Ben Marquand There has been talk of the buy-to-let market slowing down but lenders are still doing well. What is the state of health of the market?
Peter Stimson It is going very well at the moment and volumes are up on this time last year. Buyers are looking away from London and looking towards Manchester for example.
Sally Laker People who became landlords early on are now increasingly remortgaging their properties. We have seen a lot of remortgaging in buy-to-let business.
Ben Marquand Is there still scope for growth or are we reaching saturation point?
Rob Clifford Currently we have one development with George Wimpey in a leafy suburb of Nottingham ‘ a 182-bed apartment block and 44% have been sold to buy-to-let customers. Usually it would be between 5% and 15%. It is a record for us and I suggest provincial towns and cities still offer big opportunities.
Bill Dudgeon In Edinburgh and Glasgow 60% of these properties are going to investors. It is quite staggering.
Guy Batchelor As a new entrant in the buy-to-let market it is interesting for us to come in. We are seeing 70% remortgaging and 30% purchase. It seems to be predominantly purchase in the north and remortgage in the south. We are also seeing some buy- to-let investors cashing in ‘ it is an interesting market from that point of view. Landlords are keen to place their mortgages with a number of different lenders.
Steve Sandiford Saturation has been reached in some places, and those areas are finding their natural equilibrium. In other areas there are not enough properties to rent, but generally the market is approaching maturity.
Tim Dawson There are 2.25 million rented properties in the UK. The number has not changed for about the last five years. What has changed is who is financing it. There has been a switch from bank finance into the new buy-to-let market. It is a growth market but the total funding has not grown at all. It has just been a switch. Our belief based on a lot of research is that it will start growing over the next 5-10 years and the total number of rented properties will actually go up which is good for the total market.
Ben Marquand Will the growth come from existing properties or new-builds?
Tim Dawson It will be a combination of both. One of the problems in the UK is the property market is static. New-builds are down. Total stock is not growing very rapidly.
Ben Marquand Will that exacerbate the problems faced by first-time buyers (FTBs)?
Stuart Wilson There has been a lot of press coverage about FTBs being priced out of the market. Now there is a second phase of buy to let starting to emerge, people adding to their portfolios or new landlords coming in because of the demand from FTBs. They have to have a house and if they cannot afford to buy they will be able to meet rental payments through state benefits and other contributions, even if they cannot afford to get a mortgage. Demand is there. There are waiting lists at that end of the market primarily because they have to have a roof over their heads.
Bill Dudgeon FTBs drive up the buy-to-let market to some extent but you still have the key workers’ issue that still has not been resolved satisfactorily.
Paul Robertson Surely London is a separate market to the rest of the country though?
Bill Dudgeon It is and always has been. From the point of view of the overall buy-to-let market it is more about capital appreciation and there are still good rental returns. The rest of the country has had low capital appreciation.
Sally Laker With FTBs things have changed. They are going to university and not necessarily wanting to put down roots very quickly. They are not ready to buy as early as before, they are testing the market. There is a demand for rental property and that has increased demand because of lifestyle issues.
Bill Dudgeon Also, it allows you to live in an area you cannot necessarily afford to buy in. Outside London you can rent in a very acceptable area much more easily.
Tim Dawson It also allows you to test the area to see if you like it.
Ben Marquand If there is no one coming in at the bottom any more, will this impact on buy to let?
Stuart Wilson New buyers are coming in at different levels. Divorce rates are rising again and that creates demand at all levels of the housing market. There is more maturity in the buy-to-let landlord market. People were coming in on a short-term basis, but now the yields are lower and they see it as a long-term investment, while stocks and shares have suffered. There is also a national housing shortage so maybe the influence of FTBs is not as great as it once was.
Guy Batchelor The number of FTBs has decreased. In May the National Association of Estate Agents’ members reported that only 14% of purchases were by FTBs.
Bill Dudgeon 75% of those surveyed by ARLA are in it for the long-term which is good news for the market because it means people are not planning to dip in and out.
