But the complicated nature of landlord profits means there are many reasons growth could stumble. As part of a buy-to-let week, Mortgage Solutions explores the potential for the buy-to-let market and how much bigger it can get in 2013.
For this week’s Marketwatch, our commentators are:
Pargon director of mortgages John Heron, who argues a major shift in housing patterns could see the private rented sector represent a fifth of housing
National Landlords Association head of policy Chris Norris, who says landlords want a better variety of products and more clarity from lenders
Mortgages for Business head of sales Steve Olejnik, who suggests building societies could expand in the buy-to-let sector
John Heron, director of mortgages, Paragon
We are part way through a major shift in housing patterns in the UK. Owner-occupation has been in decline since the early 2000s and now represents 65% of housing. Social housing has halved in the last 30 years and now represents 17% of total housing. The private rented sector (PRS) has almost doubled in the last 25 years.
Social, demographic, economic and political change is driving this shift and there is no sign that it is running out of steam. A PRS of 20% in the next five years looks a certainty and it is entirely possible that it will go on from there. Those that doubt such prospects might be reminded that in 1919 some 90% of households rented privately.
Buy-to-let is attractive to lenders because it offers a combination of high credit quality and superior returns compared with owner-occupier mortgages. Lenders are therefore likely to want to grow this area of their mortgage business and those lenders that have not yet addressed the buy-to-let market will want to do so.
Market leadership however is hard to predict and should not be defined simply by the lenders who lend the most funds. The buy-to-let market is a specialist market that requires specialist underwriting, valuation and account administration.
Buy-to-let remains a largely intermediated market with almost 90% of all buy-to-let loans being originated by intermediaries. This is again because buy-to-let is a niche market: borrowers have widely differing needs and lender solutions are not only about the best price.
Chris Norris, head of policy, National Landlords Association
The private rental sector has officially overtaken social renting as the second most populous housing tenure and demand is definitely there from tenants, landlords and would-be investors for future growth.
With the exception of a few select areas, rental yields remained consistent at around 6% for the past five years and this is unlikely to change in 2013.
Traditionally we are aware that private landlords have relied on the prospect of capital appreciation to bolster mediocre rental yields. However, this is becoming a less certain route to ultimate returns. Buy-to-let is a business and with the cost of living and inflation rising, the primary focus should be on the bottom line and that means planning for long-term sustainable returns.
There are undoubtedly more products available to landlords wishing to invest. However, there remains little variety in the market and a great deal of concern about the decisions of some of the big lenders are making.
Likewise the indecisive nature of some other big names in relation to lending to landlords exposed to the housing benefit market is making it very difficult for individuals trying to make long-term investment decisions.
Brokers remain incredibly important as facilitators in the buy-to-let market. NLA research suggests that 67% of members secured their last mortgage with the help of an intermediary and 63% prefer this route when looking for finance.
Steve Olejnik, head of sales, Mortgages for Business
I foresee buy-to-let lending increasing by around 17% in 2013. This could stretch to 20% if we include more complex residential investment transactions. Demand from landlords will remain strong as first time buyers continue to struggle to get a foothold on the property ladder and house prices remain subdued.
I anticipate that more building societies will start lending on buy-to-let and maybe some high street banks too. I doubt we’ll see any totally new lenders enter the buy-to-let space. It is likely lenders will allocate a greater proportion of their lending budgets to buy-to-let and this could be at the expense of residential mortgage lending.
In the mainstream buy-to-let market the likes of TMW, BM Solutions, Coventry Godiva and Aldermore Mortgages will continue to lead the way. We may even see some of them start to produce products for more complex residential investment scenarios such as HMOs, multi-units and lending to limited companies.
I expect the specialist lenders who already lend on complex buy-to-let will become more flexible in their criteria which will help the professional landlord. We might even see more lenders going to 85% LTV.
Brokers have an enormous opportunity especially at the complex end but need to know the market inside out or align themselves with a broker that can transact on their behalf.
