Nigel Terrington, chief executive of buy-to-let lender Paragon Group, looks at the prospects for the sector over the next 12 months.
2010 has provided a solid base for the buy-to-let market on which to build over the next 12 months. Both the number of lenders and products has increased and gross advances are expected to be up at least 10% on 2009 numbers. I expect that positive sentiment to continue into the New Year. Gross lending will rise steadily during 2011 and, in the absence of any major economic downturn, should finish between 10% to 15% higher than 2010 levels. However, it will be some time before we see levels of lending that are consistent with ‘normal’ market conditions.
Strong levels of tenant demand will continue into 2011, particularly given the government’s planned changes to social housing, and this will provide the continued stimulus for the growth of buy-to-let lending. There will be strong opportunities for commercial brokers to meet the more complex needs of buy-to-let borrowers, especially for Houses in Multiple Occupation style property, where we see a growing market. As the Council of Mortgage Lenders recently stated, low levels of activity in the owner-occupier market will remain a feature in 2011 due to ongoing funding constraints, regulatory pressures and uncertain economic conditions, and this will create further pressure on the private rented sector.
Landlords should profit from lower void periods and strengthening yields given rising rental levels and a flat housing market. I expect the buy-to-let mortgage arrears level to be flat to falling as landlords benefit from excellent levels of tenant demand and low borrowing costs, although landlords must be cautious of tenant unemployment and arrears. There will be a dislocation between the job losses caused by public sector spending cuts being ironed out by growth in the private sector and we are likely to see unemployment rise during the year. Landlords need to ensure that they have adequate rent guarantee insurance in place to protect themselves against defaulting tenants.
Another key issue for landlords next year will be access to buy-to-let finance and I expect an improvement in this area. It is expected that we will see a number of new lenders enter the buy-to-let market in 2011 however, the recent trend has been to focus on smaller-scale landlords and there is a risk that we could end up with too many lenders concentrating on this end of the market at the expense of professional landlords. There are more and more lenders squeezing into the same space competing on price, but with little product innovation. The buy-to-let market is crying out for product innovation and diversity and we will not get that if too many lenders are chasing after the same customer.
It is vital that new lenders entering the market do so with a robust valuation process that recognises that buy-to-let is a very different proposition than the owner-occupier market. That sounds like a simple task but too many lenders got it wrong before the credit crunch and were burnt as a result – valuing a buy-to-let property as if it were an owner-occupier property doesn’t work, it requires specific expertise and experience. Lenders must also be cautious on affordability. Certain lenders are testing affordability on a short term product rate, rather than a higher reference rate, which could be dangerous when interest rates start to rise, as they are expected to do in 2011. Risk and affordability is not the same thing and the industry must be conscious of this as it underwrites new business.
