It’s been quite a transformation from the mid 2000s. Prior to 2008, when the sub prime and near prime markets were gorging themselves on the flow of unsustainably easy access to credit, and the Brown administration triumphantly proclaimed an end to boom and bust, buy-to-let was the third estate of the property world.
It was a footnote to the feast of high loan-to-value lending. Now it is a vital component of the market.
Net mortgage lending is suppressed and was £9bn in 2011, and will be somewhere in the realms of £5 billion in 2012. The Land Registry shows housing transactions are less than half the level in 2007. That provides a stark snapshot of just how subdued the residential market is.
Tight credit conditions mean hundred of thousands of first-time buyers are being frozen out of the market. Around 190,000 potential first time buyers are being displaced into the rental sector every year as a result, which is swelling the tenant population considerably every year.
Nor is their any immediate sign of this abating thanks to a rapidly congealing economy. A small improvement in credit conditions and an uptick in the economy will only be enough to free a trickle of first-time buyers.
Demand for rented accommodation is therefore extremely high, and provides a strong and steady stream of income to landlords. The latest Buy-to-Let Index from LSL Property Services shows the average monthly rent in England and Wales is £711 – a 4% annual increase in 2011.
Low property prices by historic standards add to the allure. All the major house price indices show house prices down year-on-year. Zoopla.co.uk revealed two in every five properties on the market have had their asking price reduced at least once, with the average discount standing at £19,500.
Against this backdrop, it’s easy to see why investors are piling into buy-to-let.
Demand is so high that the high street hasn’t been able to completely cater for it, which is why we’ve seen such rapid growth in the bridging loan industry. West One Loans says net lending in bridging is up 48%, and is being driven primarily by buy-to-let demand.
As it stands, yields on vanilla buy-to-let of 6.1%, according to Mortgages for Business, are higher than in almost any other traditional asset class, apart from gold. Equities have performed poorly, with US, UK and European equities down around 0.5 per cent, 4 per cent and 10 per cent respectively.
And with the FTSE continuing to fluctuate erratically, and often inexplicably, buy-to-let offers a comparatively safe haven to investors unwilling to ride the choppy waves of the stock market.
Buy-to-let already forms a disproportionate share of mortgage lending, and lenders have been scrambling to grab a larger share of the burgeoning market.
The number of buy-to-let mortgages increased by 48% between the Q1 and Q4 of last year, according to Mortgages for Business, and more lenders have been entering the buy-to-let sphere recently – most notably Abbey for Intermediaries.
Our Mortgage Monitor has highlighted how lending to buy-to-let investors is increasing, and has been cushioning a drop in overall lending.
Our lender clients have seen a significant uptick in the number of valuations they are doing for professional landlords, but also for amateur landlords who are piling into the buy-to-let cash cow.
All the key economic indicators point towards buy-to-let becoming an even larger segment of the overall market this year. Even the most optimistic analysts are only predicting flat economic growth, while the more lugubrious say the eurozone is sure to plunge the UK deep into a second recession.
Banks are under pressure from all angles. As a result they’ll look to focus on lending to wealthier borrowers and buy-to-let investors, who they see as lower risk than first-time buyers.
Given the grievous state of the economy, it’s no wonder. LIBOR has crept up to 1.09%, the highest since July 2009. And the mini credit crunch in the Eurozone is forcing banks to shrink their assets in a bid to raise their capital ratios.
While this is bad news for the government, the banks, and of course owner-occupiers, it is potentially great news for landlords. The combination of low property prices and a dearth of mortgages for first-time buyers creates a virtuous circle for landlords.
They’ll have lenders rushing to offer cheap buy-to-let deals, and only 23% of would-be first time buyers will be able to get mortgages in the next 12 month. The rest will be added to the vast backlog of first time buyers who can’t hope to cobble together the big deposits required to access affordable mortgages.
This will keep demand high, which will keep buy-to-let yields pushed towards the stratosphere.
