Recent reports warning of an imminent downturn in the housing market appear to have been greatly exaggerated, as lenders report that property price inflation is still increasing. However, many lenders believe that even if the housing market did take a turn for the worst, the buy-to-let market could be cushioned from the problems hitting other sectors, because there will always be a strong demand for rental property.
Buying property to let has become increasingly popular as an investment tool, and the market has been enjoying strong growth since the first mortgage lenders began launching buy-to-let schemes in 1997. Some lenders are even predicting that this sector will remain positive in the event of the housing market finally overheating.
The Association of Residential Letting Agents (ARLA) predicts that rented accommodation could grow to about 20% of the entire housing market by 2020, with growth caused by a number of social factors.
Bill Dudgeon, managing director of The Mortgage Business (TMB), says: ‘Some of the growth has been investment driven, but there are other contributing factors such as lifestyle changes, for example higher divorce rates and a greater number of short term contract workers who regularly have to move about the country. These factors mean there are now more single people looking to set up home and in some areas, especially the south east, spiralling house prices are forcing more people to rent because they cannot afford to get on the housing ladder.’
However, there are concerns that increasing house prices in the south east may eventually have a negative effect on buy-to-let properties regardless of the economic slowdown, as the differential between the size of the mortgage repayments and the rental income continues to widen.
Hugh Dunsmore-Hardy, chief executive of the National Association of Estate Agents (NAEA), says: ‘Rental yields may soon start to get more problematic for landlords in London and the home counties and we would expect demand to tail off as the yield return falls. But consequently, there could be an increase in the number of people from these areas deciding to acquire buy-to-let properties further north. There are very good yields in other parts of the country, where houses are cheaper and yields are high. Therefore, it could be an idea to explore areas that are not necessarily on the client’s doorstep.’
Dudgeon agrees, but notes that there are always advantages and disadvantages with rental properties in different areas in the country. However because rental yields are broadly inelastic, if landlords choose a mortgage that can be covered by the initial rental income they should be in a good position, whatever happens in the housing market. He says: ‘While in the south east landlords may soon start to struggle to cover rental income, they will gain on capital appreciation. Whereas in somewhere like the north west, they can get a good rental income but there will be less capital appreciation. If there is an economic downturn, the buy-to-let sector may not actually be affected. In the last recession, rental income stayed the same and so logically landlords should still be able to afford the mortgage repayments.’
As the survey demonstrates, the number of lenders who are now active in the market is an indication of how strong the market has become in just five years. And because of this growth it is expected the future of the market will be driven by product innovation, as lenders seek to differentiate themselves from each other and appeal to a wider market. Steve Sandiford, head of borrowing products at Birmingham Midshires says: ‘As in any field, the more competition there is, the more innovations there are, such as flexible buy-to-let products, and a growing willingness to do portfolio lending for non-standard borrowers. From the advisers point of view, there is now more chance of being able to find a suitable mortgage.’
According to Tim Sturley, head of business development at Mortgage Express, one of the most significant developments will be the expected increase in the number of borrowers setting themselves up as private limited companies, to take advantages of tax breaks for small businesses. Sturley says: ‘There will be more lending in the name of limited companies next year. In theory, they are easy to set up but there could be some initial problems with lenders’ systems, and there will be issues over whether they are comfortable taking a director’s guarantee for the loan.’
Recent figures from online mortgage transactional facilitator, IFonline, show that Sun Bank’s discount mortgage with an initial rate of 5.49% until January 2003 was the most highly quoted buy-to-let product from the number of online mortgage quotes processed during July. Bristol & West’s 6% three-year tracker was the second most popular while West Bromwich’s 6.2% three-year discount was the third most quoted product. The diversity between these products and lenders is another indication that borrowers in the buy-to-let market are becoming much more diverse.
The future is always difficult to forecast, but even though buy-to-let has not yet been through a full economic cycle there is a feeling in the industry that it could still prosper when other sectors suffer. At a time when worries are growing over the state of the housing market, a recession could actually make the buy-to-let market even more buoyant as people cannot afford to buy and are forced to rent.