Helping people to get a foot in their own door
The report by National Savings & Investments on the increasing difficulties faced by would-be first-time homebuyers in Scotland no doubt came as a shock to many - but not to those at the sharp end of rented housing.
First-time buyers north of the Border are now taking four and a half years to save for a 5 per cent deposit on a home, which is on average 12 months longer than last year, according to NS&I. It also found the average price of a first home had risen by 12 per cent to more than 106,000.
Even in the "executive" sector of the rental market we have clients who have been domiciled in the same rented flat for two or three years and more. Less than a decade ago they would have rented for a year or so and then have moved on to owner-occupation. In theory, since then low interest rates should have made buying a house more affordable but in a (until now) buoyant economy, cheaper mortgages have simply created more demand, leading to higher prices and more people being left behind.
So what is to be done about it? More houses? Relaxed planning laws? More government "help" for first-time buyers, as was announced in the pre-Budget report on Monday?
No doubt these all have a part to play but there may be another, more radical, way to address the concerns of the younger generation about finding affordable housing. The pre-Budget report closed the door on those people directly purchasing houses or flats to fund a self-invested pension plan (or SIPP), but perhaps investors in residential property funds have been allowed to slip through. The Treasury website says "the government is minded to allow SIPPs to invest in genuinely diverse commercial vehicles that hold residential property" although whether or not this will apply to all funds, or just particular vehicles, has not yet become clear. What does seem likely is that the Chancellor's SIPPs U-turn will lead to more investment in residential property being directed through funds, on a portfolio basis, rather than individual purchases.
Consequently, this will encourage the development of a market-led "structure" to rented homes, bringing with it the disciplines that have applied to shops, offices and other commercial property investments.
The best funds are currently concentrated on blue chip locations offering historically good rates of rental return and capital growth (Edinburgh's New Town and Glasgow's Park Circus area are two good examples). However, as that structure gains in experience and cost-effectiveness, the funds may branch out from such proven, high-yielding residential areas to riskier, but potentially profitable, locations where demand is growing year by year.
House-building has undoubtedly been one of Britain's most consistently successful industries, for at least a century. Even so, building for owner-occupation is not keeping up with changing demographic trends, especially when set against more numerous (if smaller) households combined with strict planning regulations.
And while owner-occupation is likely to remain the most popular single form of tenure, alternatives are desperately needed to meet the needs of future households. Relatively few people would like to see a return to the situation prior to 1980 when hundreds of thousands of Scots were trapped in municipal landlordism. Equally, the "right to buy" legislation led to a shortage of affordable rented family homes that has got steadily larger.
The increase in short-assured tenancies (usually involving furnished properties) has filled the gap to some extent but this is a niche market aimed largely at upwardly mobile professional people and was never designed to cater for those seeking long-term rental tenure. Which is why investors may not be the only beneficiaries of residential property funds. With a proper structure, complemented by a friendlier tax regime, these could eventually drive the development of new homes specifically for rent and so meet the aspirations of increasing numbers of people who, when they think "housing", are more tuned into lifestyle rather than investment.
To the well-established argument that after paying rent over 25 years the tenant is left with nothing whereas paying off a mortgage provides an asset, one has to ask just how big an asset a house is likely to be in future?
While lawyers, estate agents and other private sector interests have driven down the administrative cost of buying a house, this has been more than counterweighted by the government's growing take through stamp duty - the easiest of all taxes to collect (so no hope there of a reprieve) and currently pulling into the Treasury some 6 billion per annum.
Meanwhile, people who made sacrifices for most of their working lives so that the family home became an asset to pass on to their children are finding its value increasingly skimmed off by inheritance tax. Nowadays, any assets over 275,000 (the price of a three-bedroom flat in Marchmont, for example) are taxed at 40 per cent.
And here's a thought: is there not a connection between the amount of equity sloshing around in British homes and the government's decision to carry out an annual 5 billion raid on private pension funds? There has to be the suspicion that Downing Street thinks folk could compensate themselves for a deficit in their pensions by releasing some of the equity tied up in their homes (think of the growth in "home income" plans since Gordon Brown became Chancellor).
Even if owner-occupation eventually becomes more affordable, the current generation of young adults deserve the benefit of a level playing field between buying and renting so that they can make an informed choice between two market-driven forms of housing tenure - purchase or rental - that best suits their lifestyles and plans for the future. Residential property funds - whether by accident or design - may turn out to be the best way of giving people one half of that choice.
David Alexander is proprietor of DJ Alexander, the Edinburgh and Glasgow-based property management firm. He recently addressed the British Chamber of Commerce in Hong Kong on residential property investment in Scotland.
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