The press are at it again. ”House prices driven to unsustainable levels by the buy-to-let market,’ and ‘Shortages of properties driven by buy-to-let demand,’ are some of the headlines we have seen recently. There is a danger that such repetition could lead to the public being taken in by the headlines rather than the facts. So what are the facts?
Consider first the size of the respective market. Total gross mortgage lending increased from £86.8bn in the first half of 2001 to £99.1bn in the first half of 2002, an increase of £12.3bn, while buy-to-let lending increas-ed from £1.4bn to £5.5bn, an increase of £4.1bn in the same period. With this difference in size, it is difficult to understand how the growth in buy to let can be driving the property market.
Secondly, the growth in buy-to-let lending is effectively overstated but, unfortunately, a lack of reliable data makes it impossible to estimate by how much. Prior to July 1996, when the first buy-to-let products were launched, finance for purchasing property to rent was provided by the banks and loan companies as commercial or personal lending ‘ not as mortgage lending. While there has been substantial growth in the amount of property to rent, part of the dramatic growth in buy-to-let lending resulted in the financing being switched from the banking sector to the mortgage sector. In the first half of 2002, one-third of all the buy-to-let lending was a remortgage from other lenders, much of which would have been remortgaged from outside the mortgage sector.
So, what is driving the growth in house prices? In a dynamic market like housing, when supply and demand are out of sorts, the market responds to restore the balance. Demand is increasing for several reasons, including high employment, low inflation and low interest rates, which all look likely to continue.
However, supply is not keeping pace. Planning controls restricting the amount of land available for development, brown field sites being slowly developed, the increase in the number of households and increased labour mobility all reduce supply and increase prices. But this rise in house prices will eventually reduce demand, at which point the rate of increase of house prices will slow.
Is this a problem? Not unless the economy crashes, unemployment increases and demand collapses. This doesn’t look like a realistic prospect at present. So while great eye catching headline sells papers, demand exceeds supply driving up house prices is less marketable but more realistic.
Tim Dawson is managing director of Mortgage Express