Surge in Number of Tenants in Severe Arrears

Buy-to-let landlords are being warned of the rising number of tenants struggling to cope financially with increased rents and energy bills, which has resulted in a jump in the number of tenants in ‘severe arrears’. A tenant is considered in severe arrears if they are more than two months behind on their rent.

In the first three months of 2013, Templeton LPA, part of LSL Property Services, has recorded an increase of 4,000 tenants in severe arrears to a total of 94,000, marking the fourth-highest figure on record. This is an increase of 4.8% on the previous quarter, and represents 2.3% of all tenants in England and Wales.

The positive trend from the close of 2012, where a drop of 14.5% was recorded, has gone into reverse. Severe arrears in 2012 were around 50%           higher than in 2011, having risen for five consecutive quarters, but improved significantly in the final quarter.

The level of those in severe arrears over the last 12 months now stands at 20% above the long-term average. On an annual basis, however, the number of tenants in severe arrears is down slightly, by 2.3%.

Despite the fall in severe arrears seen in Q4 2012, the number of tenants facing eviction through court order actually increased by 5.7% from the previous quarter, bringing it to a total of 25,286. This was 10.2% higher than the previous year, and the highest number of evictions ever recorded in an individual quarter.

Paul Jardine, director and receiver at Templeton LPA, said, “Household finances are feeling the impact of spiralling costs, particularly energy bills, which were recently predicted to grow by an average £214 this year. And wallets are under pressure from the other side.

“According to the ONS, wages are creeping along at 1.2 per cent annual growth, well behind a rebounding rate of inflation. Many tenants have finally pulled their finances back together after the strain of the festive period. But for a significant minority the situation is actually much worse than three months ago, and this is reflected in the most severe tenant arrears.”

However, in February alone, overall tenant arrears fell; just 7.4% of all rent was late or unpaid. This is a drop from 8.1% in January and 10.1% in December, and is the lowest it has been since November 2012.

Mr Jardine said, “Many tenants have finally pulled their finances back together after the strain of the festive period, but for a significant minority the situation is actually much worse than three months ago, and this is reflected in the most severe tenant arrears. As 2013 progresses, the ability of tenants to pay their rent will depend on improvements in the labour market and wages in particular.”

Landlords though, are managing to keep up with their mortgage payments. By the end of 2012, the number of buy-to-let mortgages over three months in arrears had fallen to 19,700, nearly 20% lower than the previous year (based on data from the Council of Mortgage Lenders). Templeton credits the Bank of England’s Funding For Lending Scheme for easing the financial pressures on landlords.

Mr Jardine said, “In the first few months of 2013, lower mortgage repayments have allowed landlords more room for flexibility. As hoped, Funding for Lending has proved instrumental in lowering mortgage rates, especially for landlords with the most equity.”

He added, “While the current environment allows landlords more time in any given month to wait for a payment, it doesn’t fundamentally change the ability of tenants to pay rent. The latest rise in eviction orders highlights the need for long-term solutions that work for both parties.

“Luckily, landlords are much better prepared for problems than they were before last year. Cases of severe arrears have persisted well above the longer-term average for some time, forcing landlords to be flexible with tenants in difficulty, while being as aware of their own legal protection as ever before.”

David Brown, commercial director of LSL Property Services, said, “As long as rents remain close to last year’s record highs there’s a strong incentive for landlords to invest in the private rented sector.

“But credit is still extremely hard to find, despite the increasing importance of the private rented sector to the UK’s total housing supply. That’s why the government’s new ‘Build to Rent’ scheme is such a good idea. It will lead to more investment and help landlords keep up with demand. But that will take time – whatever the supply of new rental property, for the foreseeable future tenants will continue to feel the heat. Practically, that means landlords need to look carefully at potential tenants in order to minimise their own financial surprises.”

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