Tim Dawson They will still manage their portfolios, they will still buy and sell. It will keep the turnover in the market going.
Sally Laker There has been a change. A few years ago people joined in as amateur landlords but they are now looking at it as a long-term investment.
Tim Dawson But buy to let is still a very small part of the market and is relatively insignificant.
Ben Marquand What impact has the interest rate had on buy-to-let products?
Tim Dawson The impact in the last twelve months has been to switch more lending on to fixed rates where there has been a big increase. I think that is because buy-to-let lenders tend to be more commercially minded. They have probably come to the conclusion that interest rates are quite low at the moment, so why not go into fixed rates now?
Bill Dudgeon Discounts are still popular in London.
Guy Batchelor A five-year fixed product was one that we did not have. It was the one that everyone was asking for but at the same time we were saying you have to look at the pay rate on the five year fixed rather than the reversion. But it is a good hedge and if they are keeping the property for medium to long term the five year fixed product is good right now.
Stuart Wilson The margins between residential and buy to let have come down and there is more awareness. People that maybe took out their first buy-to-let properties three or four years ago and got bank-based deals are still on semi-commercial terms and now realise they can get these favourable terms. Over 50% of landlords are looking to remortgage in the next 12 months.
Bill Dudgeon There must be an opportunity because 25% of buy-to-let customers are on SVR.
Ben Marquand Will competition bring it down to prime rates?
Peter Stimson We are already seeing it.
Bill Dudgeon There is the rate and risk aspect. It is less risky and that has brought rates down too.
Rob Clifford Are those additional risks of buy to let being properly priced by lenders?
Bill Dudgeon I think initially we did price the risk incorrectly but we are in a benign market now. However buy to let is a lot less risky than residential lending.
Stuart Wilson They are putting a big investment and commitment in themselves.
Tim Dawson House prices have gone up and the rental sector is being strained. It is having some constraints on the market. Everyone says that buy to let is more risky because it is a commercial decision, rather than an emotional decision because you will not be living there. Investors will take a more dispassionate view. If they cannot afford it they will walk away. What we have not seen is the economic downturn that might prompt a shake-out in the market. It could be that, if we do have an economic downturn, the impact on the buy-to-let market could be worse than on the residential market. In a downturn the genuine risks will emerge.
Stuart Wilson Buy to let is one of the few investments that so far have not burnt people’s fingers. They have lost money in pension funds, stocks and shares and other investments, but buy to let is a recently evolving market. A worry I have is that a lot of first-time landlords have come in because it is perceived as a good investment. Maybe some of them have not questioned that, perhaps because there has not been a big downward shift yet.
Steve Sandiford I am less concerned about it now because research suggests that people are taking a dispassionate view, they are picking their location, the property and taking advice from professionals. It is still a concern but it is becoming less of a worry.
Stuart Wilson It will impact from a lending point of view because again, is buy to let risky or less risky? If people are putting in a bigger financial commitment, maybe they will be more cautious than an FTB or residential customer.
Steve Sandiford But all lenders have that in the back of their minds and that means perhaps margins will not get closer to mainstream because of that uncertainty.
Paul Robertson Does that mean there could be an upturn if say, equities started going up again. Would that affect the market?
Tim Dawson It is a question of time. It takes time for people to realise what is going on. It takes a long time for people to change their investment decisions. So yes, it would have an impact on the market but it would be gradual before people start moving out of buy to let.
Steve Sandiford I think as well, buy to let has become embedded as an investment vehicle. Once the equity markets start to show real signs of recovery some people will not take up buy to let but I think it is sufficiently embedded in people’s psyche that it will continue to thrive.
Sally Laker It is embedded in our culture. You can see why it is an investment that people like. It is the same thing with FTBs. At some point they will want to buy.
Rob Clifford It is about it being a tangible asset. In Australia there are significant tax benefits for investment properties. But I do not think culturally they have the same interest that we do.
