Buy-to-let: the past is no guide to the future
Published: 21 September 2015 | Author: Bernard Clarke
Since buy-to-let emerged in the mid- to late 1990s, it has grown strongly. Lenders have advanced more than 1.7 million buy-to-let loans since we began monitoring the market in 1999. Over this time, the private rented sector has seen nothing less than a renaissance – doubling in size over the past 12 years, following decades of steady decline.
Buy-to-let mortgage balances outstanding recently grew to more than £200 billion – equivalent to the gross domestic product of Hong Kong.
Given the growing importance of buy-to-let and the debate about its future, we would like to expand our statistical coverage of the market. We believe it would be helpful for all those interested in the development of buy-to-let – and its role in the private rented sector – to have more market data.
Today, we are publishing some new statistics on the geographical spread of buy-to-let and the types of properties favoured by investors. This data is not necessarily indicative of the way in which we would like to expand our market coverage, but it does present some new insights into the sector.
Chart 1: The geographical spread of owner-occupied and buy-to-let lending
Chart 1 shows the spread of owner-occupied and buy-to-let lending by geographical region. The greatest divergence between these two types of activity is in London, which accounts for 24% of the UK’s buy-to-let market, almost twice its 13% share of owner-occupied borrowing. But given that London has a higher concentration of private rented accommodation than any other region in the UK – at more than 27% of all dwellings – it is not surprising that there should also be a concentration of buy-to-let investment in the capital.
Chart 2: Types of property bought by owner-occupier and buy-to-let borrowers
Our data also shows that buy-to-let investors favour certain types of property - perhaps not surprisingly, 36% of loans have been for flats and 34% for terraced properties. In London, this trend is even more pronounced, with flats accounting for nearly two-thirds of buy-to-let purchases.
At out recent buy-to-let conference, we updated delegates more generally on what our data shows about market developments. The conference also reflected on the potential effects of a range of regulatory and fiscal proposals for the sector. These include the forthcoming consultation by the Treasury on proposals for macro-prudential regulation of buy-to-let lending, the introduction of the European mortgage directive, and the impact of higher taxes on landlords who fund their portfolios through mortgages.
Chart 3: Components of buy-to-let lending, £ billion
Our market data shows that, despite the overall strong growth of buy-to-let over 15 years or so, the sector experienced a sharp contraction in the aftermath of the financial crisis. Since then, buy-to-let has seen an even stronger recovery than the wider market, as Chart 3 shows.
Strong recovery - from a low base
The recovery has seen annual buy-to-let lending expand to £27 billion last year from a low point in which it totalled £9 billion in 2009. It is currently running at an annual rate of about £33 billion.
In absolute terms, however, buy-to-let lending for both house purchase and remortgaging are still some way short of their peak levels in 2007. And within the overall picture of strong growth, the expansion of buy-to-let remortgaging has been stronger than lending for house purchase. Other data show that:
- Buy-to-let has grown from around 9% of all lending for house purchase in 2010 to account for 14% of this activity today. However, buy-to-let accounted for 17% of house purchase lending in 2007.
- Arrears on buy-to-let loans have been falling since 2009, reflecting the pattern of arrears across the mortgage market as a whole. But the decline in buy-to-let arrears has been more pronounced than in the wider market, so that the rate is now below its equivalent in the owner-occupied sector.
- The strong growth of buy-to-let – and recovery of the private rented sector – have been supported by a range of factors, including increasing numbers of young people in higher education, large inward net migration, reduced job security and availability of social housing, tightening affordability pressures on would-be owner-occupiers, and poor returns on pensions and investments. Within the lending sector, there has also been improved credit availability and increased competition between firms.
- There are currently around 1,100 buy-to-let mortgage products, the highest number since April 2008.
Our data show that the buy-to-let sector has been the predominant recovery story in the mortgage market. Over the last five years, buy-to-let has accounted for more than 70% of the overall growth in mortgage balances outstanding (at £44 billion out of a total of £71 billion).
