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The diminishing HMO market in England

Keys on an outstretched hand
09 February 2023

By UKinsuranceNET In Landlord Advice

A news release by Property Industry Eye on the 6th of February 2023 carried the surprising news that the number of Houses in Multiple Occupation (HMOs) in England is shrinking. Estimates say there are around 21,000 fewer HMOs available across the country than just two years ago.

It is worth digging a little deeper to discover why the market is shrinking in this way and the likely causes underlying such a trend. But first, a bit of background on why HMOs are so crucial to the housing market.

HMOs for landlords

For landlords, traditionally, HMOs offered enhanced profitability typically achieved through this kind of setup compared with a standard single-occupancy tenancy.

Some sources say that the rental yield on such a property is between 12% and 15% – as much as twice the return that could be earned if the same property was let on a single-tenancy basis.

HMOs and tenants

With many tenants spending a little under a third of their income on rent, affordable shared housing in an HMO is an attractive proposition for many tenants.

HMOs offer affordable accommodation to low-income families and individuals (students, professionals and older tenants) and help to reduce the housing shortage.

At a time when the demand from prospective tenants continues to grow, and suitable accommodation is in short supply, this is no mean achievement.

HMOs and housing standards

HMOs offer a valuable form of tenure when demand for rented accommodation is strong, and supply is under extreme pressure – market conditions that support the financial opportunities available for landlords who invest in HMOs.

Though attractive to both tenants and landlords, HMOs have nevertheless attracted a degree of bad press and a reputation for cheap housing that too often results in sub-standard accommodation. However, that reputation may be increasingly undeserved.

The overall standards of housing represented by HMOs are steadily improving.

That is happening because tenants insist on higher standards – such as ensuite bathrooms, better quality furnishings, bigger rooms, and high-speed broadband.

But the HMO market is decreasing, with 489,701 HMOs across England today compared to nearly 511,000 in 2019-2020. Why is this?

PRS in crisis

The private rented sector (PRS) as a whole is in crisis, said the Institute of Chartered Accountants in England and Wales (ICAEW) recently, citing rising rents due to landlords being forced to pass on the increased cost of their mortgages and other buy to let expenses to their tenants.

A study revealed that in 2022, across the whole of the UK, 70,000 buy to let landlords left the PRS market, equating to around 116,000 rental properties being lost.

The report said that changes to tax relief, the loss of ‘wear and tear’ expenses, and other legislative factors are part of the exodus. Other factors could be related to the following:

  • higher costs associated with running a property;
  • limited availability of suitable properties;
  • increasing financial and legal risks;
  • difficulty in finding reliable and trustworthy tenants;
  • negative public opinion of landlords;
  • security of rental income becoming more complex to guarantee;
  • increasing competition from other landlords and investors;
  • low profitability due to rising costs and falling rents.

For HMO landlords, tightening planning and licensing rules specifically for HMOs means that many landlords are leaving the HMO market due to budgetary and time constraints.

Many local authorities have exercised their powers to enforce stricter licensing regimes for HMOs. At the same time, so-called Article 4 directions mean that planning permission is required to convert any existing residential dwelling to one in which three or more unrelated tenants occupy the property. No planning permission is needed, though, to convert a small HMO back to a single-tenancy dwelling.

The shrinking HMO market

As we mentioned before, more than 21,000 HMO properties have been withdrawn from the private rented sector in England.

This represents a decline of 2.4% in 2022, following a fall of 1.7% the previous year and leaving the total number of HMOs down to 489,701.

There are regional variations in the extent to which the HMO market has diminished. The most significant reduction has been seen in the East Midlands (down by 26.1%), followed by the Northeast (down 15.8%).

A shrinking market has also been recorded in the Southeast (6.7%), London (5.2%), and the Northwest (1.6%).

Modest increases in the number of HMOs in other parts of the UK have not compensated for the more marked decline across the country.

In summary, HMO landlords are leaving the UK property market due to several factors, including taxation changes, stricter regulations, and an increasingly competitive housing market. Additionally, the introduction of more stringent regulations and licensing criteria has made it more challenging to manage HMOs.

Are you an HMO landlord? Don’t forget your HMO insurance.

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