Just about everybody knows someone with a buy-to-let mortgage these days. Five years ago the sector was in the early stages of taking off but wobbles in the stock market, worries over pension plans and a continued increase in the value of property in the UK have combined to make rental properties an attractive proposition for a new generation of amateur landlords.
A look at the CML’s buy-to-let lending figures bears testament to this. At the end of last year, there were 526,200 buy-to-let mortgages outstanding with a value of £52.2 billion. That’s around ten times higher than it was just five years earlier at the end of 1999. What’s more, the number of new mortgages completed has been increasing each year for the past eight years.
A turning point?
But while more buy-to-let mortgages are being completed each year, for the past three years the rate of increase has gradually been slowing down, from 80 per cent in 2002 to 44 per cent in 2003 and 16 per cent in 2004. So, are we perhaps at a turning point where the number of purchases is now calming down to a more sustainable level?
Research that UCB Home Loans conducted among 1,334 intermediaries at the end of May seems to indicate that this is the case. Of those questioned, 55 per cent of mortgage brokers expect there to be a drop in the number of buy-to-let purchases this year compared with 2004.
I suspect that most lenders – including ourselves – would agree with this view. Assuming this is correct, 2005 will be the first year since the buy-to-let sector took off in which the number of buy-to-let purchases has fallen.
But that is not such a bad thing.
No one expected the sector to keep growing at the pace we have seen over recent years – if it did, we would all be living in rented accommodation before too long. What we are seeing is a natural calming of the initial rush of new landlords into the sector coupled with a general slowdown in the housing market as a whole.
Even split
Looking at brokers’ experiences over the past four months, opinions over how well buy-to-let business has been going are pretty evenly split. An increase in buy-to-let mortgage applications has been seen by 39 per cent of brokers while 38 per cent have seen a decrease. Again, no great surprise.
The buy-to-let market, in common with the housing market in general, has experienced widely differing rates and periods of growth, and of house price inflation, in different parts of the country.
At one time, house price rises in London and the South were racing way ahead of the rest of the country but over the past three years this balance has been largely redressed.
Similarly, areas that initially took off when buy-to-let started to become fashionable have now been eclipsed by towns and cities which initially showed no great degree of interest from landlords.
Other results from the research showed that 54 per cent of intermediaries regard ten years as an appropriate time period for an investor to look at when considering a buy-to-let purchase.
A further 20 per cent said that 15 years would be more appropriate with the remaining 26 per cent opting for five years. Our own advice is that investors should normally look at a time period of ten to 15 years and it appears that around three-quarters of brokers also take this view.
Long-term view
Experience indicates that most investors are indeed taking a long-term view on buy-to-let properties, with many looking to couple a regular source of rental income with the long-term capital appreciation which can be made through property investment.
Consequently, short-term movements in house prices and interest rates are of less concern than they might otherwise be if shorter time scales were being considered.
The long-term aspect of buy-to-let investments is probably one of the reasons behind intermediaries’ views that now is either a good time (46 per cent) or neither good nor bad time (39 per cent) to invest as a landlord.
Overall, the research bears out expectations that the buy-to-let market would begin to cool as the rush of new landlords slows down. However, we may see renewed interest next year when the ability to include buy-to-let properties within a self-invested personal pension becomes available to landlords from April onwards.
Buy-to-let lending figures for the first half of this year are due to be released by the CML in August which will provide some guidance on how the year as a whole is likely to look. But while remortgages will probably perform well, the number of new purchases is likely to be well below the levels we have seen over the past couple of years.
