Buy-to-let landlords and lenders will take heart that tenant arrears have declined since the turn of the year. In March, 8.7% of all rent was late or unpaid according to the LSL Property Services Buy-to-Let Index, down from 9.3% in February.
Inflation has been broadly trending downwards in the past six months, albeit with a hiccup in March.
Rents dipped in Q1 and these two factors have provided a financial respite to many tenants.
The growing minority of renters who are in severe financial trouble should provide a note of caution
The longer-term performance of rental arrears has been supported by a changed tenant mix. difficult to secure by historic
standards and the average age of first-time buyers is rising.
As a result, an increasing proportion of the tenant population comprises financially secure yet frustrated buyers better able to absorb the increasing cost of living and rental inflation.
But it’s not been an easy few months for all tenants. Despite the overall drop in arrears, a small but growing segment of the tenant population faces severe problems.
In Q1 an average of 94,400 tenants were more than two months behind with their rent payment, and this is likely to hit 100,000 by the end of Q2.
Although unemployment improved slightly in March, it is still high, and with the economy in recession, it’s unlikely to plummet.
Part and parcel of a less than robust labour market is weak wage growth. Annual wage growth is just 1.6% – meaning rents are still outstripping wage growth, despite their recent dip.
This continues to accentuate the financial burden for those renters with less than robust finances. As job losses increase, the section of the market struggling with severe arrears becomes more pronounced.
As a result, a two-tier market is emerging. The lower tier – tenants in severe arrears – represents around one in 40 renters, and this figure provides another barometer in determining the long-term health of the buy-to-let market.
If rents resume their upward trajectory and the economy continues to falter, this pool of struggling tenants is likely to deepen, triggering more evictions, buy-to-let arrears and repossessions.
While the March fall in arrears is encouraging, the growing minority of renters in severe financial trouble should provide a note of caution for lenders and landlords.
As the buy-to-let market expands, it is crucial new borrowers are aware of the costly effects of non-payment of rent, and how to combat or prevent this.
Brokers play a vital role in this education, whether explaining to their clients options such as setting aside a slush fund or paying for a rent guarantee insurance scheme, or simply outlining the importance of thorough credit and reference checking at the start of a tenancy.
A better education will play a part in preventing many buy-to-let arrears and increasing lenders’ confidence in the sector.