Buy-to-let expansion won’t be a flash in the pan, writes David Brown, commercial director of LSL Property Services Plc.
The current mortgage market has been far from ideal for brokers and first-time buyers alike, to say the least. While gross mortgage lending rallied by 24% in May after the warping effects of the March stamp duty deadline, lending is still down historically. By way of example, the Council of Mortgage Lenders estimated that gross mortgage lending last month totalled £12.2 billion – a far cry from the £29.1 billion lent in May 2006.
In this environment, the growing buy-to-let sector is providing a welcome source of revenue for brokers. And it won’t be a flash in the pan.
The CML reported buy-to-let lending totalled £3.7 billion in the first quarter of 2012. Although this represented a 5% dip from Q4 2011, lending is up 32% compared to the same quarter in 2011, as the sector grows. The 1.4 million buy-to-let mortgages represent 12.8% of the value of all outstanding mortgages, and as the demand for buy-to-let finance grows, it will account for an even higher proportion of the market – presenting brokers with a growing seam to tap.
However, the recent growth of buy-to-let has not been triggered by cheap credit for speculating short-term investors, but in longer-term underlying fundamental changes to the private rented sector.
The growth of the private rented sector has not happened overnight. Owner occupation peaked at 70.9% in 2003, according to the DCLG’s latest English Housing Survey, and has been declining as a combination of high house prices, the diminishing availability of mortgage finance, and a lack of new house building takes its toll. In fact, there are 14.45m households under owner-occupation, down from a peak of 14.8m in 2006. In contrast, the number of privately rented households has risen by 48% over the same period to cover the shortfall.
Housing supply is not going to rocket up any time soon. New build housing completions in Q1 stood at just 71% of 2007’s level, with 31,420 completed, according to the DCLG. More worryingly, just 23,810 new homes were started in the same period, less than half the level of five years ago.
This constricted supply has helped prevent house prices from falling significantly – even accounting for the current squeeze on mortgage lending to first-time buyers, and this trend is likely to continue, limiting the number of people able to buy their first home. In contrast, the number of households1 in the UK is rising by a record rate of 338,000 a year.
With the squeeze on funding, social housing is not going to be able cover the gap. In fact, the number of affordable new housing starts fell 68% year on year in March from 57,648 in 2010/11 to just 19,967 in 2011/12. As a result, the rental sector will continue to absorb the excess demand, driving rental inflation.
It is this growing rental income that is drawing in long-term investors – and increasing their appetite for buy-to-let mortgages. The average rent in England and Wales rose to £712 in May, rising by 9.8% in the last three years alone. With rental income replacing the capital gains as the main component of a rental property’s returns, longer-term professional landlords have been entering the sector or expanding their portfolios in place of short-term speculators.
This is presenting mortgage brokers with a golden opportunity. Professional landlords with larger portfolios have incredibly diverse needs, and in-depth mortgage advice is crucial to matching them with the appropriate – and complex – mortgage deals that will benefit them in the long-term. In turn, because portfolio landlords are likely to invest further in the future, valuable and expert mortgage advice is likely to result in repeat business further down the line – not to mention recommendations.
Brokers’ market knowledge is crucial given the ongoing changes to buy-to-let mortgage products. New players in the buy-to-let market have increased competition in the last year, which has helped keep down mortgage rates, while existing lenders have been continuing to launch new products and lower rates to win market share. For instance, Leeds Building Society just launched a new five-year fixed-rate buy-to-let deal at the beginning of June, while Platform, the Co-operative Bank’s mortgage lending branch, lowered rates in May to offer a two-year tracker mortgage for 3.29% for 60% LTV.
The structural changes to the mortgage market and house tenure suggests the rise of buy-to-let is not a short-term phenomenon. Given the complexity of the buy-to-let mortgage market, and the diversity of the average professional landlord’s portfolio, brokers will play a crucial role as buy-to-let lending grows, and the burgeoning sector should provide a welcome growing stream of income in comparison to the wider market.