CML news & views

Some commentators have been quick to interpret recent developments, including the nationalisation of Bradford & Bingley, as signalling the death of the buy-to-let market. Perhaps this is not surprising, given current market and media sentiment, but it is wrong. Buy-to-let remains underpinned by strong market fundamentals that will not change.

In the immediate aftermath of nationalisation, some lenders raised rates on buy-to-let products. But we have seen the same thing happen in the mainstream mortgage market at other times during the credit crunch. With the spread between Bank rate and the three-month London interbank offered rate (libor) recently rising to an all-time high, increased rates on mortgage products should surprise no-one.

Commentators have also interpreted the decision by some lenders to raise rates as a desire to avoid being swamped by applications from remortgaging buy-to-let landlords. Again, however, the use of pricing to manage business flows is something we have seen before during the credit crunch. When there is not enough funding to meet demand, it is a predictable and sensible response – but does not mean that the market is closing for new business.

Channel Four correctly reported that in the aftermath of nationalisation of Bradford & Bingley the number of buy-to-let loans had “nose-dived.” But there is still a considerable choice of products. Channel Four presumably saw nothing ironic in its follow-up observation that there were now “just 481 different deals available.”

In The Times, property editor Anne Ashworth correctly predicted more challenging conditions for buy-to-let landlords, particularly for those who had paid deposits on properties up to 18 months ago and who were now caught by a combination of tighter credit markets and falling property prices.

“After the nationalisation of Bradford & Bingley, which was, not so long ago, the major lender to amateur landlords, the death of buy-to-let was widely pronounced,” she wrote. “This is clearly not the case: many investors in rental properties are not struggling, as some have no borrowings whatsoever. The arrears and possessions figures illustrate this, despite what some overwrought commentators may claim.”

The reality is that pockets of difficulty will arise for particular types of property – some newly built flats, for example – to which amateur landlords may have been attracted. But the scale of the problems should not be overstated.

Financial difficulties may arise, but we are at a low starting point. Only around 1.1% of buy-to-let mortgages are in arrears of more than three months, compared to 1.33% in the wider market. That means that perhaps 12,000 buy-to-let mortgages are in arrears, out of a total of more than 1.1 million. Meanwhile, the proportion of buy-to-let properties taken into possession is exactly the same as in the mainstream market, at 0.16%. That means around 1,800 properties out of more than 1.1 million.

Some of the key fundamentals of the buy-to-let market have not been damaged by recent developments, and the sector continues to offer good long-term prospects for landlords who take a professional approach.

For example, there is a widely held view that the buy-to-let sector performs counter-cyclically. In other words, rental demand will be stronger in market conditions in which consumers cannot, or do not, want to be home-owners. Demand for rental property will therefore be sustained if current market conditions lead to a decline in appetite for home-ownership. 

Falling property prices will boost rental yields. And the understandable decline in current rates of construction will reinforce the shortage of housing supply going forward, underpinning rental income and helping to keep void levels low. The Association of Residential Landlords and other commentators are reporting that, overall, demand from tenants is strong and rental yields are rising.

So, will the market continue to grow? The ability to negotiate significant reductions on property prices may tempt some landlords to make judicious acquisitions to their property portfolios, if they can be funded on conservative borrowing criteria. There are reports that buy-to-let demand is currently being driven by “professional” landlords, although it is, of course, also constrained by the shortage of mortgage finance.

Even if the short-term outlook for declining capital values is a deterrent to new acquisitions by landlords, the high costs of transactions – and weak prices currently – will discourage them from trying to sell if they have income from tenants.

Once the current funding crisis is resolved and confidence begins to return to the housing market, long-term prospects for capital growth for buy-to-let investors will remain good, underpinned by continuing household growth and a constricted supply of property because of current construction rates.

Finally, is buy-to-let capable of delivering wider benefits? Absolutely. Buy-to-let has helped improve standards in the private rented sector. Between 1996 and 2004, the number of privately rented homes meeting the government’s decency standard increased by almost 80%. And the Department for Communities and Local Government has found that almost 40% of private tenants are very satisfied with their landlord, compared with only 26% in the social rented sector and 22% of council tenants.

The de-regulation of the private rented sector – and, in particular, the introduction of the assured shorthold tenancy – has played a crucial role in the development of buy-to-let so far.  It has been a significant success story in offering a choice of housing where previously it did not exist.

Going forward, it is important that unnecessary regulatory intervention does not deter investors and constrict the supply of rental property, and that the media and others recognise the virtues of a buoyant private rented sector. For the foreseeable future, buy-to-let will be the domain of “professional” landlords, who, by and large, are providing a valued service for their tenants.