Buy-to-let boom set to stay
The buy-to-let (BTL) market has been one of the biggest growth areas within the mortgage industry over the past decade, and has seen phenomenal growth compared to other sectors. Figures from the Council of Mortgage Lenders (CML), published in February, showed that BTL accounted for 11 per cent of total secured mortgage lending.
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Last year, there were over 330,000 BTL mortgages taken out in the UK, worth a total of £38.4 billion. This meant a 48 per cent increase in volume and a 57 per cent increase in value compared to figures for 2005.
As a result of this growth, we have seen increased confidence in the area, fiercer competition from lenders and increasing opportunities for non-conforming lenders to make an impact on the BTL market.
Last year ended on a positive note, as figures from the National Association of Estate Agents revealed that there was a strong marketplace for UK residential lettings over Q4 2006. Furthermore, research conducted by GE Money Home Lending showed that UK brokers anticipated a 16 per cent growth in BTL mortgages compared to 2006.
Growth
Growth in BTL has been driven by a number of factors, including affordability, a rise in immigration, an increase in the age of a first-time buyer, and an ever-strong interest in property as an investment. BTL remains an attractive option for those looking to invest in property and, according to Moneyfacts, tenants are staying in rented properties for longer than ever.
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This has resulted in interest rate differentials narrowing and, while rental yields are at their lowest level for five years, capital growth and income combined are still offering BTL investors healthy returns over the medium to long term. In February 2007, the CML announced that the average number of properties owned by individual landlords stood at 11.1, up from 10.20 in November 2006, and that the average portfolio value had risen by 7 per cent.
Another driver behind the growth in the BTL market has been the ongoing changes to employment pattern. Flexible working hours, contract work and self-employment are being more prevalent and people are looking at alternative types of mortgages as a means of getting on the ladder. Traditional lenders with rigid criteria will undoubtedly feel the push towards flexibility as they adapt to borrowers’ changing needs.
New legislation
Changes in employment are not the only things that have impacted the BTL market in the past year. In 2006, we saw the implementation of a number of new legislative initiatives in the sector, including new rules surrounding houses of multiple occupation, and in April this year, the Tenancy Deposit Protection initiative came into force.
Despite these news laws being introduced as a means of protecting tenants, there are some concerns that the changes are putting BTL investments under pressure. The new Tenancy Deposit Protection scheme requires landlords to administer deposits under one of three national arrangements, safeguarding tenants’ interests. As a lender, it is important that we help make brokers aware of the changes and help landlords to understand what the new laws mean.
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The impact of the new regulation is yet to be seen but it is important that both landlords and tenants are protected and these laws appear to be a positive move for the development and future of the BTL market.
Here to stay
Looking ahead, it seems that BTL will continue to grow in the coming years, with the current housing deficit being one of the main drivers.
In the 2005 Barker Review, it was estimated that 200,000 houses per year would need to be built to help meet demand and address affordability problems. However, in last month’s Monetary Policy Committee meeting, the committee pointed to the lack of supply as a contributory factor behind the rise in house prices over the last year.
Renting is slowly losing its stigma with an increasing number of people – particularly young people – being forced to stay in rented accommodation for longer due to the rising house prices and the affordability of getting of the property ladder.
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As the BTL market grows, we are seeing the development of new niches, offering a wider scope to consumers and non-conforming is just one area which could see rapid growth later this year as an increasing number of non-conforming lenders offer BTL products. Those already operating in the BTL market will continue to seek ways to boost business by offering non-conforming options on existing products to meet the changing needs of customers and it is here that the larger lenders will be able to use their industry knowledge and expertise to demand.
Demand for BTL properties is reported to remain strong for the foreseeable future. A recent survey by Mintel suggested that 2 per cent of all adults plan to buy a UK property to rent in the next three years which will potentially double the size of the BTL market by 2010. This is also reflective of the views of the industry brokers who predict that their BTL mortgage business will grow by 12 per cent by 2010, according to research.
Whatever is in store, it looks as if BTL will continue to grow for some years to come and will remain a focus for the industry as new products and services are developed to meet customers’ changing needs.
