Chairman Clifton Asset Management
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Averting the rental trap catastrophe

25th Jul 2019
Chairman Clifton Asset Management
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Buying a new house

We recently set out proposals to the Treasury designed to get many more millennials into homeownership, and sooner, as well as getting them engaged with, and enthused by, pension savings.

I won’t go over all that again, as our ideas around allowing first-time buyers to save for a deposit within their pension savings have been covered extensively (if you want to read the document in full you can find it here or listen to my Tav on Money opinion on the matter).

In short, our ideas met with an exceptionally polarised response. Basically, pretty much everyone outside of the financial advisory business loved the idea and pretty much everyone within the industry (or anyone who commented, at least) hated it. So, for the majority, making pensions relevant and useful to younger savers is, apparently, heresy.

Anyway, that squabble notwithstanding it was interesting to read the output from the All Party Parliamentary Group (APPG) on Housing and Care for Older People.

The APPG has become increasingly concerned about the long-term prospects for employed renters who never make it into home ownership. Their recent report suggests that currently some six hundred thousand millennials face such a prospect. Whilst long term renting isn’t necessarily a problem, affordability is.

The high cost of private rents means that, on average, a younger employed person is paying something like 40% of their take home pay in rent, according to the APPG. The immediate effect on this is, of course, to significantly reduce the amount they can put aside for other financial essentials, such as saving for a deposit or long-term savings for retirement.

The bigger problems come later down the line, however. Even if they do manage to amass a meaningful pension pot most individuals can expect their income to halve in retirement meaning that instead of paying 40% over to the landlord, they would now be paying 80%. That’s real poverty and a route to homelessness.

The committee has stressed the urgency of building more affordable homes, recommending a target of 21,000 a year for the next twenty years. Whilst I cannot disagree that this is part of the solution, deposit affordability in a currently renting scenario still has a massive impact.

Pensions and property really are the cornerstones of most people’s long term financial security. And thus, using the generous tax breaks and employer contributions of one to help young people acquire the other makes perfect sense to me. For many young savers, it is probably the only realistic way out of the rental trap.

Yes, it is effectively a government subsidy on saving and property purchase but the net benefit to the economy, especially when contrasted with the APPG’s stark picture of future pensioner poverty and homelessness, is immense.

It is gratifying to see that, despite the (I suspect) somewhat self-serving response of sections of the IFA community, some pretty big hitters have come out in support of our ideas, including the secretary of state for housing, the Association of Consulting Actuaries and Scottish Widows, amongst others.

If we are to counter the negativity and make this a real option for brightening the future prospects for millions of youngsters who, through absolutely no fault of their own, are caught in a vicious cycle of ever-increasing house prices and high rental costs, then more influencers need to get behind the idea. At the top of my list would be the ICAEW and the ACCA. Come on guys…

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By C.Y.Nical
26th Jul 2019 11:29

My wife and I own 4 residential property investments, mortgage free. It used to be 5 but we sold 1 to try and stay under the MTD threshold (a failed tactic). For the purpose of discussing Adam Taverner's subject I have to ignore 2 of the properties because they are within the curtillage of our PPR and we would never sell them separately. The 2 properties that are relevant to this are (A) a 2 bed terrace and (B) a 3 bed semi.
We know and have a friendly trusting relationship with our tenants, they are nice people and they look after the properties beautifully. A is a childless couple, B have kids from a previous marriage visiting but not staying. Both of these households really ought to be buying a property for exactly the reasons Adam Taverner gives.
Couple A say they do not want to buy because they hope to do more travelling and are fearful of becoming landlords themselves if they have a property they need to rent out while they are away (they have been frightened off by all the recent changes). I think couple B would buy if they had a deposit in cash but I don't think they are saving.
I have tried to devise a way of converting these two investments into some form of shared ownership. I think that some B2L investors would be interested in this and it would go some way towards mitigating the problem which the APPG is worried about. But there seems no ready-made route into this, our accountants and solicitors don't think they know enough about the ramifications to advise us, and clearly it is something that would have to be as foolproof as possible for us to take the risk.
I wonder if anyone is thinking about this idea? It might be quite popular once landlords discover that they can't regain possession using s21, and therefore they can't sell their investments with vacant possession.

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By LostinSuspense
26th Jul 2019 14:20

The problem is that all the apartments built to house athletes / officials at the Olympics that I understood would then be sold to the public as homes were instead sold to private companies who sold them on to foreign investors to sit empty or rent out.

People working in London buy further afield (with larger salaries) forcing prices up and those on lower salaries into the rent trap. Meanwhile these investment properties sit empty, but with the desire of foreign investors to own a 'new virgin property' and existing investors refusing to take a hit on their investment, will we end up with another bubble?

Nevermind because all those relying on the gain in their homes to help fund their retirement in the next 10-20 years can sell at higher prices to the next generation and give their children money to get on the property ladder once their house has sold...

Soon a 4 bed house "could" be worth less than a 2 bed one.

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