Rachel Williams: To start off with recent reports suggested the property market is about to implode. Is this the case?
Steve Sandiford: No. We have seen an awful lot about buy to let in the press because it is a very good story for them. Buy to let was a story largely driven to public consciousness by the press. There are certain factors which at the moment would suggest buy to let is not going to continue at the same rate of growth we have seen over the last few years. I think most of us would agree that is the case ‘ but implode, I don’t believe so.
Roger Hillier: I think some investors think it is a way of making a fast buck, but they are very quickly realising this is not so. It is not an easy way to make money but a long-term investment.
Eddie Smith: It won’t implode, but it will become a lot more sophisticated. Amateur landlords who are finding it difficult to let, may start thinking twice about their long-term investment. For the serious investor my view is that there is still a long-term gain to be made.
David Humphreys: Investors have to learn more. They need to visit seminars and exhibitions and so on. They need to invest for more than 10 years and take advantage of changing hotspots. The location also has to be absolutely spot on, even down to the exact residence. We have got a flat on our books at the moment. It is in a block, seven flats away from the lift. People want a flat which is only two flats away from the lift. It is getting that difficult. Then, in particular, the interior is vital.
Mark Harris: I think the press are not helping because they are sensationalising the problem. There are problems with pensions ‘ we can’t buy endowments any more and there are difficulties with the stock market. Short of putting it under your bed, you have got to do something with you money and again property has a good reputation and points of value.
What it used to be, thinking back to 10 or 12 years ago, was a way of investment. You buy a property, someone has to pay your mortgage for 25 years and then you own the property.
That was the simple analogy of why you bought an investment property. Then that changed to buy a property, two years later sell it and make £150,000 profit. We had a period of about four or five years when this was happening ‘ but it has stopped now.
Richard Coles: You need to take a long-term view. If you look at house prices in 1989, they didn’t recover until 1996/97 which is eight years later. So if you take a long term view, it needs to be at least 10 years.
Steve Sandiford: Another point is that the social demographics in the next 10 or 20 years will support what we have just said about long-term investment. Supply and demand will continue and I certainly cannot see that the demand will not be there over the medium to long term.
David Humphreys: What I think we are going to see over the next six to 12 months is an increasing amount of press on buy-to-let failures. We have already been contacted by a TV company making a programme on somebody who has actually lost a property ‘ this is news.
When you buy a house for a home it is a heart decision. When you buy a property for investment it should be a head decision. Most estate agents are trained to sell to the heart. So if you walk into an estate agency in Chelsea and you want to buy a little pied à terre, they will sell you that as a good buy for investment but in fact, the better investment is Brixton. It is a growth area ‘ you are better invested with better returns and it is more secure. But the average investor won’t go near Brixton.
Rachel Williams: How is the profile of the buy-to-let investor changing?
David Humphreys: We assume we are going to be looking at potential investors who are about 40-50 years of age. In fact many investors are now in their 20s. Given job security and other issues, it makes sense to go into buy to let, rather than buy your own home. If you go into buy to let, you get a tax break on the interest and if you are still living in your home you overcome capital gains, you can rent it out and be free to move.
Mark Harris: What is driving them? Pensions? People don’t want to wait until they are 60 to get their money. Once they have their money it buys them a worse than useless annuity and the pension fund is going down every year. With all these things combined, is that what is driving people to go into buy to let instead of pensions?
David Humphreys: It is a tangible investment. Some people don’t want investors but want to go out and do it themselves. It is a very hands-on investment whereas with pension schemes, somebody else has to manage it for you.
Mark Harris: Is there a danger that people are doing buy to let instead of pensions when it should be as well as pensions? It should be used as a complement to a pension but I think there is a danger that people are saying that their investment is their pension.
Sally Laker: Don’t you think that in a nation of homeowners, from an early age youngsters feel they must have their foot on the property ladder. People are going to university and when they have got all their qualifications they are not sure what job they want to do and what career they want to follow. They are not sure where they want to be, so they buy a property to have something there for the future.
Eddie Smith: The danger is whether these smaller landlords can stand a period of rental voids. How much cushion have they got? The maximum we will lend is 85% LTV, but most lenders go up to 90%. We don’t make calculations on the pay rate we work it on a notional rate which is about 7% at the moment and that really gives us about 150% cushion which is about 50% more cover than the landlord would actually make.
Kirstie Redford: Is it too easy therefore to get into buy to let?
Mark Harris: It is cheaper for someone who hasn’t got the first clue what they are doing to borrow money than for someone who has been doing it for 20 years of trading through the ups and downs of the last problem.
I think what has driven lenders into this market is not making enough money on their core lending book. It is seen that this is a positive margin business. It is easier than it ever has been to get a buy-to-let mortgage. It is good that everyone has a fair crack at it but it has its limitations and there are people that are going to struggle. They buy one and it works well, they buy two it works well and the next thing you know, normal people have 15 or 20 properties.
These are not people with maybe a couple of hundred grand a year behind them if it all goes wrong, but people earning £25,000 or £30,000 a year. They are not taking the excess that is available and banking it, they are re-investing it and buying more.
David Humphreys: Do you think that it is anyone’s responsibility to make certain the investment is viable? It is very easy to get into buy to let. It is easy to borrow £1m, yet it is the only investment you can make that on a monthly basis can start costing you. You invest in stocks and shares and if a few years later the company gets into trouble you do not get the director knocking on your door asking you to help his company out. These investors are in a big business ‘ these are £1m debts we are talking about.
