John Heron is
managing director at Paragon Mortgages
In just 10 years buy-to-let (BTL) has become a national phenomenon. There are over one million households in BTL accommodation – more than 5 per cent of the UK total. The BTL property industry contributes over £30bn to the economy every year, more than all the country’s pubs, hotels and restaurants put together, and more than four times the contribution of the British motor industry. These are some key conclusions of Professor Michael Ball of the University of Reading in his study ‘Buy-to-Let: The Revolution – 10 Years On’.
An important role
BTL has played an important role in regeneration programmes throughout the nation. It has contributed significantly to reviving towns and cities across the country – rejuvenating rundown neighbourhoods and increasing housing demand in some low appeal boroughs. It has also helped re-populate city centres, encouraging young people to enjoy city centre living through rented accommodation.
The latest figures from the Council of Mortgage Lenders (CML) indicate a very healthy market that continues to grow at a substantial rate. During the first half of 2006 new advances exceeded £17bn – 20 per cent up on the previous half year. Furthermore, BTL mortgages represented 11 per cent of all mortgages in the period, making BTL the most important ‘niche’ market.
This market has developed on the back of a gradual shift in housing demand. The changing lifestyles of younger people, a burgeoning student population, growth in separations and divorce and in one-person households, and the increase in inward migration have all boosted demand for flexible and affordable accommodation. BTL provides this, in a way that owner-occupation cannot.
The quality of BTL properties has come a long way in the past 10 years. Competition within the private rented sector has brought considerable benefits to people living in BTL accommodation, with the general improvement in standards across the board contributing to its increased popularity.
Factors for growth
Population growth has also led to increased demand for rented accommodation. A significant part of this growth results from inward migration. Migrants are more likely to rent rather than buy and, indeed, CML research suggests that only 20 per cent of immigrants become homeowners within five years of arriving in the UK.
With the recent expansion of the EU, the UK has been experiencing a strong influx of migrants from EU Accession States – an estimated 600,000 migrants have arrived into the UK from these states alone in the last two years. This places additional pressure on government for public services and on other fundamentals, such as housing. This trend is set to continue with the planned enlargements of the EC in 2007 (Bulgaria, Romania), 2010 (Croatia) and 2015 (Turkey).
Changing lifestyles, affluence, employment patterns and financial circumstances all combine to encourage more young people to rent rather than own. Only 20 per cent of 20-24 year-olds are now owner occupiers compared to 40 per cent back in 1980, and only 50 per cent of 25-29 year olds compared to 66 per cent over the same period of time.
These demographic and economic factors, combined with a long-term shortage of good quality accommodation, continue to contribute to growing demand for rented homes. BTL provides the solution. It is flexible and cost-effective, providing decent accommodation for particularly younger people in the place where they need it.
HSUB
However, as most renters age, they will build up savings, settle down, maybe have children, and eventually become homeowners themselves. On the other hand, people are now becoming owner occupiers around a decade later in life than people of their age used to. With ongoing supply and affordability constraints, the average age of a first-time buyer has now risen to 34 according to Halifax.
Flexibility
There is also another social factor at play. With the general improvement in standards of rented homes and changing lifestyles, many young people choose to rent rather than buy, because it is more flexible, more sociable and can be cheaper. Growing numbers of people will remain in private rented accommodation as they get older, leading to a phenomenon referred to by Professor Ball as ‘permanent lifestyle renting’ (people who chose to rent over buying a home based on changing lifestyle, employment and financial circumstances).
Average growth in BTL tenancies of 20,000-30,000 annually is forecast for the next 10 years (projections by Professor Ball and Geoff Meen in conjunction with Oxford Economic Forecasting). Demand for private rented property is expected to continue to grow steadily for as long as can be reasonably predicted. As long as demand for rented properties continues to expand we can expect BTL to grow as landlords grow their portfolios to service this demand.
BTL is set to remain inextricably linked to the future of the housing market and a vital element in providing homes for a significant portion of the population.
