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Buy to let is here to stay – Phil Rickards

by: Head of BM solutions Phil Rickards
  • 14/05/2019
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A downturn needn’t sound a death knell for landlords, as history has shown us time and again, says Phil Rickards, Head of BM Solutions.

The last 11 years have been a challenge for landlords in anyone’s book.

When you compare the post-credit crunch market to the booming early and mid-noughties, the difference is stark.
Then, people were clamouring to jump on the buy-to-let bandwagon, house prices were rising, lending was flexible and government and regulatory intervention was infrequent to say the least.

Now, some landlords are leaving the sector, others putting a halt on expansion, house prices are stuttering and the red tape just keeps on tightening, squeezing landlords’ profit a little further with each new measure.

It has certainly got tougher, following a swathe of new rules and regulations for landlords and lenders that, frankly, make investing in property to let less attractive. These include the withdrawal of tax relief on mortgage interest payments, PRA minimum underwriting standards and the Stamp Duty surcharge, to name but three.

But, while there’s no denying landlords are having a harder time when compared to the recent past, are we really seeing the slow demise of buy to let?

Bigger picture

 

We can see more clearly what’s happening in the Private Rental Sector when we step back and look at the bigger picture.
It’s important to recognise that the period from the mid-nineties until 2007 actually represented a boom for landlords rather than the long-term trend.

In fact, when we look further back – over 100 years – we find a cycle of downturns and booms, interspersed with government interventions. The Private Rental Sector grows and government steps in to protect tenants and restrict landlord profits. Eventually supply can’t fulfil demand and the Private Rental Sector rises again.

It’s a cycle that looks pretty similar to what we’re going through now.

A potted history of the Private Rental Sector

history lesson, learning, education

 

At the start of the 20th century, the Private Rental Sector was flourishing. Most Brits rented property and the majority of lets were private.

The next century saw repeated highs and lows for landlords, with two world wars contributing to a lack of supply in properties generally (housebuilding was halted during The Great War and homes demolished by bombs in WW2).

This, in turn, meant letting property privately became more profitable and the Private Rental Sector grew, which was followed by government measures to give tenants greater rights, which curtailed that profitability.

From the Rent and Mortgage Interest Restriction Act of 1915 which capped rents, to the Protection from Eviction Act in 1977, as well as huge social house building programmes in both post-war periods, the Private Rental Sector shrank and expanded again more than once.

We also saw the introduction of low interest mortgages in the seventies, which supported homeownership, and Right to Buy in the eighties which decimated social housing stock and boosted homeownership to well over 60%.
As a result of all of these factors, the Private Rental Sector fell to a low of just over 10% of households in the eighties.

 

Beginnings of buy to let

 

The seeds of buy to let, as we now know it, were sown with the The Housing Act in 1988 which introduced the Assured Shorthold Tenancy and removed rent caps, making it far easier for landlords to make a profit from renting property.
Cut to the nineties and the introduction of off-the-peg mortgage deals for landlords, and the buy-to-let boom began in earnest.

We all know what happened during the Global Financial Crisis, and government interventions initiated by then-Chancellor George Osborne to make investing in property less attractive continue today.

But the fundamentals supporting the Private Rental Sector are evident, in population growth, owner-occupation rates and a chronic lack of social housing.

Supply and demand

 

population growth, global population,

The population of the UK is an estimated 66 million, according to the Office for National Statistics (ONS), and it’s expected to continue growing, reaching almost 73 million by 2041.

But Britain’s housing market is struggling and we are still not building homes fast enough to keep up with demand. Plus, house prices – at an average of £226,234 according to the ONS – are not affordable for many aspiring homeowners.

It’s no surprise that the number of households in the Private Rental Sector rose by 25% between 2010-11 and 2017-18, to 4.5 million, according to the government’s English Private Landlord Survey making it the second largest tenure in England, and home to a fifth of all households – 35% of which are families with dependent children.

Rental demand remains high, rents are higher still, according to Your Move – up to £861 a month (up by 0.4% over the last year) – and, of course, buy-to-let mortgage rates are low.

So, while continued challenges for landlords (and there are more to come) mean we are likely to see the buy-to-let market stagnate in the near future, the long-term demand for the sector is clear.

As history has shown us, the Private Rental Sector always bounces back.

For the use of mortgage intermediaries and other professionals only
If you do not have professional experience, you should not rely on the information contained in this communication. If you are a professional and you reproduce any part of the information contained in this communication to be used with or to advise private clients, you must ensure it conforms to the Financial Conduct Authority’s advising and selling rules. Birmingham Midshires is a division of Bank of Scotland plc. Registered in Scotland No. SC327000. Registered Office: The Mound, Edinburgh EH1 1YZ. Bank of Scotland plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority under registration number 169628. This information is correct as of May 2019 and is relevant to Birmingham Midshires products and services only.

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