Tim Dawson Over the last twenty years property has shown returns of 20% per annum. Equities have shown 2% per annum. Five years is probably all most people have in their memory. Looking back it is definitely biased people towards property.
Paul Robertson It is interesting that when lenders quote those statistics it is a five year statistic but if you look back 15 years shares have done much better than property. People only look back as far as the figures look good.
Tim Dawson Property has been a good investment over the last 25 years.
Peter Stimson Yes, and it has been driven by the fact there are more households than houses.
Guy Batchelor As part of an overall portfolio it is a good investment.
Stuart Wilson If you look at investment returns over the last five years, there is that paradox that the best time to invest in equities is when it is down and the worst time to invest in buy to let is when it is at the top of the market.
Ben Marquand That it is doing well now is against the trend. If there is a downturn in the housing market the buy-to-let market should still be viable.
Stuart Wilson Supplying the demand created because of that, will people want to invest in buy to let as landlords? You might end up with supply not meeting demand.
Andrew Drummond All the estate agents I have spoken to in London have said both the rental and sales sides of their businesses are doing well.
Tim Dawson In the 1-2 bed market demand has been relatively consistent. Now we see that the interest is coming back. The part of the market with problems is the high value end, and £1m plus properties are coming off, with 20% falls in rental prices. At the lower end, demand is now coming back.
Ben Marquand Are there any specific areas where you think buy to let is doing particularly well and representing good value?
Bill Dudgeon Liverpool since it was announced the city of culture for 2008.
Kevin Patterson Leeds, Sheffield, Teeside all those areas are hotspots for us right now.
Rob Clifford We have more people buying in Sheffield from out of the area than any other provincial location. More people from London and the South East are buying buy to let in Sheffield than any other area.
Ben Marquand Is there a worry that buyers do not know the area and have a lack of knowledge of the market?
Guy Batchelor But they are also eliminating the risk by spreading their portfolios geographically.
Ben Marquand Does it matter which property you buy?
Tim Dawson If you are in the student market you will not buy luxury flats, you will buy six-bed houses. You can tell by the property someone buys what business they are in. If they are mass market and ask for a £1m property in the Docklands, you will ask questions for example.
Rob Clifford We come across many amateur landlords who do not make financial provision for voids and we rarely come across amateur landlords who consider different types of tenants. We draw their attention to it.
Kevin Patterson We have seen a rise in a third market. Typically buy to let was driven by student areas or some corporate saturation areas but what has happened recently is school catchment areas are becoming quite popular. There is one development on the outskirts of Teeside where people move temporarily because it is in the catchment area for three different schools which have very high ratings. Once families get their children into the right schools they move out.
Ben Marquand Is it in a broker’s remit to advise on the type of property?
Rob Clifford Should there be a regulatory requirement to do so? I worry about it. Unregulated, unqualified intermediaries have tended to flock towards unregulated product types.
Steve Sandiford I cannot see any justification for keeping it outside the regulatory remit. I think the Treasury has seen quite enough scandals for them to want to cover all angles.
Tim Dawson That assumes the FSA will stop scandals.
Steve Sandiford Even within regulation we will find that some brokers are doing the wrong thing.
Rob Clifford There is no doubt that regulation does drive up professional standards.
Tim Dawson But there is a downside because the FSA’s approach is very heavy handed, it is very prescriptive, it will dramatically change the structure of the market and it will reduce the number of lenders and brokers. All of this is acting against the public’s interest. So yes, it has a benefit but it has a downside and it is very costly. The first person to pay for it will be the customer.
Stuart Wilson Everything will be regulated with the exclusion of buy-to-let mortgages. What will actually happen is that certainly with so many advisers operating under other organisations, there will be a best practice system applied. There will be a lot of self-levelling going on.
Bill Dudgeon The FSA has missed a trick. They should regulate the advice around buy to let not the actual mortgages.