The buy-to-let market appears to have something of the World Cup and the vuvuzela about it. For the uninitiated, the vuvuzela is a plastic modern spin-off of a traditional instrument made from spiralling kudu horns which has become the symbol of the World Cup. The constant humming, buzzing, annoying racket has split opinion about its ‘atmospheric’ quality and offers the perfect excuse to under-performing players.
However, it strikes me that the vuvuzela and the buy-to-let market share some strikingly similar qualities. Both South Africa as host nation and the buy-to-let market have been heavily scrutinised from all sides and both have long been expected to under-perform. The World Cup host nation and the property investment market are also now under increasing pressure to see how external factors, such as the vuvuzela in the case of the World Cup, and the government’s raising of Capital Gains Tax (CGT) for the buy-to-let market, will affect their performances and the huge pressure of expectation bearing down on both.
The fact that minds are being changed everywhere is another cause for comparison between the two. Of course, this is the first World Cup ever to be held in Africa. As an emerging footballing continent, most people want it to host successfully and for its teams to challenge the generations of dominance by other continents. So let’s equate Europe and South America to the home purchaser market and African football to the rental market. After years of supremacy, is it finally time for fans, pundits and players alike to recognise the need for a new force? Or are we still too focused on the importance of homeownership in this country? In terms of football, the jury is still out, as the African teams do not appear to have the necessary confidence, and possess the ability to implode under pressure. But there are some small signs that a shift could be emerging, especially on home territory.
The comparisons outlined might be a little uneven, and I may have let World Cup fever go to my head somewhat, but change is certainly in the air in people’s perception of renting and homeownership. Indeed, it appears that when it comes to this country’s conviction that homeownership is preferable to renting, there is increasing evidence that the attitudes of yesteryear are changing.
Despite pronouncements by housing minister Grant Shapps on the new government’s determination to help prospective homebuyers, the younger generation has become increasingly comfortable with the notion of renting. 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 have reassessed their options. 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.
This may be a lifestyle choice, but according to a recent survey of 1326 UK renters by flat and house share website, Spareroom, a significant number (33%) of people currently renting do not believe they will ever be able to afford to buy a property. Of those that do, most have resigned themselves to a relatively long wait. Almost two-thirds (65%) of those who responded think it will be more than five years, or at least until the next General Election, before they are in a position to step onto the property ladder. Indicators like these, as well as new lenders entering the market, increasing LTV levels and innovative new deals, suggest that the prospects for the buy-to-let sector are bright and the market is in a strong position to rebound strongly after surviving a tough few years.
The only potential blot on the landscape appears to be the government’s increase of CGT from 18% up to 28% on second homes and other investments. Before the implementation of this rise in taxation, private landlords were up in arms, calling on the government to scrap the plans. Letting agent Upad’s recent rental confidence survey revealed worries about the then proposed increase, despite the majority feeling confident in the market. The survey reports that one landlord declared himself ‘appalled’ at the proposals, while another claimed that the buy-to-let market would become much less attractive. However, of the 257 UK landlords surveyed, 54% still felt more confident about the market, despite the tax hikes, with many highlighting the improvement on last year.
This market confidence has long been a characteristic of landlords, if they can steer clear of voids, and get a decent rental and capital return on the value of their property in the long term. Landlords have to treat buy to let as a long-term investment. This brings with it the chance for more certain capital gain, unlike many other asset classes, which even if subject to tax are still less certain, provided the rental returns stack up in the first place. Indeed, private landlords have become an increasingly integral element of the market, even overtaking housing authorities and local authorities as the private rental alternative of choice amongst the new generation of renters.
There is no getting away from the fact that the buy-to-let mortgage market has had to endure a torrid time in the past few years compared to its success in the boom years. Inevitably, this has resulted in many amateur landlords leaving the market, and even made professional landlords take a good long hard look at their portfolios and business plans when looking ahead.
However, opportunities still remain for the savvy investor, landlord and developer and while there is still a lack of available funding for many lenders operating in the specialist markets there are signs of life. Lenders such as Precise Mortgages and Aldermore are focusing on the intermediary market. This should be applauded, and will hopefully open the way for new entrants.
Lenders will continue looking at the sector with great interest and it wouldn’t be crazy to speculate that a few more new or returning lenders could return to the market before the year is out. Whatever happens, these lenders will be more aware of the need to price for risk accordingly and the key importance of strategic distribution.
All in all, despite the CGT rise, there is enough evidence to suggest that landlords, both professional and amateur, should be relatively confident about the future of the buy-to-let market. As highlighted, the private rental market is playing an increasingly prominent role in providing homes for buyers that either cannot afford to or are choosing not to buy and demand shows no sign of dwindling.
The green shoots are there, but let’s hope the government treads with caution so that it does not trample over this fragile growth, which will enable the buy-to-let market to continue blowing its own trumpet for years to come.
Guy Garrard is head of business development at Tiuta