Our Mortgages Managing Director, Richard Rowntree, explains why house shares are an essential part of the private rented sector.

As I write, I look back on what has been an extraordinary year in the property market. I’m pretty sure I said something similar at the same time last year, but it has been another rollercoaster twelve months.

UK Finance’s Household Finance Review highlighted a 33% year-on-year increase in mortgages being written during the third quarter of the year, resulting in £14.9 billion of business. Exceeding the high seen when borrowers raced to complete purchases ahead of the Stamp Duty holiday end, this was the highest total value of lending on UK Finance’s records dating back to 2016.  

When it is published in March, the Q4 review is unlikely to share such similar positive figures, with the hangover of the inauspicious mini-budget still being felt as the year came to a close.

Amongst the continuous flow of articles reminding us of the UK’s fiscal fragility, I’m sure any downturn in lending will be seized upon by some as further evidence of the downfall of buy-to-let. However, there is reason to be optimistic.

We have already seen product availability increase and swap rates come down those volatile weeks in October. This will go some way to enabling buy-to-let landlords to invest in response to demand for rented homes, which hit record levels twice throughout 2022.

However, the imbalance between that and supply remains.

I often read with interest market analysis by Capital Economics, and they recently looked at reasons behind a tight rental market, exploring factors impacting the supply of privately rented homes.

While I think they were right to cite the RICS landlord instructions balance and UK Finance’s healthy Q3 lending figures to counter the suggestion that landlords are offloading properties to owner-occupiers at scale, I’m not sure I agree with their conclusion that the drop in supply is because of renters choosing to live alone rather than in house shares.

This was based on analysis showing a year-on-year increase of 530,000 in the number of people renting alone, while the number of people renting in a household of three or more fell by 2 million.

Capital Economics pointed out that due to the data covering April 2020 to March 2021, it may have been possible that some renters reported living alone after their housemates moved back in with partners or family members to form ‘bubbles’. Despite this, the author concluded that more of a conscious shift was suggested by data highlighting that among renters that had recently moved house, the share of one-person households almost doubled from 24% to 42%.

While I can see the logic here, I suspect that the shift is not quite so severe in reality.

Our book supports this with strong lending figures for the purchase of HMOs seen throughout much of last year. This correlates with wider industry statistics showing that the £198 million of buy-to-let mortgages written for the purchase of HMO during Q3 2022 was higher than that written during the same period the year before.

The case for strong HMO demand seems even more compelling when we consider that during Q3 2021 activity was elevated as a result of the Stamp Duty holiday ending in September, while the market saw substantial disruption following the mini budget in September 2022.

Capital Economics did recognise that the trend they identified may be reversed as a result of cost-of-living pressures and I think that affordability is an important factor. Again, referring to our tenant research, the most affordable type of rented home was a room including bills, which averaged £571 per calendar month in a converted flat and £557 in a terraced house, the two property types most commonly converted to HMOs. This can be compared to an average of £1,255 paid to rent a whole converted flat or £875 for an entire terraced house, both inclusive of bills.

Tenants have also told us that rented homes can enable them to live in areas where they couldn’t afford to buy and this is particularly true of HMOs. We often find that house shares are well located, within a short commute to city centres, or near universities or large employers like hospitals and distribution centres.

This means that house shares are an essential part of the private rented sector, relied on by a wide range of renters for both work and social reasons, and investment in them should be recognised as part of a comprehensive solution to the UK’s housing shortage.

Richard Rowntree
Managing Director for Mortgages