The Bigger Issue
Is the buy-to-let market i Last month Lord Lamont warned the chancellor to keep a careful eye on the buy-
I understand Lord Lamont’s fears but I see the surge in demand for buy-to-let as part of what is now looking like an inevitable return to the reduction in owner occupation in the UK. Sadly, the gap between the haves and the have-nots in terms of home ownership is widening and we appear to be moving back to the rental levels of the early part of the twentieth century which is a great shame in my opinion. Low interest rates on savings and investments are clearly leading people to seek a higher yield elsewhere and buy-to-let offers investors a formidable vehicle with rental yields currently peaking at around 10% in the rental hotspots according to the latest research by
Home.co.uk. I agree with Lord Lamont that government intervention in the housing market, principally the Help to Buy scheme, is doubtless stoking house price inflation. The latest figures from the Office for National Statistics show that house prices in the UK are up around 3% on last year and take up of the Help to Buy scheme has so far been high. The intentions of the scheme are good but the consequences are inevitable. What lenders can do, though, is take great care when assessing buy-to-let applications. Most lenders, including us here at Teachers Building Society, stipulate that monthly rental income must be considerably higher than the mortgage payment to provide some protection against any future interest rate rises. It’s also sensible for lenders to limit their exposure to individual landlords and at Teachers we will lend on a maximum of three properties per landlord.
Underwriting on a case by case basis enables lenders to minimise the risk of landlords over stretching themselves financially. Equally, lenders can’t ignore the thriving buy-to- let market and with demand for rental property on the rise, the proportion of buy-to-let lending will rise too. While we’ve relaxed certain buy-to-let criteria in recent weeks at Teachers we continue to assess each case carefully. As long as all lenders take a measured and prudent approach to this market Lord Lamont’s feared catastrophe should be avoided.
Angela Evans is finance and operations director at Teachers Building Society
Looking at what has happened since the late 1980s it is very clear that we have reached the limits of a sustainable owner- occupied market and have seen some retrenchment in recent years. We have also seen to a degree the deconstruction, in part, of the social rented sector. Both have been the product of the policies of successive governments along with significant social and demographic change.
Norman Lamont of course was a part of the government that oversaw much that has led us to where we are, including the introduction of Right-to-Buy, the sale of council housing to housing associations, the withdrawal of tax relief on mortgages and, perhaps most critically, the 1988 Housing Act. It was the 1988 Housing Act that re-balanced landlord and tenant rights and introduced the Assured Shorthold Tenancy. This ensured that the private rental sector was capable of expanding to fill the gap between a moribund owner-occupied market and a shrinking social rented sector. It was therefore no accident that buy-to-let was first introduced in the mid-1990’s as a response from the lender community to satisfy demand from landlords who needed to build their property portfolios to meet the rapidly growing demand from tenants that has continued unabated since that time. And it doesn’t look like we are going to see a reversal in these trends any time soon.
In the wake of the financial crisis, society has demanded
stronger and safer banks and building societies and our regulators are busy delivering this through tighter conduct of business regulation and prudential regulation. Mortgages will be harder to come by and will be more expensive and so buying a home is likely to be more difficult than ever. The demand can only really be met by private landlords and these private landlords need buy-to-let finance to fuel the growth. Of course we need to avoid a bubble but even if the buy-to-let market hits £20bn this year it will still be less than half the scale of the market in 2007 and will still be barely keeping pace with the demand for rented housing as is apparent in the rate of rental inflation in the most popular areas.
John Heron is director of lending at Paragon
32 MORTGAGE INTRODUCER SEPTEMBER 2013
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