Buy-to-let lending is booming, with a record 938,500 loans outstanding at the end of June 2007, according to the Council of Mortgage Lenders (CML). However, buy-to-let is a term that has met with a fair amount of derision recently, as certain sectors of the housing market become concerned that investors are purchasing a high proportion of new build, leaving a growing percentage of new housing stock largely unoccupied.
In addition, there are ongoing concerns that the growth in buy-to-let lending is forcing first-time buyers to compete for the limited supply of one and two-bedroom homes, squeezing them out of the market. However, buy-to-let funded purchases accounted for just 10 per cent of transactions in 2006 compared to 28 per cent made by first-time buyers.
Perception problem
Part of the problem lies in the perception that buy-to-let, the financing of rented housing by private individuals, is becoming synonymous with the private rented sector. While there is currently around £100 billion of outstanding buy-to-let loans, not all this new investment has added to rental supply. There were already 1.3 million rented properties let on the open market prior to the introduction of buy-to-let mortgages.
The private rented sector can make a highly valuable contribution to balancing housing supply and easing affordability pressures. The ownership and financing of rented housing is really a secondary issue.
In reality, the supply of private rented homes in Britain is low by international standards. The ‘headline’ data show that the private rented sector accounts for 11.3 per cent of housing supply in England. However, stripping out rented housing that is not publicly available reveals a true open market rented sector that accounts for just 8.4 per cent of housing supply, or 1.83 million dwellings in England.
This lack of sufficient supply of rented accommodation limits labour mobility and often forces households into owner occupation before they are ready. With high house prices and stretched affordability levels, this is a key area of risk in the short to medium term.
Looking forward
New market analysis shows that the private rented sector is already catering for those ‘intermediate households’ unable to get on the housing ladder. Indeed, a high proportion are trapped in the private rented sector due to high house prices and a drop in the level of new affordable housing compared to the late 1990s. The private rented market is just an extension of the affordable housing sector, which puts a different perspective on the recent buy-to-let boom.
Looking forward, Hometrack estimates that an investment similar to the current £100 billion of buy-to-let loans will be necessary to meet future demand for rented housing over the next 15 years. With a growing importance on rental supply to meet the rising population and the increasing propensity to rent over the next 15 years, it is no surprise that the industry is evolving as the specific requirements of the buy-to-let market are catered for.
One area that the industry is benefiting from is the advent of technology. Automated valuation models (AVMs), computer-based systems that provide valuations of a property and the associated confidence levels have streamlined the house buying process, enhancing lenders’ business operations and enabling home buyers to receive instant mortgage offers. Four years ago, AVM use was negligible, but today, the buy-to-let market is increasingly looking to AVMs to provide not only valuations but information on rental yields and rental demand.
A buy-to-let AVM can be used for both individual properties and large portfolios which incorporate both an ‘assessed’ and ‘market’ rent, accompanied by confidence levels. In addition, AVMs can also be used to assess wider influencing factors, such as the current state of the local property market, the performance of different types of housing stock and localised supply and demand characteristics.
With such extensive data instantly available, this AVM and its associated databases can provide a complete picture of what’s driving and potentially affecting property values, or indeed putting them at risk.
The property specific nature of the buy-to-let AVM represents a quantum shift from historic approaches to estimating area average rents and areas of rental demand. It is a necessary development in the current housing market, with a growing buy-to-let sector and a large and long-term continuing demand for private rented housing.
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