Assessing persistent popularity of property

According to latest figures from Connells Survey and Valuation, the UK buy-to-let sector experienced a surge of activity over recent months as investors “rushed to complete their transactions before the new stamp duty surcharge kicks in”.

Data showed the number of buy-to-let valuations carried out in February rose by 34 per cent compared to February 2015.

Buy-to-let activity saw a month-on-month increase of 25 per cent.

John Bagshaw, corporate services director of Connells, says: “Buy-to-let investors and those remortgaging with the aim of buying a second home are racing against the clock.

“Activity from both these groups is picking up pace monthly as the 1 April stamp duty deadline looms and people hurry to complete their transactions before being hit by the 3 per cent surcharge on their buy-to-let property or second home.

“This activity will reach a crescendo this month (March) before calming in the second quarter of the year.”

Much of this may have been caused by press coverage, Steve Griffiths, head of sales and distribution for Kensington Mortgages, believes.

He says: “There has been a lot of noise about the property market in the weekend papers and the flurry of stories will have prompted more people to look at investing in the market.

“Buy-to-let has received a great deal of interest following George Osborne’s changes to stamp duty and early signs have confirmed a surge in interest in buy-to-let during the opening months of 2016.”

Safe as houses?

Richard Sexton, business development director for eSurv, believes interest in the market never really waned, even after the 2008 credit crisis.

He says: “Enthusiasm for property faded a little after the recession but interest in the market never really dissipated.

“Investors have always been drawn to the idea of owning bricks and mortar. The ability to increase the value of property through renovation and redecoration sets it apart from other investment options.”

The reality is pension freedoms have had little impact on buy-to-let Steve Griffiths

Over the past 10 years, the average house price in England and Wales has risen by £86,000 - 42 per cent - according to Your Move and Reed Rains’ house price index.

Rents, moreover, have risen from £642 a month in January 2008 to an average of £790 a month in January 2016, while gross yields have gone from 4.2 per cent in 2008 to 4.8 so far this year.

This suggests a strong income generation still from buy-to-let, that has outpaced the vagaries of the stock market - by comparison, the average yield on the FTSE 100 is 4.18 (as of February 2016), with warnings that dividends could come under threat as equity markets continue to rattle corporate expectations.

Lee Travis, head of professional development at the Society of Mortgage Professionals, adds: “In 2000, less than 2 per cent of all mortgages in the UK were buy-to-let. Now they account for approximately 15 per cent of all home loans and 8 per cent of new mortgages.

“It equates to approximately £220bn of gross borrowing - close to the national debt of Greece.”

Lending rates

Lenders have also been willing to lend on buy-to-let, with few signs that this is abating.

According to data sourced for FTAdviser from MoneyFacts, the number of buy-to-let products has risen significantly year on year, while the average repayment rates have decreased.

In January 2015, there were 757 available products; by mid-March 2016 there were 1280 buy-to-let products on the market.

Although average two-year fixed buy-to-let rates have risen slightly from January 2016 to March 2016, repayment rates are still lower than the previous year.

Table: Year-on-year comparison of available products

Source: MoneyFacts for FTAdviser

Mr Sexton says: “What has changed since the recession is the willingness of banks to lend for property purchases. After initially clamping down on all lending during the crash, their position has been easing, with £21.8bn lend in October 2015, according to the Council of Mortgage Lenders.”

Moreover, the Office for National Statistics has estimated there are 4.8m people in the UK living in rented accommodation, up from 2.5m 10 years ago. “This surge in demand is set to continue, with some suggestions a quarter of the UK population will be renting by 2025”, Mr Sexton adds.

According to Charles Haresnape, since the inception of the buy-to-let market in 1996, demand for products has seen tremendous growth.

Bank of England data showed at the end of Q2 2015, there was a 40 per cent increase in the outstanding stock of buy-to-let mortgage lending since 2008, compared with just a 2 per cent rise in owner-occupier mortgage lending.

Mr Haresnape adds: “As of Q3 2015, landlords have the widest choice of mortgage options on record at over 1000 products, a rise of 11 per cent since the previous quarter and a yearly increase of 35 per cent.

“The context for this growth is important and over past economic cycles, the rate of growth of buy-to-let purchase transactions matches the pattern of first-time buyer purchase trends, with the markets being complimentary, rather than in direct competition.”

Pension Freedoms

The government’s pension freedoms have given people approaching retirement far greater choice when it comes to their savings and, according to Mr Travis, buy-to-let availability is at a seven-year high, which “many people are attributing to the new pension freedoms.

“There can be no questioning the surge of popularity of buy-to-let and many had predicted the pension freedoms would lead to a ‘grandlord’ bonanza.

“It is claimed that the proportion of newly retired landlords entering the buy-to-let market has more than doubled since pension freedoms were introduced in April, with those aged to 55 to 70 now making up 31 per cent of applications.”

However, Mr Travis says this has been tempered by realism, and now in addition to existing considerations such as average pension pot sizes - approximately £43,300, according to the Association of British Insurers - the chancellor’s new tax rules “appear to penalise the smaller investor and drive them out of the market”.

This means it has been made less attractive for newcomers to break into the market - “a tax on pensions through the back door”, says Mr Travis.

His comments have been backed up by Mr Griffiths, who says: “Despite considerable press about over-55s cashing in their pensions for rental income, the reality is that pension freedoms have had little impact on the buy-to-let market.

“The average pension pot would still leave a prospective buyer unable to reach today’s average deposit, which according to the Mortgage Advice Bureau is £80,000.

“Even if they could, it is unlikely someone would swap all their savings for a deposit, mortgage repayments and a rental income.”

Questions about whether pensioners could really use the freedoms to go large on property was even raised by the Bank of England.

In its July 2015 Stability Report, the Bank suggested that retirees would be keen on going for buy-to-let, and the market could be bolstered by this.

It said: “The buy-to-let market could receive an additional stimulus from recent pension reforms”. However, it concluded that most retirees would find it difficult to get mortgages, given the size of the average pension pot.

Mr Sexton adds: “Pensioners will often find it easier and less stressful to leave their savings in a pension fund, rather than go to the effort of working as a landlord.”