Published: 16 November 2011 | Author: Bernard Clarke
Our recent data showing strong growth in the buy-to-let sector for the second successive quarter coincided with reports from landlords, estate agents and surveyors of buoyant demand for privately rented accommodation. Only two days before we published our buy-to-let figures for the third quarter of this year, one estate agent reported demand for rental property at a "record high across the UK."
Against a backdrop of rapid growth in household formation over a number of years, a modest – but steady – decline in owner-occupation since 2003 and a long-term shortage of social housing, it is perhaps no surprise that demand for privately-rented property remains strong. But what does the data show us about recent developments in the private rented sector and buy-to-let mortgage market? And, now that we have seen a recovery in the sector over two successive quarters, is it likely to continue?
One issue regularly debated by market commentators is the extent to which a buoyant private rented sector is either driven by, or contributes to, the displacement of would-be first-time buyers. Some of the data for the last decade shows strong growth in buy-to-let coinciding with declining first-time buyer numbers. But Chart One also shows that, in the period immediately prior to the credit crunch, numbers of both first-time buyers and buy-to-let investors were both growing at the same time.
Thereafter, both also declined, with activity in the buy-to-let sector turning down even more sharply than borrowing by first-time buyers (and in the wider residential mortgage market). During this period, first-time buyer activity – at least as a proportion of the market overall – continued to hold up. From this, we conclude:
- The causal relationship between buy-to-let and first-time buyer activity is far from clear-cut. Chart Two shows how the relative proportions of buy-to-let and first-time buyer borrowing have changed over time.
- Buy-to-let has shown significant signs of recovery in the last six months. But trends in buy-to-let activity differ significantly in different locations and local market conditions.
- While the balance of tenures has evolved over time, the key housing problem in the UK is a persistent shortage of supply of property, relative to the formation of households.
The key problem: housing supply
- A long-term shortage of housing supply has been a crucial factor in the affordability problems for first-time buyers.
- The shortage of property has also contributed to an excess of demand over supply in the private rented sector, pushing up rents for tenants.
- Finally, there is a continuing under-supply of social housing, which has added to demand in the private rented sector.
Chart One: Number of first-time buyer and buy-to-let borrowers
Chart Two: Relative shares of first-time buyer and buy-to-let markets
Recent buy-to-let activity
Data we published last week showed that the number of new buy-to-let loans increased by 16% in the third quarter of 2011. Over the same period, the value of lending in the sector grew by 19%. That was the second successive quarter of strong growth, with buy-to-let increasing (coincidentally) by the same proportions in the preceding three months.
In the three months to September, lenders advanced a total of 34,500 buy-to-let loans, an increase from 29,700 in the preceding quarter. The value of lending totalled £3.8 billion, up from £3.2 billion. By both measures, buy-to-let lending was at its highest level since the final quarter of 2008.
The number and value of outstanding buy-to-let loans also continued to grow. At the end of September, there were 1,378,700 mortgages outstanding, an increase of 6% over 12 months. The value of outstanding mortgages was 5% higher than a year earlier, at £157 billion (£150 billion at the end of September 2010). In contrast, the mainstream mortgage market was virtually static over the same period, with the number of outstanding loans declining by 0.5% and their value rising by 0.7%.
The decline in buy-to-let activity during the downturn was driven both by the combination of a shortage of mortgage funding and falling demand from investors. But despite the significant pick-up in activity in the last two quarters, buy-to-let lending has only recovered some of the lost ground. Levels of activity are still running at only around one-third of their peak in 2006 and 2007.
Future prospects for buy-to-let
Buy-to-let activity looks well placed to continue growing in the foreseeable future. First-time buyer activity is likely to remain constrained both by affordability problems and by concerns among potential buyers about taking on borrowing commitments against a backdrop of economic uncertainty and weakness.
Landlords and estate agents, meanwhile, continue to report strong growth in rental incomes, driven by a shortage of property and the growth of household formation. Rising demand and upward pressure on rents are likely to continue for the foreseeable future, creating opportunities for professional landlords to make judicious acquisitions to their portfolios. This trend looks set to continue.
Sources of demand in the rental sector
Much of the growth in household formation in the UK in recent years has been driven by net inward migration. A significant proportion of new migrants to the UK are unlikely to become owner-occupiers immediately and have therefore contributed to the growth in demand for privately rented accommodation.
Another reason for buoyancy in the sector is the number of people making a conscious decision to rent rather than buy. This may be either a lifestyle choice, or a preference for mobility to be able to move in response to job opportunities or for other reasons. For these (and other) tenants, the emergence of buy-to-let since the late 1990s has improved the quality and choice of accommodation in the rental sector.
Yet another group of tenants (and landlords) emerging in recent years comprises former or existing owner-occupiers. Since 2008, the number of property transactions has declined to around half the level of the more than a million we saw annually in the decade to 2007.
This has made it difficult for those buying and selling property to form chains of transactions, leading estate agents to report an increase in the number of people seeking to sell their home first, then renting while they look for another property to buy. Other owners, who are unable or unwilling to sell but wanting to move, have chosen to rent out their own home while renting another property to live in. If the home they are renting out is mortgaged, however, they should normally seek the consent of the lender beforehand.
An important factor of the buy-to-let market is that it is often highly localised, with a significant degree of concentration in some cities and towns (and often in certain parts of cities and towns, perhaps where there may be a large student population and a ready supply of properties suitable for renting). The concentration of buy-to-let therefore has local effects on housing, mortgage and rental markets.
Predictions for buy-to-let
Earlier this month, estate agents Countrywide reported that "demand for rental property remains at a record high across the UK." The number of viewings was 8% higher than a year earlier, and tenants were agreeing more quickly to rent a property once they had viewed it. The firm predicted that recent buoyancy in the buy-to-let sector would continue, driven by tenant demand, falling house prices and the availability of competitively priced mortgages for landlords.
The Royal Institution of Chartered Surveyors also reported that tenant demand was outpacing the growth in supply of rental property. "The combination of strong tenant demand and a limited stock of good quality properties on offer is pushing rents ever higher across much of the country," it said.
Finally, the National Landlords Association said that the private rented sector was playing an increasingly important part in housing provision, given the decline in owner-occupation and "virtually inaccessible" social housing.
Recent data shows that buy-to-let lending has grown strongly in each of the last two quarters, although activity remains significantly lower than its peak in 2007. The fundamentals of growth in the number of UK households, combined with constraints on access to the owner-occupied and social housing sectors in the foreseeable future, suggest that demand for privately rented accommodation will remain strong and continue to grow.
The root cause of many of the problems in the housing market, for would-be owner-occupiers and for landlords and tenants, remains the continuing shortage of property. This is adding to affordability problems for first-time buyers, while rents have also been rising. Buy-to-let does, however, improve quality and choice for tenants in the private rented sector, while providing an option for those who are unable to fulfil their aspirations to home-ownership in the short term.