The 1 April saw the introduction of the 3% Stamp Duty Land Tax surcharge. The surcharge is part of a range of measures designed to reduce the risk of an overheating market and tip the delicate housing balance a little towards first-time buyers. This follows on from the announcement of tapered reduction of tax relief for mortgaged investors and the latest consultation on underwriting standards for buy to let mortgages.
So what will be the impact of all these changes on the buy-to-let mortgage market? At a minimum we expect the changes to usher in a period of consolidation with a plateauing in the run-rate of lending volumes on an annual basis, and month-on-month falls in the near term. There will be less new business written and slower growth in rental supply as some landlords re-size their portfolios to manage their tax liabilities – especially in low-yielding markets.
Despite all the gloom, we believe that buying property as an investment, with or without a mortgage, is set to remain an attractive option for investors in the face of poor returns from other assets. The level of yields available in the market, the strength of the underlying cash-flow and the ability to leverage via buy-to-let mortgages will continue to attract investors into the market, albeit at a slower rate.
The one factor that is most likely to change this outlook is an increase in mortgage rates which will push up debt servicing costs and have a knock on impact on investors’ expectations for house price growth. The prospect of a rate rise is some way off, but property yields are already starting to decline as house prices rise faster than rents. This is a trend that has been well established in London for the last 18 months. Falling yields and tightening lending criteria are likely to result in investors moving ‘up the yield curve’ into lower value and potentially riskier property markets.
The greatest downside risk for collateral values is in markets where there may not be a ready supply of prime mortgaged buyers to purchase the property. Localised markets where current pricing levels are driven by investors need to be treated with caution, as an upward shift in mortgage rates would impact what investors are prepared to pay for property or can sell for in a hurry.
While the raft of changes aimed at buy to let need time to work their way into market activity, the case for investing remains, despite higher entry and ongoing costs. It is crucial that lenders continue to fully assess the collateral risk profile of new originations and consider the differences for how house price sensitivity might vary between buy-to-let and prime lending at a localised level.