The buy-to-let market in Britain has grown from virtually nothing a decade ago to now representing approximately 10 per cent of the residential housing market. By the end of 2006, there were 850,000 buy-to-let mortgages outstanding, worth £94.8 billion. This represents nearly a 30 fold increase since 1998 when there were only 28,700, according to CML figures in Febuary 2007.
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Buy-to-let soared during a period of low interest rates. Ten years ago interest rates were 6%, having fallen from a high of 15% in 1989 and over the course of the decade fell to a record low of 3.5% in 2003. This improved affordability encouraged investors to spend more and lenders to offer larger loans. The number of amateur landlords soared as people took advantage of the low cost of borrowing to invest in property.
The buy-to-let market was also further aided by the removal of restrictions to the Assured Shorthold Tenancy agreement (AST) in the early days of the Labour administration. This made lettings easier and signalled to the market that the Government was not going to bring back the rent controls abandoned by the Tories.
MEETING MARKET DEMAND NOT STIFFLING IT
Now, this tremendous growth has led to concern that the buy-to-let market is preventing first time buyers entering the market, reducing the supply of available homes for aspiring homebuyers, whilst inflating house prices.
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These fears are unfounded. Despite the growth in the buy-to-let market during the past decade it is still one of the smallest private rented sectors amongst the world’s industrialised nations. In the United States, 32 per cent of its residential market is rented housing and in Germany, 48 per cent, according to 'The future of private renting in the UK, Social Market Foundation report into the private rental sector by Michael Ball in 2004. The rental market in the UK is now starting to reflect the market across Europe and US, where people commonly wait much longer to buy a property.
Also, in the UK, we still rely heavily on the public sector to supply our rental accommodation needs. Non-private rentals account for 68 per cent of the rental market. In contrast, in Germany, 31 per cent of its rental market is non-private. The growth of buy-to-let has been crucial in helping to ease this burden.
As affordability becomes a growing issue for many first time buyers due to rising prices and a diminishing supply of homes on the market, more young people are delaying stepping on to the property ladder. With interest rates rising by 1 per cent in the last twelve months and set to increase further, an increasing number of people are content to rent their home and be protected from the full impact of rising mortgage costs.
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It isn’t just affordability that is causing first time buyers to hold off. Changing lifestyles are also a factor in individuals now simply choosing to wait longer. The employment patterns and lifestyles mean people enjoy the freedom and flexibility that renting provides.
Britain’s growing population has also helped to further the growth of the buy-to-let market by creating increased demand for rental properties. The boom in Britain’s wealth and economic position over the last decade has encouraged high levels of immigration into the UK, especially into London. The capital’s position as the world’s financial centre has attracted huge numbers of people who all need to rent or buy putting further pressure on supply.
Tenants have benefited from the increase in the number of buy-to-let properties. The growth in the market has meant that there is greater choice for renters. This increased competition has resulted in better quality accommodation being more widely available. Also, more rental accommodation is now available outside cities and towns.
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The UK’s growing population, affordability constraints, a shortage of supply and changing lifestyles are all playing an important role in maintaining the buy-to-let market. This emerging sector now not only fills the gap between those who can afford to buy and those who can’t, but also those who choose not to buy.
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