Buy-to-let growth is based on solid fundamentals, writes Bob Young, managing director of CHL Mortgages.
With the year coming to a close it seems an opportune point to take a look back at what has happened in the buy-to-let market over the last 12 months, and to pontificate slightly about what may (or may not) be coming over the horizon.
As a first point of order, I should acknowledge that this is being written before the publication of the Mortgage Market Review (MMR) which, if we’re led to believe the press, is due out on 19 December. Having said that, I don’t believe any of the fundamentals driving the buy-to-let market will be affected by the MMR. We still live in a country where the prevailing winds of a housing supply shortage, tight credit conditions, stricter mortgage product criteria, a lack of first-time buyers, etc, all mean that buy-to-let as a long-term investment opportunity should remain attractive.
Of course there are many more factors to throw into the mix, all of which have been high on the buy-to-let agenda over the last 12 months, namely existing and prospective landlords’ own difficulties in securing suitable finance, married up with new and already active buy-to-let lenders’ and the need for responsible criteria. Of course, we can also think about whether professional and/or portfolio landlords are being catered for sufficiently, not forgetting the importance of spelling out the pros and cons of actually entering the sector to new landlords.
This is before we even tackle the huge regulatory questions that continue to swirl around the market. At present the vast majority of buy-to-let business is unregulated and while this remains the case there will always be a debate about when (or if) full regulation is likely. The FSA appear to be willing to take on the responsibility however this is not their call indeed it may not even be the call of HMT if the European Mortgage Directive attempts a catch-all regulatory proposal.
Looking at some of the comments around buy-to-let regulation, a number in the sector appear to think it is a foregone conclusion already. I am not of that opinion, indeed, the reasons why I believe buy-to-let should not be regulated remain as forcibly held as they have always done. This is an investment decision after all and the triggers for protection are not around the buy-to-let mortgage product but in terms of advice about whether to purchase a home, to buy in a certain region, target a certain renter, etc. Understanding this potential misunderstanding should be crucial to any decision to regulate.
Overall however there is clearly much to be positive about when we look at the buy-to-let sector. Lenders are obviously feeling much more inclined to dip their toes into the marketplace with a considerable increase in the number of products on offer and lenders returning. Even as we end the year, Abbey for Intermediaries announced its re-entry and one suspects there will be many more who follow its lead in 2012.
The year ahead is often a great unknown but it appears that, while the overall mortgage market is likely to remain flat, buy-to-let lending will continue to grow. The CML recently downgraded its own prediction for overall gross mortgage lending next year by £17 billion, however it also highlighted buy-to-let as one area which will see growth. It suggests that the ‘strong pick-up in buy-to-let lending over the past few quarters’ has been predominantly remortgage activity however house purchases are also now increasing. The lender trade body also said that strong rental demand and increased rents caused by, for example, ‘strong demographics, limited new build and the affordability pressures facing potential homebuyers’ would ‘self-moderate’ over time however, the platform for continued strength in the buy-to-let market meant activity would ‘continue growing in the foreseeable future’.
So there is much to be positive about as we enter a new year. What is also pleasing is that the strengthening of the sector has had little to do with ‘hype’ or as I believe it is called ‘ramping’. This is a positive story based on fundamentals and still with responsibility at its heart. We know that the short-termers who only got involved in buy-to-let hoping to see super-quick capital returns have now been shaken out of the tree. Which puts the market back in the hands of those who see the long-term advantages, are willing to treat the investment professionally and are likely to hold their properties for a considerable length of time.
Advisers are likely to benefit from the growing interest in the market and as increased funding becomes available it is to be hoped they have a more competitive marketplace to choose from. The signs are strong for buy-to-let and I think we can all look forward to an interesting, and hopefully prosperous, year ahead.