Over the last few months, concern has been raised in the media over the long-term viability of the thriving buy-to-let market. It has been one of the biggest growth sectors in the mortgage industry over recent years, but questions are beginning to be asked over its future. However, both lenders and intermediaries have been saying confidence remains high in a market they claim still has plenty of growth potential.
Peter Stimson, head of product development at GMAC-RFC, is one who feels the market has not yet peaked: ‘There has been a lot of negative comment recently on buy to let, but this is often speculation or ill-informed comment.’ While he accepts the market has grown quickly, he does not believe this means it will collapse and fold in on itself.
Strength in numbers
Figures from the Council of Mortgage Lenders (CML) would tend to confirm this as they point to the buy-to-let market being as strong as ever.
In the first six months of 2002, £5.5bn was loaned through buy-to-let mortgages. A CML report said: ‘Buy to let continued to grow strongly with more than 58,000 loans worth £5.5bn, taken out in the first six months of this year. The latest figures increase the total of residential investment mortgages to 233,000, worth a total of £19.1bn.’
What is more encouraging for the industry however, are the arrears figures. They do not point to a collapsing market, but one that is maturing and coping with the demands placed upon it. The CML report found ‘arrears in the sector also improved slightly in the first half of this year. The percentage of mortgages three months or more in arrears stood at 0.5% (0.55% in the second half of last year), less than half the level for residential mortgages generally.’
Michael Coogan, director general of the CML, was confident the figures were a true reflection of the strength of the market. He says: ‘Against the backdrop of recent stock market turbulence it is not surprising the buy-to-let market has grown strongly. Although rental yields are falling in some areas, landlords are continuing to find buy to let attractive, and are not having significant problems in meeting their mortgage payments. The sector continues to offer good prospects over the long term, but borrowers need to continue to take a realistic view of the risks, as well as the rewards. Fundamentally, the buy-to-let sector remains sound and we expect it to continue to be popular in the future.’
Nevertheless, some point to figures which suggest that perhaps the success and popularity of the sector will be its downfall, as it attracts first-time landlords who have failed to assess the nature of the risk they are taking on appropriately.
The buy-to-let market has become more accessible to the first-time entrant, with deposits of only 10% required in some cases, according to Rob Clifford, managing director of broker franchise network, mortgageforce. Although the norm is 15%, he points out this is still lower than two or three years ago when 20% or 25% was the smallest deposit buy to let lenders would accept.
However, the aforementioned CML figures on arrears seem to point away from a trend of new landlords failing to meet repayment demands, and it seems most speculators are not entering the market in a bid to get rich quick.
Roger Hillier, product development manager at Mortgage Express, says: ‘There are people jumping on the bandwagon with returns better than in stocks and shares, but this is not a dramatic trend. Most investors are in it for the long term and not there just to make a fast buck.’ He makes his point with figures detailing the intentions of Mortgage Express borrowers.
The lender’s figures show that 63% of buy-to-let mortgage holders expect to increase their investment, with 18% expecting to maintain their holdings. While 10% have no firm plans, only 7% expect to reduce their portfolio and just 2% aim to sell up. It seems it is not the profile of a short-termist market.
John Heron, managing director of buy-to-let specialist Paragon, also believes first-time lenders will not upset the buy-to-let apple cart. He says professional landlords still overwhelmingly dominate the market. ‘The novice buyer’s interest blows hot and cold and is affected by the media. Their behaviour is not that different to that of the private equity investors,’says Heron.
He says novice buyers only make up a single digit figure of the buy-to-let market and does not expect this to change dramatically. New blood may be coming into the market, but not to the extent that it will alter its stability.
Law of average returns
While it is true the returns investors can make in the buy-to-let market have diminished as rental yields have come down, renting property is still an attractive proposition.
Ray Boulger, senior technical man-ager for mortgage intermediary, Charcol, says: ‘Investors should expect a lower return on property than a few years ago, but it still represents a solid investment to the other options available.’
Much has been made of falling rental yields, but they still offer an average return on buy-to-let investments of 6.3%, according to figures released by the Association of Residential Letting Agents (ARLA) at the start of September. While this is down from 6.8%, it is still higher than some other investments. ARLA also says demand for rented properties is increasing with panel members reporting a 15% increase in the number of new tenancies arranged.
However, this increase in numbers is something landlords have to be made aware of. Buying in an overly-competitive area will push rental yields down further, and increase the chance of void periods, making sustainability difficult for the owner. But while a good location is imperative, there are still plenty of areas in the UK that offer an attractive opportunity for buyers.
Charles Haresnape, head of mortgage sales at Natwest Mortgages, says: ‘There are opportunities across the UK and people are being more selective. For example, many investors are looking into the Manchester area and its sub regions but it is important to be as selective as possible. Here there are areas of re-development and a growing student market, but this development is not uniform across the city.’
It is not Manchester that is the important part of what he says, but that buyers look into what potential tenants will need, and where conditions favour the landlord.
Timing is everything
Following market trends is all very well, but if the timing is poor it will leave the purchaser with a property on their hands that proves difficult to rent. Chasing the higher yields may provide wins in the short term, but with a long-term investment such as buy to let, an assured return is where the money is to be made.
It is for this reason that more buyers are choosing fixed rate deals allowing them to add a certain degree of security to their budgeting, according to Haresnape.
He believes most of the new entrants into the buy-to-let market are astute enough to research their investments carefully. As such he believes the FSA is correct to leave the buy-to-let market outside the remit of the CP146 consultation paper. He says: ‘It should be left outside providing the client knows it is treated as a business project and not a domestic house transaction.’
However, the issue is not quite so clear cut as this and Clifford says: ‘I think it is a missed opportunity, and it is not appropriate it should stay outside the remit.’
While every market sector has its ‘bad eggs,’ he fears a lack of regulation will attract those not qualified to work in other sectors of the mortgage market, and create problems.
While there are arguments for both sides, the fact is that buy to let has a different underbelly to the rest of the mortgage market.
The regulatory proposals are about protecting peoples’ homes. In the buy-to-let market your home is not at risk. The property you have bought is a commercial entity and the decisions you make regarding it do not affect your place of residence. And as such, Heron believes it is not so much a question of whether or not the buy-to-let market should be regulated, but a question of ensuring appropriate areas of the mortgage market are not simply banded together for the sake of simplicity.
Whether the buy-to-let market remains outside the remit of proposed regulation remains to be seen, but it seems there are still good times ahead. They may not match the past months and years, but with the need for rented accommodation continuing to rise and interest rates unlikely to bolt skywards, interest and activity in the market will continue.
As a spokeswoman for Birmingham Midshires predicts: ‘This growth will stabilise and will become a gentle increase, rather than the boom that we have seen over the past couple of years.’
It seem that time has not been rung on the buy-to-let market just yet.
Edward Murray is news editor
A substantial deposit shows commitment, and suggests the borrower understands what they are getting into.
Returns may be down, but in general the market is still outperforming the stock market.
The right location is probably the most important single issue to consider when taking out a buy-to-let mortgage.