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When is the buy-to-let tipping point?

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Recent figures on the buy-to-let sector show increasingly favourable rates are emerging at a time when rental costs are on the rise.

Figures from the Council of Mortgage Lenders last week reveal buy-to-let lending accounted for 11.5 per cent of total gross mortgage lending in 2012, up from 9.8 per cent in 2011.

Gross buy-to-let lending hit £16.4bn for 2012, its highest level for four years and 19 per cent higher than the £13.8bn advanced in 201. Few industry commentators are expecting the buy-to-let market to slow down anytime soon.

CML director general Paul Smee says: “Buy-to-let is benefiting from strong tenant demand, which is likely to continue. Loan performance compares favourably with the owner-occupier sector, and the overall outlook for the buy-to-let sector is positive.”

Mortgage broker Anderson Harris director Jonathan Harris says:“While capital growth on investment properties is likely to remain subdued for some time to come, income is strong and returns are favourable when compared with other investments. Buy-to-let is only going to grow in popularity as mortgage rates become increasingly competitive.”

But as more and more of the country’s housing stock is absorbed by the rental sector over the longer term, what are the implications for a growing nation of renters? First-time buyers in particular are increasingly going to find themselves competing with potentially cash-rich landlords.

The dominance of the buy-to-let sector also needs to be put into the context of England’s dwindling housing supply. In October, the Home Builders Federation argued the government’s NewBuy scheme was on track to provide a quarter of the 100,000 new homes it was set up to provide.

According to the HBF, around 110,000 new homes are being built a year in England, compared to Government projections made by Labour in 2007 which say we should be building around 240,000.

The Communities and Local Government committee held its first evidence session for the private rented sector earlier this month. The committee found approximately 3.4m households, or 16 per cent of all households in England, are in private rented accommodation, an increase of 30 per cent since 2005.

Property research firm The Model Works founder Brian Hall says: “There is still too much subjective opinion on the growth of the buy-to-let sector from those with a vested interest and not enough independent analysis into profitability and risk.

“There is this groundswell of opinion that BTL is the only game in town, which is disadvantaging young people who cannot get on the property ladder.”

The HBF puts the average cost of a FTB home at £175,000, and the average FTB deposit at 20 per cent. In order to raise the £35,000 required, and based on on average salary of £22,665 for 18-38 year olds in 2011, the HBF estimates a person in their twenties would have to save 33 per cent of their net income for 83 months in order to raise the required capital.

It says when costs such as rent, utility bills and council tax are factored in, FTBs in their twenties could save half of their discretionary net income and still have to wait 10 years before being able to afford a deposit on a home in England and 24 years for a home in London.

Legal and General Mortgage Club managing director Ben Thompson says: “Undeniably, landlords have fought with FTBs in some instances. Many landlords are also cash-rich and in a better position than competitors to buy a property.

“There is a strong school of thought which says a clever move would be to tilt the balance back into the favour of owner-occupied but regulatory intervention is not necessarily the best way. Market forces should combine to force a natural correction.”

Rather than regulatory intervention, Thompson would like to see lenders start to consider FTBs with 5 per cent deposits, as he says there are still good potential borrowers who would keep up with mortgage repayments.

Paragon Mortgages director of mortgages John Heron is worried championing owner-occupiers or FTBs could be dangerous.

He says: “Landlords account for around 13 per cent of the mortgage market while FTBs are upwards of 20 per cent. These are not competing figures.

“You cannot blame landlords for the shortage of stock which is the primary driver supporting house prices. The danger of that is you are addressing the wrong target. If you were to disincentivise landlords in some way, you effectively punish tenants to the benefit of homeowners.”

But Hall would like to see the buy-to-let sector curbed with the scrapping of landlord tax breaks and the introduction of buy-to-let regulation. He says: “When you retire and you do not have the £108,000 in the bank required to pay your rent for the rest of your life, then you have to go on housing benefit. The cost of that to the taxpayer could be tens of billions per annum. It is an enormous time bomb waiting to go off.

“We need to get people buying again and it is going to take decades to get enough built. One way of getting more properties on the market is to address the BTL sector. The professional landlord will be fine but more naïve investors, if they find the tax breaks eliminated, they might be less encouraged.”

Given the government is failing to meet its own targets for house building, much less the amount required to meet demand, it seems unlikely this issue will be resolved in the near future.

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