Buy-to-let (BTL) has undoubtedly been one of the great success stories of the UK mortgage market. You only have to refer to the Council of Mortgage Lenders’ (CML) latest statistics to fully appreciate just how rapid the growth of this market niche
has been.
At the end of 1999, the first year in which the CML captured full information about the BTL market, there were 73,200 BTL mortgages outstanding worth £5.4 billion. In total they accounted for just over 1 per cent of the UK mortgage market. By 2006 this figure had risen to 767,600 outstanding BTL mortgages, with total balances of nearly £84 billion representing more than 8 per cent of the total mortgage market. It’s a very different market today than the one it was just eight years ago.
This growth, which is continuing unabated, has been the reason why some commentators have said the bubble must eventually burst. Their logic is that no market can sustain such phenomenal rates of growth without the good times eventually coming
to an end.
I’m sure that most brokers and professional landlords in the BTL market have become somewhat weary of these prophets of doom. The truth is that there is little evidence that the market is about to stall and every reason to believe that BTL will continue to be a good investment. To understand the reasons why, you need to look beyond the short history of the BTL market and go right back to the early 1900s to understand the social and political changes that are fuelling the market’s growth.
Times have changed
In the early 1900s, home ownership was for the wealthy middle and upper classes only. The industrial masses were housed in rented accommodation and this continued until well after the Second World War. The infamous 70s film 10 Rillington Place encapsulated the way in which many people depended on rented accommodation – although, of course, not all landlords turned out to be mass murderers.
In the post-war era, rent controls and legislation made life very difficult for private landlords and the onus fell on councils to provide the bulk of rented housing stock. But in the 80s, government action made it less attractive for local authorities to continue investing in housing. The Thatcher government also introduced its famous right-to-buy scheme and the era of private home ownership really started to gather a head of steam.
However, that did not mean an end to rented accommodation. In the 90s, the Assured Shorthold Tenancy was introduced, which enabled private landlords to rent out homes on a reasonable basis and the timing could not have been better, because thousands of people were ready to move their savings away from an underperforming stock market and into the housing market which, at the time, was growing at double-digit rates.
BTL birth
If a birth date is needed for the BTL market, it can probably be pinned down to 1996, which is when the Association of Residential Letting Agents (ARLA) was formed. However, the growth of BTL has not only been fuelled by political and economic factors but also social factors such as increased immigration, the rise in the student population and the greater formation of single parent families.
It isn’t simply the case that rapidly rising house prices have prevented young people from buying property of their own. People are also electing not to be constrained by mortgages and home ownership in the early years of their working lives. Many younger people, when setting out on a career, prefer the flexibility that rented accommodation has to offer. It can provide reasonably priced, city centre accommodation which reduces transport costs and has none of the costs of ownership and maintenance attached. Many have, therefore, taken the view that it is far better to rent until they are ready to settle down in one place – hence the increase in the average age of first-time buyers to 34.
Immigration is also having a bigger impact on the BTL market than politicians thought it would. It is estimated, for example, that out of 100,000 immigrants due to enter the country during the year ahead, approximately one in five will end up buying property and the remainder will rent. Add to these trends factors such as the greater formation of single parent families and it’s easy to see why BTL is continuing to grow strongly. To describe the market as a bubble implies that it is a temporary phenomenon which must eventually burst. However, nothing could be further from the truth. It would be like describing the increased use of technology in modern society as a bubble. Technology and BTL are both here to stay.
Development
What of the future? Like all maturing markets, the BTL sector is going through an interesting phase of development. In its early days, the market was characterised by what could best be described as ‘monolithic’ products. They were typically rate-led, only went to 85 per cent loan-to-value (LTV) and had very prudent rental calculations, initially as high as 150 per cent. However, greater competition and the recognition that the BTL market is anything but homogenous have led to the development of very specific products which cater for the differing needs of specialist niches.
For example, the market for student accommodation is a large and important sector. There is also a growing market for first-time BTL borrowers. The emergence of products based on earned, as well as rental, income have helped open up this sector to those who may otherwise have struggled to get a foot on the first rung of the BTL housing ladder.
At the other end of the spectrum there are also products for limited companies and landlords with significant portfolios of properties. Rental incomes have also fallen. Wherever lenders identify a niche starting to establish itself, they will develop products to satisfy those niches. It is the way in which markets have always worked and responding to customer demand in this way has been a distinguishing characteristic of mortgage lenders in the UK market.
Importantly, neither lenders nor investors are being put off by rising interest rates or talk of a slowing housing market. Most property investors are taking a long-term view – for many, BTL is either an alternative or supplement to their pension provisions – and are happy not only to hold on to their existing investments, but to build their portfolios. This confidence is partly supported by knowledge that there is a continuing shortage of housing in the UK and will continue to be for many years to come. Clearly, the consensus is that any market based on greater demand than supply has to worthy of consideration.
Blessed
The BTL market is blessed with a growing number of lenders and diversity of products on offer to both mortgage intermediaries and borrowers. Many lenders and providers are working hard to offer products tailored to meet the needs of specific borrowers.
The time has now come for people to stop worrying about whether the BTL bubble is about to burst and instead to focus on the ways in which the market will develop in the future, into discreet niches of its own. This market segmentation is a positive development for the BTL market, as well as investor landlords, lenders, mortgage intermediaries and tenants alike.
The first decade of BTL lending has been good. It looks as if the next decade could be
even better.
