Q. What part has ARLA played in the development of the buy-to-let sector?
ARLA actually invented buy to let back in 1996. We also invented the term ‘buy to let’ ‘ which is interesting, as it has become colloquial and now appears in lots of publications ‘ I am sure it will not be long before it appears in the dictionary. We still get some recognition that it was us who initiated the first buy-to-let scheme, but the market has now exploded and we have lost some ownership of the term.
To give some background history, the residential letting market was tied up for most of last century with an endless stream of legislation from governments of all persuasions restricting rents and so on, until the rental sector came to an all-time low in the 1980s. The 1988 Housing Act opened up the market and in the following years, lenders started offering specific mortgage products to enable landlords to buy properties and let them out. ARLA started that in 1996 with a panel of six lenders offering specific buy-to-let products. Now there are more than 40 lenders in the market.
Q. There has been huge growth in the sector. How long do you think this can continue?
I do not think we are anywhere near reaching a peak. There is a perception the private rented sector as a whole is growing dramatically, but I do not think that is quite true. The private rented sector is staying about the same size.
What is happening is that a lot of the old tenancies ‘ the old regulated tenancies ‘ are dropping out at the far end of the pipe, and we have new tenancies coming in on buy to let. These new tenancies are of a much better standard, with more modern properties that are better presented. The whole impression of the market and the standards is lifting quite dramatically.
The size of the market will not be decided by the number of landlords wanting to do buy to let, but the tenant demand. Within a free market ‘ which is welcome ‘ if tenant demand goes up then there will be plenty of landlords now who will be able to satisfy that demand.
Q. How have mortgage lenders adapted to the success of the market
Products are now very competitive. In the early days, buy-to-let products used to cost more than an owner-occupied mortgage. It was regarded as a risky, niche market. Of course, it is neither of these. It is now larger than most people realise and evidence has shown it isn’t risky. You can now get buy-to-let products at very similar terms and prices to owner-occupied mortgages. The only significant difference is that buy-to-let lenders want you to put in a fairly sizeable deposit ‘ typically 20%. The reason is that if lenders go up to 95% or 100% LTV, the rent will not quite cover the mortgage repayments. Most lenders want the rent to cover 130% of the mortgage repayments.
Q. Do you think there is a danger of some investors over-stretching themselves in the current low interest rate environment?
There is a danger that rental yields can fall below the mortgage repayments, as low interest rates have put pressure on yield margins in all investment markets ‘ including residential. However, evidence seems to suggest a lot of people going into buy to let are reasonably well off and a large proportion can afford to supplement ‘ if they need to ‘ their buy-to-let mortgage, if there is a rental void or rental yields are low.
Q. Do you think the buy-to-let market should be regulated?
I think you will find the Government does not have much sympathy for investor landlords and is unlikely to offer them protection. If somebody can afford to buy another property and make investment decisions then they do not need regulation and protection. I do not know what the future holds, but I do not predict much Government enthusiasm for offering protection to investors who own a lot of properties. I do not perceive an obvious need to protect the market. People who go into it should be able to look after themselves and lenders should know how to act responsibly.
Q. What urged ARLA to recently issue its buy-to-let charter?
Now there are lots of players in the market, we have lost ownership of the initiative ‘ it has outgrown us. So we are putting together a revised panel and taking the lead in buy-to-let initiatives and publicity and so on, within that charter of responsible lending and best practice. We want to maintain ownership of the sector and maintain good standards by effectively introducing voluntary regulation. We also want to promote and publish these standards ‘ it is fairly simple.
Q. Are there any more buy-to-let initiatives on the horizon for ARLA?
We will wait for the charter to settle first. Our aim is for would-be investors to know about the charter, read it and take notice, so we will be concentrating on its promotion. We will wait for that to get off the ground before we launch anything new.
Kirstie Redford is deputy editor