The Bank of England’s Financial Policy Committee has turned its attentions to buy-to-let as a potential for concern, although its not concerned enough to intervene – just yet.
Buy-to-let lending has been increasing this year, and in the second quarter there was a slightly larger than usual seasonal jump in the numbers of loans for house purchase.
Rising house prices and increased caution about the sector might have meant that activity would have been more subdued. But perhaps the change in pension regulations allowing those over 55 years of age to withdraw some of their pension pot tax free may have been a factor in the rise.
Releasing funds from pension pots may help buy-to-let lending, but conduct issues will be important.
Its probably too early to know, but data from the FCA’s survey shows that in the first three months following the introduction of the new pension freedoms in April 2015, around 205,000 customers accessed their pension savings – almost 70,000 people per month – compared with less than 95,500 during the same period in 2013 (one year before the reforms were announced).
More than half of those accessing their pensions – just under 121,000 – have taken some form of cash drawdown, and this could be helping to swell investment in buy-to-let loans part funded by a mortgage, if not now, then in the future.
The potential to access cash to invest in property from pension pots could make BTL lending less risky if landlords put bigger deposits down, which may mean an opportunity for more lending at lower risk. But that has to be weighed against the risks to individuals of withdrawing monies intended for later life.
The beady eye of the regulator, concerned that unsophisticated investors become over exposed to the sector, could mean that conduct issues may well raise their heads in future.
It is too early to say whether the new pension freedoms have swelled outright cash purchases for BTL but it seems unlikely that it will have made a big difference in the second quarter of 2015.
With the average value of a buy-to-let property at around £180,000, that limits the numbers of people who can withdraw a 25 per cent tax-free lump to buy outright with cash. Withdrawing more than the 25 per cent tax-free lump sum would incur income tax charges and alter calculations considerably.
However, cash purchases of property are increasing despite the increase in house prices, and that will include some purchases for renting out. The number of sales, proportion of the market and total value of cash sales are all higher than at any time since records began in 2006. In the 12 months from the first quarter of 2015, 420,000 homes were bought without a mortgage, – worth a total £110bn – so that means that almost two fifths of homes sold in the last 12 months were bought with cash.
The introduction of tighter lending controls resulting from April 2014’s Mortgage Market Review and prudential regulations for banks are likely to have played a role in this. Whereas new mortgage lending numbers have declined by about 3 per cent since the introduction of the MMR, cash-buyer numbers have increased by 8 per cent.
Cash buyers, who include buyers of BTL properties and second homes, became a more important part of the market when mortgage credit became constrained from 2008. That reflected the fall in sales rather than a large rise in cash buying.
But growth is also being driven by wider demographic shifts, in particular the accumulation of housing wealth by older generations. English Housing Survey data shows that in 2014 the number of owners without mortgage debt overtook those with a mortgage on their property for the first time. By comparison, the number of mortgaged owners has fallen every year since 2005.
Rising house prices may have helped buyers to release funds from existing property for cash purchases.
Rising house prices, particularly in London and the South, may also hold a key to the increase in cash buyers as higher levels of equity may have allowed more people to downsize without a mortgage than might otherwise have done. Sixty per cent of purchases of one-bedroom properties were bought with cash, according to Hamptons International Research.
Many of these may be from downsizing households, although this may also be due to an increase in the purchase of investment properties or second homes if borrowers are able to release capital from their existing homes rather than take out a separate loan to do so.
While many lenders do not allow capital raising for a second home or buy-to-let property when remortgaging or taking a further advance on an existing loan, regardless of whether the borrower meets the ability to pay criteria, there are some that do. Therefore the pick-up could be a reflection that at least a proportion of sales recorded as cash sales are financed by remortgage loans or further advances secured on other property.
Every region in England saw an increase in the proportion and number of cash sales over the year to the first quarter of 2015. The south west continues to be the region with the highest proportion of cash sales – 45 per cent of homes bought in the last 12 months were with cash. That reflects the demographic of the region. One third of the population in the south west are aged at least 55 compared with an average for the UK of 20 per cent.
The higher proportion of cash purchases in the south west suggests there are higher numbers of downsizers at the end of their housing career. That also seems to be the case for the south east as a whole, although the geographical dispersion of sales for downsizing is likely to be concentrated outside of the most expensive parts of the region.
The attraction of property as an investment is ingrained in the British psyche and, with affordability remaining difficult and house prices expected to rise, that seems unlikely to change.
Using funds from pension drawdowns of equity from existing homes is a way to get into the market, but there are risks, not only from the over exposure to buy-to-let property that the regulator is looking at, but also the risk that poor advice means pension pots designed to fund retirement are depleted. That spells danger from a conduct point of view too.
Fionnuala Earley is director of residential research at Hamptons International
Key points
The Bank of England’s Financial Policy Committee has turned its attentions to buy-to-let as a potential for concern
Cash purchases of property in general are increasing, despite the increase in house prices
Rising house prices, particularly in London and the south, may also hold a key to the increase in cash buyers
