Is holiday let regulation bad news?

Is holiday let regulation bad news? 4-year LHA rate freeze to end. January 30th may see base rate cut;
Holiday cottage

The latest development in the Private Rental Sector (PRS) is the news that councils in Scotland and Bristol have decided to regulate short term holiday lets.

Some present this as a cautionary note to landlords considering holiday letting. Landlords may feel world weary of the word ‘regulation’, but, a pragmatic look at this prospect actually has positive connotations.

The challenges being tackled

The AirBnB phenomenon has grown at a fast-pace, since the company was founded in 2008.

To illustrate this growth in real terms, in 2015 the London AirBnB market comprised 20,000 listings, a figure which has grown to 80,000 listings.

In particularly popular tourist locations, concern has been raised that the growth in short term rentals is reducing the long-term rental housing stock for local people.

Other issues, such as poor behaviour of some over-exuberant holidaymakers, has also been flagged within local communities.

What does regulation entail?

Imposing standard for health and safety, capping the number of properties used for short term lets in an area and enabling property checks to be made are amongst likely measures to regulate holiday lettings.

Limiting the number of days that a property can be let for on a short term basis may also be imposed.

For any decent landlord these measures only seek to ensure decent standards are maintained with the industry, which is nothing but positive.

If a cap on the number of days a property can be let for is imposed, then of course investors would have to do more careful maths to assess profitability.

An investor may also be pursuing the potential for capital growth, which may play a part in the decision making process.

Should landlords be put off?

Regulation is no bad thing for holiday let landlords. In fact, the opposite is arguably true.

Where controls are in place to maintain decent the standards of an asset, the risk of lending against that asset reduces.

So, if holiday lets become widely regulated, it is possible that more lenders will offer funds to those looking to invest.

As the choice of lenders grows, rates of borrowing commonly become more favourable which, in its turn, can have a positive impact on profitability for the investor.

What is the right approach to holiday letting?

Any business venture requires careful planning.

The prospect of holiday letting becoming regulated in more areas may naturally follow, as councils in Scotland and Bristol impose their changes.

As a landlord operating in or considering investing in this sector, it is a subject well worth keeping informed of, but it should not put off landlords with a robust plan from pursuing their plans.

4-year LHA rate freeze to end

News that the government’s Local Housing Allowance (LHA) rate freeze is to end, has not been met with enthusiasm within the rental industry.

The LHA rate is used to calculate housing benefit. Before the rate was frozen, back in 2016, it was intended that the LHA rate would make a proportion of rents affordable to those on housing benefits.

However, since the freeze, rents have increased. The gap between housing benefits and accessible rents has widened as a result.

Whilst lifting the freeze might on the surface be seen as good news for tenants in receipt of benefits, spokespeople from across the letting and landlord industry have said the move simply does not go far enough.

On behalf of the letting agent industry, chief executive of ARLA Propertymark, David Cox, had this to say:

“While any increase is welcome, this uplift does not go far enough. Ultimately, the government has missed an opportunity here to really help vulnerable and lower-income tenants.”

Representing UK landlords, John Stewart, of the Residential Landlord Association, highlighted the rise in rents versus the uplift in the LHA rate:

“Given rents have risen by an average of 5%, and in some areas more than that over the past four years, a rise of 1.5% in the benefit level is not going to be much help to a tenant struggling to afford the rent in those areas and many others.

“If it really wants to help tenants, the government should restore the direct link between rent levels and the LHA instead of a paltry flat rate increase.”

900,000 housing benefit claimants are due to be affected by the change, but the amount they receive per month is set to increase by just £10 per month.

January 30th may see base rate cut

In December, Jonathan Haskel and Michael Saunders voted to cut the Bank of England Base Rate. As the 30th of January approaches, the date of the next vote, two further members of the Monetary Policy Committee (MPC) seem to be gearing up to vote the same way.

The MPC comprises nine members, including the Governor of the Bank of England, Mark Carney.

At the December 2019 vote, Haskel and Saunders sought a drop in the Base Rate to 0.5%, from the existing 0.75%.

Silvana Tenreyo, Professor in Economics, spoke at think tank Resolution Foundation’s conference “Working Britain: What does 2020 have in store for job prospects and pay packets?” at which she spoke about a possible base rate cut:

“If uncertainty over the future trading arrangement or subdued global growth continue to weigh on demand, then my inclination is towards voting for a cut in Bank rate in the near term."

On 12th of January 2020, Dr Gertjan Vlieghe, member of the MPC since September 2015, added his voice to the sentiment for change. He spoke to the Financial Times about the option to delay a change in the rate or go ahead, stating:

“If you knew nothing about Brexit… and just looked at the UK data, you could reasonably make the case we should have cut rates already.”

The outgoing Governor of the Bank of England Mark Carney, in a speech published on 9th January, weighed up the pros and cons of taking action to affect change.

He referenced factors on both sides of the argument, acknowledging that there was “relatively limited space to cut Bank Rate”, but did say that “if evidence builds that the weakness in activity could persist, risk management considerations would favour a relatively prompt response.”

With some lenders already cutting buy to let mortgage rates, a drop in the base rate may see others follow suit, if only to remain competitive amongst their counterparts.

This information should not be interpreted as financial advice. Mortgage and loan rates are subject to change.