Steve Sandiford: Are you saying that the lenders should undertake that?
David Humphreys: Yes, I think they have a responsibility to look at the viability of the investment that they are up against. We act for investors in London and we go out and buy properties for them and we rent which is the best way of doing it. Since August last year, we will not buy properties in London for clients unless they are offset at the same time by high yielding properties in the North.
Rachel Williams: So is there a lack of good buy-to-let advice?
Mark Harris: If you want a pension an IFA can advise you on exactly what to do. But what do you do if you want a ‘buy-to-let’ property, where do you look? What generally happens is they come to an adviser having decided they want one, possibly having found one and they come to the adviser not to get advice on the investment, but to get a mortgage.
David Humphreys: The problem is investors can get access to hundreds of thousands of pounds very quickly. They can put an investment together which doesn’t stack up and this is where the problem lies. Five years down the road they have got repair bills, re-fit bills, they have to keep their product up to date. The estate agent isn’t concerned, the lending agent isn’t concerned and the mortgage broker isn’t concerned.
Steve Sandiford: I completely disagree with you. I think you are assuming all mortgage brokers and financial advisors haven’t got a clue about buy to let and they seem to be incapable of advising their clients.
David Humphreys: I’m not saying that at all. What I am saying is that there are thousands of people going into buy to let who don’t understand it and there are a very limited number of people who do.
Sally Laker: We have quite a core of brokers who specialise in buy to let and do nothing other than buy to let. That is their core business.
David Humphreys: But are they advising the investor on the viability of what they are going to buy?
Sally Laker: Most of these brokers have clients that have quite a vast portfolio of properties and they started those clients off with their first properties but now have 20 to 30 to 40 properties. They have had these clients for five years.
David Humphreys: I am not suggesting it is impossible. I am simply saying there is no check made by the lender to check whether the borrower has taken experienced advice and you can’t say every mortgage broker in the country is capable of advising about buy to let.
Mark Harris: They are capable of advising on the mortgage and coming out with a range of products. They have their own personal view on whether that two-bedroom flat is a good investment or whether the one with three bedrooms is a better one. What I am saying is that there is no body of people that have perhaps no mortgage knowledge but just understand property and the things to look at. I think the onus is on the investor to do their research themselves.
Roger Hillier: It is very easy to borrow £1m. What we say is if they want to go beyond a million we have to apply for this portfolio facility and fill in a new application form. We assess all their assets and liabilities and ask them what their business plan is.
Unless they can prove that they have a reasonable number of liquid assets to pay for deposits and can prove that they have a professional approach to buy to let, we will not lend any more than £1m.
David Humphreys: There is the opportunity within buy to let to create what I would call a balanced portfolio. Inside the store cupboard of £1m property (or whatever the sum is) you have got high yielding properties and low yielding properties and broadly speaking the lower the yield, the higher the potential capital gain. The higher the yield, the lower the potential capital gain.
I think if you are going to lend somebody £1m, at some point in the supply chain of this investment, someone should take a look at the balance of that portfolio. If the high gain stock rents reduce, where does it cut in? Where is the support coming from? If you have a portfolio which is the combination of highly paid potential yielding and high yielding, you have got the support there.
Mark Harris: But this is a very sophisticated area of expertise.
David Humphreys: I agree it is. Everybody in the supply chain of the investment ‘ we are not in the supply chain, we give advice ‘ the estate agent wants to sell the property, the mortgage broker wants to sell the mortgage, lenders want to lend their money, the letting agent wants the business. They all have a vested interest in doing business with that person in that location.
Mark Harris: You may find the onus returns to the broker. Not to give advice on is that a good investment because I don’t think anyone is qualified to do that. But putting more emphasis on assessing the client’s situation. Do they have £20,000 on deposit to cover any problems? This is why the buy to let market has to be regulated. It has to be brought in line.
Kirstie Redford: How has buy-to-let growth affected the housing market as whole?
Roger Hillier: It is interesting how buy to let impacts on the first-time buyer ‘ this has been picked up by the press a great deal.
Rachel Williams: I think it is one of the most significant reasons why house prices have risen. A lot of buy-to-let investors have much more spending power than the typical first time buyer and are pushing house prices up.
Mark Harris: I don’t think there is any doubt that this the case. I think it is still possible for first-time buyers to buy property, they just might not be able to buy in the areas they want to. There are still places to buy in London, borrowers just have to realign their expectations.
Richard Coles: Mortgage advances on buy to let are approximately 4% of the total in the property market. Do people really think that buy to let is such a big factor in impacting first-time buyers across the country?
David Humphreys: It has certainly had an effect on prices in London. People were paying £200,000 for properties before Christmas which have now risen to £250,000.
Rachel Williams: Thank you all very much for your comments. I think everyone round the table would agree that buy to let is not a bubble that is about to burst. However, now more than ever brokers have a duty to check that their clients have done their homework and accept that buy to let is a long-term investment and not a get-rich-quick scheme. At the same time, lenders must also strive to ensure lending criteria remain sensible so as not to expose themselves or their customers to too much risk. Ultimately however, it is the investor’s responsibility.
Rachel Williams is editor
