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Buy to let: exploding the first-time buyer myth

by: BM Solutions
  • 30/05/2019
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Phil Rickards, head of BM Solutions, asks if buy-to-let landlords really triumphed at the expense of first-time buyers.

Landlords get little sympathy when they complain about the changes to taxation rules and other legislation they’ve had to swallow over the last few years.

Received wisdom is that landlords are partly responsible for today’s sky-high house prices and lack of affordable properties. Politicians talk about fixing Britain’s broken housing market, and buy-to-let borrowers have been accused of being complicit in excluding many first-time buyers from home ownership.

Then-Chancellor George Osborne said in his July budget of 2015 that landlords had a ‘huge advantage’ over first-time buyers and promised to make buying property to let less attractive to “create a more level playing field” between them, as he announced the removal of tax relief on mortgage interest costs for landlords.

In November that year, he delivered the hammer blow announcement of a 3% stamp duty surcharge on second properties, saying: “Frankly, people buying a home to let should not be squeezing out families who can’t afford a home to buy.”
With these announcements Osborne dramatically altered the profitability of investing in residential property, and kicked-off a period of tightening the screws on landlords that continues today. Public and political opinion has hardened further amid press reports of slum landlords and extortionate rents.
But is it fair to pin Britain’s broken housing market on landlords?

Social housing sell-off

sale, sell off, Right to Buy

In fact, the size of the Private Rented Sector has waxed and waned over the last 100 years, as we explained in Buy to Let is here to stay, and it hasn’t always been directly connected to rates of owner-occupation.

In fact, one of the biggest catalysts for the growth in private rental was the massive sell-off of social housing under Margaret Thatcher’s Right to Buy initiative in the eighties, under which approximately one million council owned homes were sold to their owners. A concurrent chronic lack of social home building meant the Private Rental Sector had to expand during that decade, to meet the needs of millions of renters.

If the seeds of the Private Rental Sector expansion were sown with Right to Buy, it was watered by The Housing Act of 1988, which ushered in Assured Shorthold Tenancies, making it much easier to be a private landlord.

And because social home building never recovered, there was ever more demand for private landlords. In a report by The House of Lords Committee on Intergenerational Fairness and Provision published in April The Peabody Trust stated that between 2010 and 2013 the ‘construction rate on social housing dropped by 97 per cent’.

The same report added that, while home ownership has declined over the last decade and the private rented sector has doubled in size over 20 years, the largest change has been the fall in social renters (from 31.7 per cent in 1981 to 17 per cent in 2017–18).

Some of the growth of the Private Rental Sector can clearly be attributed to a lack of social housing, but are landlords to blame for the fall in home ownership, or is it more complex?

Coincidence or correlation?

correllation, up and down, arrows

The rise of the Private Rental Sector over the last 20 years certainly seems to have coincided with the fall in home ownership levels. Owner-occupation peaked in 2003 at 71% and has since fallen to 64%. From 2002 onwards the Private Rental Sector has doubled from around 10% to 20%, according to the English Housing Survey.

The reason for this is simple – increased house prices.

But although the buy-to-let boom contributed to the rise in property prices, at its peak in 2007 buy-to-let borrowing of £45bn still only accounted for 13% of all mortgage lending by value. It’s too simplistic to say that landlords alone pushed up house prices.

The fundamental supply and demand issue – a rising population and a chronic lack of house building, combined with more flexible lending and lower mortgage rates, meant that for too long buyers could keep buying despite prices racing well ahead of wages.

It’s also too easy to say that demand for privately rented homes came solely from frustrated first-time buyers, beaten to starter homes by landlords.

In fact, the rising number of single person households, increased immigration, rising student numbers and a mobile workforce have also boosted demand for rental property.

An increasing number of families use the private rented sector too – now totalling 35% of tenants according to the English Housing Survey – and family homes, not starter homes or flats, are an important part of today’s Private Rental Sector.

FTBs are back

first-time buyers, new buyer, let

For many first-time buyers, high house prices, tight mortgage criteria and a lack of support from the bank of mum and dad mean it’s still virtually impossible to get on the ladder.

But plenty are finding a way. Last year, first-time buyer numbers hit a 12-year high, as Help to Buy, innovative mortgages and family support combined to make getting onto the ladder possible.

Landlords didn’t cause the affordability crisis, but government and regulatory intervention have decisively curbed buy-to-let and boosted first-time buyer lending. In February 2019 UK Finance said there were over 24,000 first-time buyer mortgage approvals and less than 5,000 buy-to-let purchases.

You certainly don’t hear many people claiming landlords have a ‘huge advantage’ over first-time buyers any more.

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 June 2019 and is relevant to Birmingham Midshires products and services only.

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