Cover
Light at the end
Bad news has been splashed across the pages of our media for almost three and half years now but there is a light at the end of the tunnel and it is in buy-to-let. Sarah Davidson examines those looking to accentuate the positives at a time when there are few rays of sunshine breaking through those doom-sayers’ storm clouds
It has been a rocky ride for buy-to-let. Council of Mortgage Lenders’ figures show that when the credit crunch hit in mid-2007 gross mortgage lending plummeted 60% in two years. As if that wasn’t shocking enough, buy-to-let lending fell disproportionately, 81% from £44.6 billion in 2007 to just £8.5 billion in 2009.
Lenders retrenched and went from having a 12.3% stake in buy-to-let in 2007 to the sector representing a mere 5.9% of all gross lending last year.
Activity levels also nose-dived 73% over the same period to 93,500 approvals – a level not seen since 2001. The reasons for this vary according to who you talk to, but most agree that the risk associated with buy-to-let had been untested in a downturn and lenders shied away from any type of lending they didn’t consider vanilla.
The other significant reason was that
government support for the mortgage market bypassed specialist lenders which had historically served the buy-to-let market and went straight to the big retail banks.
Buy-to-let was considered particularly uncharted territory in light of the discovery that many landlords who had been given buy-to-let loans in 2006 and 2007 were
inexperienced and bought properties off-plan in areas where they didn’t understand the rental market in the naive belief that they could make a quick buck through capital inflation.
In some cases, in collusion with valuers,
brokers and solicitors, landlords committed fraud by inflating incomes, property values and failing to disclose incentives from developers which hid true loan to values from lenders. In theory, buy-to-let should behave counter-cyclically to the residential mortgage market. As house prices fall and criteria tighten, fewer people can afford mortgages but still need somewhere to live.
That pushes up demand for rented accommodation and consequently landlords are able to reap a better rent, covering their own mortgage and avoiding falling into arrears at a time when private residents may run into payment difficulties on their mortgage. But we are now beyond the three year mark since the credit crunch hit and buy-to-let has built a track record of surviving the test of a down turn. Estimates from the CML put the
proportion of all buy-to-let mortgages over three months in arrears at 2.7% at the end of the second quarter this year. The
28 mortgage introducer NOVEMBER 2010
numbers show 0.13% of privately rented properties taken into possession in the same period. Analysis by research firm, Datamonitor, is further evidence that buy-to-let outperformed residential mortgages. During the period between 1999 and March 2010, buy-to-let arrears exceeded arrears in the total market during the second half of 2008 only. There are positives in this market and it seems that lenders are beginning to recognise that again.
The Association of Residential Lettings Agents (ARLA) published its “Review and Index for Residential Investment” for the third quarter 2010 recently, which showed that yields in the private rented sector are improving.
In Q3 2010 average yields on houses
were at 5% and for flats the return was up to 5.1% from 5% in the second quarter. “The market has bounced back in a way that no one could have predicted to levels of demand that have not been seen since the last century,” says Ian Potter, operations director of ARLA. “More than 70% of our agents have stated that consumers coming to their offices are being forced to rent because of the pressure exerted on potential home buyers.”
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