But, although there are many socio-economic factors supporting further strong growth in the private rented sector, the medium- to longer-term prospects for buy-to-let have suddenly become less certain. As our conference heard, they are likely to be affected by the tax changes announced by the chancellor in his summer Budget, as well as regulatory developments.
In recent times, both the chancellor and the Bank of England have supported an extension of the range of macro-prudential tools to counter any risks that may emerge from the housing market. Many of the measures are already in place, but the Treasury is currently working on proposals to extend the tools available to the Financial Policy Committee (FPC) to address risks in the buy-to-let sector.
At our recent conference, Matthew Browne, the head of the mortgages unit at the Treasury, said it was planning to set out its proposals for macro-prudential regulation in a consultation document, to be published later this autumn.
The document may propose that the FPC should have powers to limit loan-to-value or debt-to-income ratios – although it could also choose other options. And while the Treasury was seeking to ensure that the FPC had appropriate powers, Matthew Browne said, it was also interested in the impact any proposals would have on the growth of the private rented sector and the wider economy.
In recent weeks, we have been working with the authorities to provide information and data on the buy-to-let sector, and the Treasury is urging individual lender firms, and brokers and landlords, to do the same. We will also be consulting widely with members when the Treasury publishes its proposals, before submitting our formal response to its measures.
The mortgage credit directive
The UK government has consistently recognised a distinction between owner-occupiers, who are protected by the Financial Conduct Authority’s (FCA) mortgage rules, and investors who use buy-to-let mortgages to finance their business activity in the private rented sector.
When the mortgage credit directive was first proposed, the UK therefore successfully negotiated an opt-out for loans to buy rental properties.
But in considering how the directive should be implemented in the UK, the government felt compelled to extend regulation to cover a small proportion of borrowers with buy-to-let mortgages. Its intention was capture those who are ‘incidental landlords’, perhaps because they rent out a property that they may have inherited or that they used to live in but now rent to someone else, having bought a new home.
The directive comes into effect on 21 March next year, when new consumer buy-to-let loans will be supervised by the FCA. From that date, the onus will be on firms to ensure both that they comply with the directive, and that they identify those buy-to-let borrowers to whom it should apply.
At this stage, it is not clear exactly how many mortgages should be designated as “consumer” buy-to-let although the Treasury has estimated that 11% of existing buy-to-let mortgages may fall into this category.
It is also unclear how the directive will affect the market, or consumer choice. It is possible that some lenders, particularly small and medium-sized firms, may be cautious about offering consumer buy-to-let mortgages. One consequence may therefore be that “consumers” wanting to take out buy-to-let loans will have a narrower choice in the market, particularly in the short term.
The chancellor’s announcement of tax changes affecting buy-to-let landlords – which are being introduced over a five-year implementation period – has created another source of uncertainty for landlords, tenants and lenders.
The measures are likely to deter some landlords from expanding their portfolios, and may encourage others to reduce their property holdings. They could also lead landlords to seek to increase rents to cover some of their additional tax liabilities. Overall, the extent to which the measures may discourage future growth of buy-to-let and the private rented sector is unclear.
We have, however, already urged the Treasury to take into account the effect of tax changes in finalising its proposals to reform macro-prudential powers.
Over the last 15 year or so, buy-to-let has made an important contribution to the expansion of the private rented sector, helping to reverse many decades of decline. Currently, however, there is considerable uncertainly over the impact of a series of regulatory and fiscal proposals on both buy-to-let and the private rented sector.
Lenders do, of course, accept that regulatory authorities must have the right tools to address any macro-prudential risks. But we urge the government and other authorities to consider the effects of uncertainty on the market and, in particular, the potential for a series of reforms to have cumulative, unintended and perhaps damaging consequences.
Earlier this summer in a News & Views opinion piece Buy-to-let: not a saint, not a sinner, we urged that the debate about the future of the housing market should not become unnecessarily polarised, and should seek to avoid pitting home-ownership against buy-to-let. We urge a policy approach that encourages all those who can make a contribution to help deliver more housing – in a balance of tenures that meets consumer needs.