Why buy-to-let is still going strong

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Why buy-to-let is still going strong

The worry was that what had provided a steady stream of income for landlords and a way of ensuring a continuous housing supply for tenants would become less appealing as some of the tax incentives were withdrawn.

In the UK the buy-to-let market is worth more than £227bn, according to The Northview Group’s Keith Street, vice chairman, group lending.

Bricks and mortar investment

The UK has long believed in bricks and mortar as a good long-term investment and this enduring relationship with property appears to be holding.

Robert Sinclair, chief executive of the Association of Mortgage Intermediaries, comments: “As an asset class, property in the UK has always been seen as a relatively strong home for value. Even after downturns values return relatively quickly and hitherto, residential has been a quite liquid market.

“As a long-term investment it has historically performed well, therefore as an asset class it still appears popular as a capital investment, even if the income gains are being eradicated by tax changes.”

In a housing market where the primary characteristic is a shortage of supply against a background of strong population and household growth, investment in residential property will remain a popular choice.John Heron

What has helped the buy-to-let market remain buoyant in recent years is increasing demand for rental properties, particularly in areas such as London, where younger people are unable to save a deposit for a property of their own. 

Jamie Smith-Thompson, managing director of Portafina, explains: “First-time buyers now need much larger deposits than before. The days of 100 per cent mortgages have gone and most buyers will need a deposit of around 10 per cent, or more. High house prices mean it will take the average first-time buyer a lot longer to save for a deposit than it used to.

 

“As a result, more and more of the younger generation are moving into the rental market.”

“In a housing market where the primary characteristic is a shortage of supply against a background of strong population and household growth, it is likely that investment in residential property will remain a popular choice for many,” predicts Paragon Mortgages' managing director John Heron.

He believes the private rented sector is now a crucial part of the UK’s housing tenure mix, providing a home for one in five households in the UK, including families.

“People rent for a variety of reasons; from the flexibility it provides to the difficulty of affording a mortgage to buy a home. This is unlikely to change in the short-term,” he says.

Supply and demand

Property investment is generally perceived as a far more secure investment than one made in the stockmarket. It also generates high returns than any money left sitting in a bank or building society savings account when interest rates remain so feeble.

One of the reasons a buy-to-let portfolio has become a more predictable way of generating an income is because of rising rents in the UK.

Any significant rise in rates or withdrawal of stimulus could pose a big shock to the market.Matthew Bird, Seer Green Financial Planning

Paul Shearman, proposition director, mortgages, protection and GI at Openwork, points out an ongoing failure for housebuilding supply to meet demand means there is little likelihood of supply outstripping demand any time soon. 

“This will mean rising rents and limited void periods, reinforcing the attraction of buy-to-let,” he suggests.

“That said, with limited house price inflation expected over the next couple of years, combined with the impact of tax relied and other rising costs, the financial attraction of buy-to-let will be under some pressure in the coming years,” cautions Mr Shearman.

“This will inevitably curtail some landlords from entering the market or growing their portfolios, and will mean greater focus on regions and property types that generate higher yields.”

Matthew Bird, independent financial planner at Seer Green Financial Planning, observes property values in the UK are still underpinned by a “chronic shortage” of housing supply.

But he warns: “People should be wary however, that the demand side has been heavily stimulated by ultra low interest rates – and away from buy-to-let by government stimulus from Help to Buy.

“Any significant rise in rates or withdrawal of stimulus could pose a big shock to the market.”

The Bank of England governor Mark Carney has hinted at a rate rise sooner rather than later this year so buy-to-let landlords will want to keep a close eye on monetary policy committee meetings.

With cash rates still on their knees and first-time buyers getting on the ladder at a later stage it’s still too early for the death of buy-to-let to be announced. David Hollingworth

They may also have to come to terms with slightly lower returns from their buy-to-let properties from now on.

Tenants take the brunt

John Phillips, group operations director for Spicer Haart and Just Mortgages, reassures landlords and investors there is “still money to be made” as buy-to-let continues to yield reasonable returns. However, he believes it is tenants who will ultimately take the brunt of the taxation changes and renewed regulatory scrutiny.

He notes: “If landlords are paying more, be that in tax, or in extra charges to a letting agent, ultimately they will cover that by putting the rents up.

“This means all the new measures will end up hitting those who can least afford to pay – the tenants. Many of those people will still not be able to buy as they will be less able to save up for a deposit, or they may be self-employed and not have the required number of years’ accounts.”

David Hollingworth, associate director, communications at L&C Mortgages believes the market is already adapting to change.

Lending figures have been improving, although CML figures point to the strength of remortgaging in the market, now accounting for around two thirds of lending. That may well have been provoked by the changes in criteria as landlords look to improve their deal ahead of any tightening. In addition, the desire to manage costs as available tax relief on mortgage interest is reduced is only likely to grow,” he notes.

“The other aspect that is likely to see growth is landlords turning their attention to the opportunity that incorporation may offer, given that they can continue to set cost of finance against income within a limited company structure.”

He admits this will not suit everyone but says the specialist lenders have reported strong interest and there may be a move by the more mainstream lenders into that area.

“With cash rates still on their knees and first-time buyers getting on the ladder at a later stage it’s still too early for the death of buy-to-let to be announced,” he suggests.

Market transition

Assuming the factors that have driven demand for buy-to-let up until now – fewer people able to afford to buy, a shortage of housing stock and the appeal of owning bricks and mortar – continue then the market does indeed seem far from death.

“The structure of the market will no doubt continue to transition with the changes that have been introduced and the further changes to come,” Mr Street acknowledges.

“It is encouraging that lenders are reworking their propositions to be more relevant to today’s low interest rate economy.”

He concludes: “With all the uncertainties in the global economy, a fair return on UK property still stands as a class of investment that many people will want exposure to.”

eleanor.duncan@ft.com