The indications are that the first half of 2006 has seen buy-to-let continuing the strong performance shown in the second half of 2005. Forecasts are for more modest market growth than recent years, but the trend is still very much up. It also appears concerns that the Chancellor’s decision not to allow investors to put residential property in Self Invested Personal Pensions (SIPPs) would dampen the market appear to have been unfounded.
Fierce competition
Competition for buy-to-let business has grown increasingly fierce over the last six months as lenders compete on both price and criteria. This is good news for intermediaries and clients, who, in addition, can expect to benefit from the spate of new entrants set to come into the market throughout the rest of the year.
Looking in more detail at the market, recent figures from both the Royal Institution of Chartered Surveyors (RICS) and the Association of Residential Letting Agents (ARLA) show tenant demand remaining buoyant and rental levels rising. In the medium term this looks set to continue, with private renting being supported by a range of underlying social and demographic trends. Government projections show growth in a number of areas, for example single person households, inward migration and students at university. The result of all of this will be an increase in the number of people looking to rent.
In recognition of this, the government has expressed its desire to see a growing private rented sector, and is committed to improving the quality of the sector’s housing stock. The introduction of licensing for houses in multiple occupation (HMOs) in April was part of this. Although these measures will deter some prospective landlords, HMOs are only a relatively small part of the buy-to-let market and we do not expect licensing to have a big impact. Indeed, the buy-to-let model itself has undoubtedly had a big part to play in improving the supply and quality of private rented housing, and we hope the government is mindful of this in its treatment of private landlords.
Positivity
Positive market data is backed up by our own Confidence Study research, which shows that landlords remain extremely positive about buy-to-let. Our latest survey showed that 83 per cent of landlords were planning to either increase or maintain their portfolios, and only 1 per cent were planning to exit the market. Landlords experiencing rental arrears fell from 26 per cent to 19 per cent and over half (52 per cent) of landlords questioned said they had no void periods in the preceding six months.
When it comes to products, buy-to-let has been extremely competitive during the first half of 2006. Despite rises in money market rates at various times, lenders have sought to maintain competitive pricing and this has contributed to an increase in high fee/lower rate business, with fees of up to 1.75 per cent in some cases.
In addition to price, lenders have continued to slacken criteria. The CML’s average level of rental cover (across all lenders) fell to 125 per cent for the first time in February and products with rental cover as low as 100 per cent continue to be available. In addition to reduced rental cover, 2006 has seen lenders prepared to accept greater exposure to buy-to-let business, either through higher loan-to-value (LTV) limits or increased loan amounts.
85 per cent has been the traditional maximum LTV for buy-to-let, although some lenders (for example, Northern Rock) will lend above that level. However, 2006 has seen moves to 90 per cent from smaller lenders such as Kensington and the new db mortgages followed by more established lenders such as The Mortgage Works (TMW) and Platform.
There is no doubt that competition in buy-to-let is good for intermediaries and clients. Moreover, the buoyant market is encouraging a range of new entrants to the market. Already this year, we have seen Alliance & Leicester and db mortgages enter the sector, and there are new offers expected from Abbey and edeus, bringing a broader choice of suppliers to meet potential client needs.
Clouds on the horizon
Despite the generally positive nature of the market, there are always a few ‘clouds’ on the horizon which raise concerns. For buy-to-let, one area of recent concern has been the valuation (linked to over-supply) of new build properties and the issues this may cause. While there are localised areas where there may be a large supply of new build properties, we have no evidence of widespread over-valuation. The recent changes to the RICS ‘red book’ instigated by the CML should address what concerns remain on this issue. We continue to lend on new build properties, ensuring that any developer discounts or incentives are deducted from the value of the property before we determine the amount we will lend.
So, as we enter the second half of 2006, the outlook for the buy-to-let sector remains very positive. Believe it or not, 2006 sees the 10th anniversary of the first buy-to-let mortgage. Things have changed dramatically since 1996, when a small number of mortgage lenders launched buy-to-let-type products and were brought together by ARLA, which launched its buy-to-let lender panel in September of that year. Since then, the sector has grown rapidly and continues to attract new investors seeking both long-term capital growth and monthly income. The sector has been, and continues to be, a focus for innovation and product development, encouraging the ‘man on the street’ to invest in residential property.
