other sectors. BTL has been instrumental
in unlocking the appetite for professional landlords to invest
in the sector and their continuing ability to do so will ensure
that the PRS can play a full role in meeting housing needs in
the current environment.
Arrears and Repossessions
20. The credit performance of our borrowers
has remained robust despite conditions in the wider mortgage market.
Demand has remained strong at the professional end of the market
and increasing tenant demand in the current environment has actually
seen void periods fall amongst our landlords.
21. The Government has understandably been
urging a more responsible approach to repossessions as the credit
crunch places increasing numbers of borrowers under financial
strain. Some organisations such as Shelter have drawn attention
to the problems that can result for tenants in the case of repossessions
in the BTL sector. We recognise these concerns and take our approach
to arrears management and repossession extremely seriously.
22. Paragon operates what we regard as a
market-leading approach in the event that one of our borrowers
runs into difficulty with their repayments. We look at a range
of options when arrears emerge but we always ensure that the welfare
of sitting tenants is our highest priority. In all cases at present,
where we have to take control of a property due to chronic non-payment,
we will leave a sitting tenant in the property and ensure that
the property is professionally managed and maintained, either
directly or through a competent and qualified third party (ie
a managing agent). This secures the tenant's position, ensures
that the property is maintained and safe and the rent payment
profile maintained.
Private Sector Mortgage Rescue
23. The DCLG announced new mortgage rescue
arrangements as part of its package of measures to support the
housing market. These are directed at the most vulnerable families
who can no longer afford their repayments and who would be eligible
for homelessness assistance. They will be overseen and delivered
by local authorities and registered social landlords.
24. There has been a willingness within
the lending industry to provide privately-funded mortgage rescue
solutions. Proposals that have been put to the DCLG have the potential
to extend support to a much wider section of home-owners under
financial pressure than the Government's own arrangements are
intended for or would be capable of. The capacity of the private
sector to assist in this respect could become even more important
as the economy moves towards recession and financial pressures
intensify.
25. Appropriately regulated and funded private
sector mortgage rescue arrangements could provide an important
additional tool to the Government as it continues to focus on
how to limit disruption to the housing market and homeowners.
It may also represent an alternative model to some of the sale
and rent back schemes that have aroused concerns amongst policy
makers in recent weeks but which have nonetheless become increasingly
popular, suggesting a growing need amongst homeowners. It is therefore
important that the Government continues to discuss these mortgage
rescue proposals fully with industry, as it has indicated it will.
CONCLUSION
26. The Communities and Local Government
Committee's inquiry is very important and timely in the current
economic context. With many potential first time buyers unwilling
or unable to purchase homes, and existing homeowners coming under
increasing pressure to maintain their repayments, other sections
of the housing market are becoming increasingly important sources
of accommodation, not least the PRS.
27. It is vital that the Government's housing
policy responses to the credit crunch take full account of the
role of the PRS as a vital source of accommodation, and of BTL
investment as a key underpinning of the PRS. We hope the Committee
will help to highlight some of these issues as its inquiry progresses.
November 2008
| 
