Latest figures from the Council of Mortgage Lenders (CML) show the value of buy-to-let (BTL) loans extended to landlords reached a record £17.5 billion in the first six months of 2006, up 20 per cent on the second half of 2005.
Indeed, over the four years since we first started collecting data for the Paragon Mortgages’ BTL Index, total BTL mortgages outstanding have surged from £19.1 billion (as at 30 June 2002) to £83.9 billion, a rise of almost 340 per cent.
These figures might seem to suggest a sudden explosion in buy-to-let, but a closer look at the facts indicates otherwise. The private rented sector has been key to the UK housing market for many decades, and indeed the proportion of rented homes was larger in the early 1970s than it is today.
Looking back
The Thatcher years marked a period of steady decline in both the social and private rented sector, as individuals were encouraged into private ownership by a variety of measures, including tax incentives on home purchase and ‘right-to-buy’ council housing schemes.
A change in the law, which strengthened the landlord’s rights relative to the tenant, helped bring an end to this decline in rented housing in the late 1980s and gave landlords more incentive to invest. Following the housing market crash of the early 1990s and the crisis of confidence it brought with it, many potential homeowners turned to the private rented sector rather than buying. This contributed to annual growth in the number of privately rented properties of 2.7 per cent between 1996 and 2005, according to government statistics.
Other factors contributed to expansion in the private rented sector over this period – in particular, population growth. The Centre for Economics and Business Research recently estimated the UK population has risen from around 60 million five years ago (around 900,000 more than officially counted in the infamous 2001 census) to around 61.5 today.
A significant part of this growth is attributable to inward migration. Officially, in the past two years 415,000 migrants have arrived from EU accession states alone. Taking account of arrivals from other areas and illegal or uncounted entrants, it is hard not to conclude that net migration in 2005 was significantly higher than National Statistics’ calculation of 235,000. Migration contibutes directly to demand for rented homes. The CML research suggests that no more than one-fifth of inward migrants will become a homeowner within five years.
Demographics
Demographic and social influences such as growth in one-person households contribute further to demand for rented accommodation. In 1991, six million people lived on their own or were lone parents. By 2006, this had risen to nine million and the government expects this to continue. For many years successive governments have encouraged the take-up of higher education, resulting in a steady growth in the student population and serving to bolster further demand for rented accommodation.
Finally, rising property prices in all parts of the country have stretched affordability for first-time buyers (FTBs). The average age of FTBs is now 34 years, and indeed reflects a trend whereby people delay getting married until far later than they did a generation ago. While they are still young, free and single, people frequently share a rented home with friends – a solution that is flexible and sociable, as well as meeting accommodation needs in a cost-effective way.
Reaping the rewards
Thus, over the past few years, residential property investors have grown their portfolios in response to growing tenant demand, and indeed many have reaped handsome rewards.
By way of example, the landlord who purchased an ‘average’ property at just over £99,300 four years ago will have enjoyed a total return of more than 100 per cent, based on capital appreciation plus rental income generated over the period, as shown in our Index. Of a return of just over £101,000, around £38,300 would have come from rental income and some £63,000 from the increase in value of the property.
In my experience, landlords invest in residential property for a combination of capital gain and rental income – choosing the right property in the right place to meet the needs and expectations of the widest cross section of tenants also means the property will gain in value and be popular with prospective purchasers as and when the investor decides to sell.
Thus the past few years have seen strong growth in BTL – but what of current and future trends?
Sustained demand has led to a general firming of rents in recent months. We’ve seen rental incomes rise by almost 2.8 per cent over the past quarter, while yields have remained stable recently. With these positive trends repeated across the country and in the expectation of further growth in demand for rented accommodation, landlords will continue to grow their investment portfolios on the basis of attractive yields combined with the expectation of capital appreciation over the medium to long-term.
