Mortgage curbs have their upside

This habit does not particularly endear our parliamentary representatives to the electorate but it is something from which residential property landlords just might take comfort in the next year.

As most of you reading this will know, some banks are coming in for mounting criticism for introducing much stricter criteria on applications for mortgage finance. We have travelled a long way, in a very short time, from lenders offering loans equal to 125 per cent of a property’s value to demanding a down payment in cash of 30 per cent.

For its part, the Government is on record as saying that lending criteria may be too tight and that more money should be made available to borrowers.

But this puts the Government in a quandary because it currently owns most of RBS and almost half of HBOS/Lloyds and, therefore, has a vested interest in a recovery in the share price of these two organisations to enable it to get back the billions of pounds spent on rescuing both of them from bankruptcy in the autumn of 2008.

Now, it is perfectly possible for a bank to be successful and have a flexible lending policy (that, after all, is what they are there for). However, while RBS and HBOS/Lloyds may be out of intensive care, the recovery process is not yet complete; strength and muscle need to be built up before they can go about their business normally again.

Dropping the medical metaphors that means both banks will need to build up their cash reserves if they are to boost the share price, which inevitably means tighter lending restrictions will continue to apply for the foreseeable future. And whatever they say in public, Government Ministers (and members of the Shadow Cabinet in what will be an election year) will mostly go along with this policy.

So why should this be of particular relevance to residential landlords?

Well, tight lending restrictions, which are only to be eased ever so gradually, is bound to have a dampening effect on the numbers being granted mortgages.
Consequently, many people occupying rented accommodation for the past two or three years, who otherwise would now be thinking of moving on to owner-occupation, will have no alternative but to renew their rental leases. This fact, combined with demand from the “next generation” of young tenants, could very well enable landlords to demand more in rent – or at the very least lead to a sustained period in which rental levels do not fall.

The only landlords unlikely to be beneficiaries from this situation are those who own top end luxury accommodation; this is a market driven largely by corporate-led lettings paid for by companies rather than private individuals and tends to suffer whenever the corporate sector makes cuts. On the other hand, if landlords of such properties are prepared to take a realistic view of achievable rental rates in the current climate, they may benefit from demand from “conventional” tenants prepared to pay that little bit more to live somewhere special.

Most residential landlords – even those with prime portfolios in the best parts of Edinburgh and Glasgow – have been adversely affected by the property slump, in the sense that the value of their holdings has (on paper at least) gone down. However, in practical terms this has only hit those property owners (in reality, a small minority) for whom selling up is an absolutely necessity, either now or in the short to medium term.

In this respect rental income has provided property landlords with a “haven” not available to other investors. For all its drawbacks, made apparent by the recent financial crisis, investment in residential property still has much to commend it.

David Alexander is proprietor of D J Alexander, the Edinburgh- and Glasgow-based letting and estate agency.

THE SCOTSMAN, 10 December 2009