As we finally seem to be coming to the end of the big seasonal freeze, both in terms of mainstream mortgage approvals as well as climatic conditions, it would seem an ideal opportunity to take a step back and look at the buy-to-let market. One of the big questions being posed in the this market relates to the UK’s commitment to homeownership.

House purchase has long been viewed as a ‘must have’ for all young, or not-soyoung, people. The British mentality of owning bricks and mortar has historically formed a long held tradition and aspiration. However, this mentality has come under extreme scrutiny as a result of a mixture of lending institutions’ funding issues, lifestyle choices, affordability problems and larger deposit requirements especially for those in London and its surrounding areas.

Only last month, housing minister John Healey came under fire for suggesting that a fall in the number of people owning houses might be a good thing. Of course, it is relatively simple for the opposition to highlight and jump on such a remark for not being ‘aspirational’, but to the same extent, is it fair to highlight a comment from Liz Peace of the British Property Federation, who said Healey’s remarks should be applauded. She claimed that pushing homeownership down the throats of people who cannot afford it is what led the country into the current economic mess.

Increasing numbers of people have found themselves facing financial concerns and some form of debt or credit problems. Five, maybe even four years ago, one in five potential borrowers were considered non-conforming. After what has happened to the market and the economy as a whole since then, this number must be currently sitting at a level of at least two in five. So
we are now faced with somewhere in the region of over 40% of the adult population not being able to obtain a mortgage. If people cannot get a mortgage, then they will have to rent. If they rent, then there must be rental properties, and if there are rental properties, there has to be a strong buy-to-let market.

Harking back to the political row, this comes as new figures show a sharp reduction in the number of people who think it is important to own a property, according to research by protection provider Scottish Provident. The research showed that a total of 51% think owning their own home is critical for a reasonable standard of living, a decrease of 9% in the last six years.

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The most dramatic change in attitude has occurred among those aged between 55 and 64. Further statistical data showed that 44% in this age bracket now see homeownership as very important, a drop of 17% compared to 2003 when the figure reached 61%. The study blamed the decline on people’s fear about taking out a large debt in order to get on to the property
ladder.

These findings seem to underline that the aspiration of homeownership may indeed have taken a knock, due to a combination of house price insecurity and affordability issues. It is clear that the credit crunch has had an effect on the mentality of many potential buyers who appear, either through choice or financial restrictions, to assess whether homeownership or longer-term renting is the right option for them. I believe that we are in the midst of a fundamental shift in the way that people view property, with many more people reverting to long-term renting rather than buying. Even last year’s X Factor winner Alexandra Burke has stated recently that
she cannot afford to buy her dream home yet. (I am not sure how I know that, or hether I should admit it, but it does illustrate the difficulties which face first-time buyers – even famous ones with a lucrative recording contract.)

In terms of landlord attitudes, findings by CHL show that the majority (81%) are positive about the future for buy to let, with many suggesting the sector has now shed its former get-rich quick image and is once again a market of professional landlords. When asked whether they planned to buy or sell some of their investment properties in the near future, 38% said they intended to buy, 13% said sell, while the majority, 53%, are content to sit tight with the
properties they currently have.

A majority of respondents (59%) manage their properties themselves, suggesting that their role as buy-to-let landlord is a profession rather than a hobby, with 34% using the services of a lettings agent. Almost three quarters of landlords say the rental money they gain from their
buy-to-let properties is sufficient to cover the mortgage payments, management and maintenance fees, while 15% say it is only enough to cover the mortgage. Just 6.1% said their rental income was insufficient to cover their outgoings.

Just over half of respondents said they had not experienced any rental voids in the last 12 months, with 28% having to deal with a rental void in the last six months, and 17% in the last year. Finally, only 12% of respondents said they were using Rental Guarantee Insurance to protect against voids and rent arrears.

Trailblazing

This landlord positivity combined with a shift in homeownership mentality surely means that the buy-to-let market must be blazing a trail? I think we all know the answer to that. Having said that, there were a few positive undertones beginning to come from the sector last November, when Tiuta launched its first buy-to-let product.

Although it was after the launch of this particular product, the CML coincidentally announced that gross lending in the buy-to-let mortgage market grew in the third quarter of 2009 for the first time in two years. At £2.1bn, lending was 10% higher than in the previous three months.

The third quarter also saw a similar first increase in two years in the number of buy-to-let loans advanced, from 21,600 to 23,700. But it is prudent to point out that this welcome recovery in buy-to-let lending was from a low base, with current lending volumes sharply lower than their peak in 2007. The number of outstanding buy-to-let loans grew to 1,205,000, representing 11% of all mortgages by the end of the quarter (compared to 1,180,000 three months earlier).

The value of outstanding buy-to-let mortgages increased by 2.5% to £144.2bn. It’s fair to say that the buy-to-let mortgage market has endured a torrid time in the last two years, but while there is still very little in terms of available funding for many lenders operating in the specialist
market, there are signs of life.

Tiuta’s entrance is firmly a case of not rushingheadlong into the market and proceeding with caution. Other lenders will be looking at the sector through similar eyes, and it would not be too unexpected if a few new or returning lenders entered the market in the year ahead, but these lenders will certainly be more aware of the need to price the risks correctly. Provided they are able to price sensibly for risk, there is no reason why there should not be a healthy buy-to-let market, in terms of the number of lenders, within a relatively short time.

Distribution will remain key to these offerings however and restricting distribution channels will allow such lenders to dip their toe in the water without becoming over exposed. This will inevitably cause a few ripples of positivity which should translate into increased lending in the next 12 months. But the waves of business experienced in the past will I think continue to be a distant memory for quite some time to come.

Guy Garrard is head of business development at Tiuta