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will inevitably be above current levels. The form of rented accommodation. Too many market are turning their attention to alternative
Government is likely to have introduced tax investors lost sight of this fact and purchased areas of the mortgage market or other revenue
breaks to encourage consumers to start spending property without the tenant in mind or because streams altogether.
again and the Bank of England will have contin- of attractive discounts offered by developers. At Therefore, the specialist broker skills that have
ued its policy of low interest rates. the heart of any good decision in buy-to-let is helped the market to grow and have encouraged
And what will the mortgage market look like tenant demand - strong sustainable tenant sensible buy-to-let investment will be in short
at that point? The stark answer is much smaller demand will provide the most solid platform for supply when the market eventually returns. I sus-
than it was in 2007. It will take a long time for a successful buy-to-let strategy. pect that this will be a short-term blip though as
the contraction that has occurred over the past One side effect of the credit crunch is the like- the broker community has proven itself to be
12 months to reverse, especially with a smaller ly cleansing of the 'speculative' investor from the able to quickly adapt to consumer demand in the
number of specialist lenders in the market and market. The buy-to-let operator going forward past.
fewer investment banks willing to fund niche will be very similar to those 'traditional' investors
markets. that were already in the market in the mid-1990s Hurdles
when the term 'buy-to-let' was originally con- Another hurdle the sector faces is supply. Some
Cautious ceived. They are financially sophisticated, cau- of the sector's big names, such as Bradford &
Bruised high street lenders will continue to be tious investors who adopt long-term investment Bingley and Northern Rock, are unlikely to step
cautious for some time to come and we may see strategies. They base their purchase decisions on back into the market following their nationalisa-
more merger activity, which will reduce competi- proven levels of tenant demand and they buy tion, while Lloyds' plan for HBOS's smaller
tion for consumers further. The mainstream property based on its potential return and not on brands remains to be seen. At Paragon, we're
mortgage market will be dominated by a small whether they would personally want to live there. confident our constraints on new lending will be
number of powerful lenders, whose pricing The investment environment should also temporary, but for others it is more likely to be
power will make it difficult for smaller players to return to mid-1990s conditions. Average yields – permanent.
compete. a key driver of any professional landlord's invest- With customers on the books of Rock and
The natural habitat for the remaining smaller ment decision - will return to levels above 10 per B&B looking for better deals when their intro-
lenders will be the specialist markets where there cent due to falling house prices and high tenant ductory deals end, in addition to an upsurge in
will be a myriad of opportunities for fast moving demand. With current yield levels hovering demand from investors looking to fund fresh
operators able to react quickly to market around the 6 per cent level, that will make prop- purchases, pressure on available product will be
demands. This will particularly be the case with erty investment an attractive proposition. The intense.
buy-to-let. opportunity for capital growth will also return as Therefore, the speed and extent of the recov-
It is widely acknowledged that this market is house prices bottom out and the simple eco- ery in the buy-to-let sector will ultimately
currently closed to significant levels of new lend- nomics of supply and demand come back into depend on the return of the mortgage backed
ing, but to predict the death of buy-to-let is pre- equilibrium. securities (MBS) market and the level at which
mature. The market will reopen at some point the investment community's appetite for risk
but it will be dominated by specialist independ- Chronic shortage also returns. There is no doubt that MBS will
ent lenders and it is unlikely we will see the high The fact remains that there is still a chronic return in some form. If we are to experience a
street players wanting to build the type of market shortage of housing in the UK and this problem lengthy period of low interest rates, then
share that they have enjoyed in the past. is worsening as new home building grinds to a investors, such as major pension funds and
Buy-to-let has traditionally been the natural standstill in the current economic climate. insurance companies, will want to – and need to
domain of the specialist lender due to its highly According to Communities and Local - generate better returns from their investments.
specialised underwriting and criteria require- Government figures from 2008, new starts But we should expect major changes to the
ments. Specialist lenders are able to react quickly amounted to only 100,000 homes last year, with MBS vehicles, which are likely to be far more
to consumer demand and are able to maintain the prospect for 2009 looking equally as bleak. transparent than those formed before the
close relationships with their customers as they The Royal Institution of Chartered Surveyors crunch. Investors will demand to know exactly
build portfolios and develop their businesses. warned that the Government's target of 240,000 what types of loans are being held in the vehicles
Those lenders that came to the buy-to-let market new homes by 2016 looks unrealistic. It says: and exactly how they are performing. The 'slicing
with a mainstream mortgage mindset have suf- 'Unless more homes are built there is a real dan- and dicing' of prime and sub-prime stock is con-
fered from rising arrears rates as the desire to ger of a serious mismatch between demand and signed to history, which can only be a good
build market share dimmed the focus on careful supply which could lead to renewed problems of thing.
and considerate lending. affordability when the market recovers.' The Government has taken tentative steps to
Buy-to-let is not a suitable investment for If people can't buy, then they are left with few help stimulate the MBS market. Alistair Darling
everyone and we have seen some inexperienced options other than to rent. The combination of announced in the 2008 Pre-Budget Report that
property investors suffer in recent months. 'Buy- fewer owner-occupiers, a stagnant property the Government will adopt Sir James Crosby's
to-let' is a term that covers a wide range of development market and a growing population recommendations and will offer to guarantee
investors but there is a certain band of inexperi- places intense pressure on the private rented sec- MBSs. We await the finer details of how this
enced investors that came late to the market and tor. scheme will operate, but it is a step in the right
could be more accurately described as 'specula- Demand for buy-to-let lenders' products is not direction.
tors'. Speculators typically made poor purchase the issue going forward, but how products are We all know that these initiatives take time to
decisions, often in association with a property distributed could be. The mortgage broker com- bed in and we can expect further grim market
club, and some lenders were happy to fund their munity has suffered badly during the economic conditions in 2009 and possibly 2010 as well. But
property investments without properly looking downturn and we have seen a severe contraction by the time the first starter gun fires in 2012, I'm
under the bonnet. in the number of firms operating. Key people confident that the buy-to-let market will be a lit-
have left the industry, destroying relationships tle battered and bruised but, most importantly,
A commodity that have taken years to build. This contraction is intact.
'Buy-to-let' and the private rented sector is essen- likely to continue in the coming months and
tially a commodity – providing a product in the those brokers that did specialise in the buy-to-let
www.mortgageintroducer.com February 2009 Mortgage Introducer
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