Let BTL be

Certainly, those with thoughts of a new BTL status quo, a new normal, will need to wait much longer to see such stability, given the ongoing focus on the sector. Indeed, for the past year BTL has been so firmly in the political and regulatory spotlight that we cannot truly be sure that it will not be subject to further interventionist measures in the short term that will reshape it even further – this is even before some of the measures already announced have even been introduced.

There is no doubting that when it comes to highlighting a potential ‘risk sector’ within the UK housing and mortgage markets, BTL appears to be not only the first name on the rap sheet but also, in some sectors of society, public enemy number one. In the imaginary homeownership fight that appears to exist in some politicians’ heads, BTL has certainly been pummeling first-time buyers into a pulp, and therefore it has been decreed that its ‘powers’ need to be contained at all costs. Batman versus Superman appears to have nothing on the BTL sector in terms of its unparallelled power and its ability to vanquish potential first-timers from the housing market.

This is not being flippant about the over-arching issues within the UK housing market, but in the quest to find a good versus evil angle, which appears to be the flow of much political discourse these days, those in the seats of power appear to have settled on the shorthand assumption that landlords are the bad guys and first-timers the goodies. It seems naïve in the extreme, and certainly does not take into account the crucial importance of the private rental sector in supplying homes to live in. However, it is a narrative that everyone involved in the BTL market has to deal with.

For advisers in particular, the number of changes afflicting the BTL market might seem somewhat baffling. Beginning with George Osborne’s Emergency Budget of July last year, we have seen a steady stream of changes which have been designed to curb activity levels and to give private landlords pause for thought in terms of expanding their portfolios, or even entering the private rented sector in the first place.

First up, we had the increase to stamp duty charges for those purchasing additional properties, which went live from 1 April and means an extra 3 per cent cost for those buying a property which is not a main residence. This extra cost for landlords resulted in what some have described as a ‘rush-to-let’ as those who wanted to add to their portfolios, or buy for the first time, did all they could to get their purchases through before the completion deadline of 31 March.

To say it put the entire sector, and all stakeholders, under pressure would be the understatement of the century, especially when you add in the fact that the final rules were not delivered until two weeks before the deadline. Lenders, advisers, agents and conveyancers were essentially placed in a no-win position by the Government, and the fallout is likely to be felt for some time to come, not least from those purchasers who were unable to secure completion before the deadline.

If March 2016 and the preceding months teaches us anything about the property market, it is that interventions on this scale are not welcome and can have seismic impacts because of the introduction of arbitrary deadlines. Tell the British public that they will save money by meeting a deadline and, lo and behold, they are going to do all they can to do this. We hear from our conveyancing panel firms that March 2016 saw them often doing more than double the number of cases of any ‘normal’ month and, while profitable for them no doubt, the question has to be asked, what happens next?

Interventions on this scale are not welcome and can have seismic impacts because of the introduction of arbitrary deadlines

Now, do not get me wrong, I can understand why the Government and regulators are wanting to intervene so stridently in some areas of the mortgage and housing market. Indeed, there are some moves that I wholeheartedly agree with. No one wants to see the market collapse so spectacularly as it did post-credit crunch and there are clearly ways and means that we can strengthen the way we lend and whether the borrowers we are dealing with can afford to pay their loans back.

I am also quite clear that measures which dissuade the ‘speculators’ rather than long-term investors from participating in the BTL market are to be welcomed. We want a further improvement in the quality of rented properties in the sector. Certainly, with the introduction of the stamp duty increases and the changes to mortgage interest tax relief – moving it down from the higher to the basic rate over the next three years – we are going to see many ‘speculators’ thinking again about whether they can make a ‘quick buck’ from purchasing ‘rental’ property.

However, if we continue much further down the interventionist road we are in danger of throwing the baby out with the bath water, because what we do not wish to do is cripple the sector. Especially, if the belief is that (in some mystical, fantasy world), first-time buyers are suddenly going to step in and be the big beneficiaries of a drop in private rental sector housing and/or landlords choosing not to add to their portfolios. This is a fallacy – the notion that potential first-time buyers are going to be able to come to the market in their droves, completing the transactions that landlords may once have done, appears to be nonsense. Think, after all, of the issues first-timers have to confront – securing a deposit, accessing high loan-to-value finance, for example. These are not going to be eradicated by simply making it more difficult for landlords to purchase property.

In fact, the Government could be making a rod for its own back here in that we could have landlords selling up large numbers of properties because they are unprofitable, which precipitates large-scale falls in house prices. We would have a drop in the number of private rented sector homes available at a time when first-time buyers still cannot afford to buy these properties. With simple supply and demand forces this would lead to an increase in rents.

On top of all this, we now have a major regulatory intervention in the form of the Prudential Regulation Authority’s (PRA) recently published consultation paper on BTL underwriting standards. Again, there is much within the document to be supportive of – I have said before that any lender raging against measures that force them to look at the overall affordability of a BTL loan, including the borrower’s own financial circumstances, should probably not be lending in the first place. To us it is a commonsense series of measures which I believe most responsible lenders will be following already. The ability to repay a BTL mortgage should be predicated on the rental cover and the provable character of the borrower, and the fact this paper has to seemingly spell this out should perhaps be slightly worrying, although the fact the PRA itself says the vast majority of existing lenders already comply with these measures, is heartening. In other areas, such as stronger underwriting standards for portfolio landlords, a definition of what a portfolio landlord is, we need to understand what is behind the PRA’s thinking.

With these measures, I am of the opinion that they may well be aimed more at forthcoming new lender entrants into the sector, rather than those who are currently active. I have no problem with new (or indeed) existing lenders, but to me the battleground has to be good versus poor lending practices. Securing market share quickly can often mean new entrants move up the risk curve far too quickly.

The sector is already in the spotlight, and we do not need loose lending practices from some suggesting all market players work in the same way. To my mind, the sector has acted incredibly responsibly since the credit crunch and one would hope that new lender participants do not feel the need to push the boundaries of what is acceptable – perhaps these new PRA measures will put in place the necessary barriers to stop them motoring off in the wrong direction?

In the main however, I believe (even with these interventionist measures) the future of the BTL sector is assured. The demographics in the UK appear to underlie continuing demand for private sector renting – despite the stamp duty/mortgage interest tax relief measures, landlords appear to be in this for the long term and want to add to portfolios to meet that demand; lender appetite remains strong and targets for growth over the next few years show this; and there are some market fundamentals that favour the sector, not least the ongoing low level of new housing supply.

In essence, while there might be some inevitable, short-term falling back from the activity levels we have seen in recent months, this does not mean the sector is in terminal decline. Indeed, far from it; our activity levels in areas such as limited company/house in multiple occupation BTL continue to improve – the market will adapt. Certainly, landlords will cut their cloth accordingly, and once those regulatory measures have been introduced, we will eventually get that ‘new normal’ although it is probably fair to say that further intervention is also inevitable and the market will continue to shift and change for some time to come.

Bob Young is chief executive officer of Fleet Mortgages