Buy-to-let: is it a boom or a bubble fit to burst?
People borrowing to be landlords could face the same restrictions as homebuyers, with MPs voicing fears that property speculation may be overheating the market
Saturday 19 July 2014
Buy-to-let has been one of the UK's financial success stories. While it may have dipped in the worst years of the credit crunch, lending to residential property speculators is almost back to pre-2008 levels.
But there is now increasing concern that amid a UK hosing crisis, buy-to-let may be part of the problem, not the solution.
According to the Council of Mortgage Lenders, there were 16,000 buy-to-let loans worth £2.2bn approved in May 2014. In 2013 buy-to-let accounted for 14 per cent of all mortgage borrowing, compared with 11.5 per cent in 2012 and 9.5 per cent in 2011.
Rob Saunders at comparethemarket.com reported that the comparison site had seen interest in buy-to-let mortgages jump 70 per cent since the start of the year.
He said: "Buyers are looking at higher-value loans which have jumped from an average of £108,453 in 2013 to £123,026 in 2014 – an increase of 13 per cent.
Buy-to-let was once was the preserve of professional landlords but plummeting pension returns, poor savings rates and stock market uncertainty have led many homeowners to see their house or flat as a safe asset, not just a place to live.
Two years ago, the mortgage broker John Charcol noted a dramatic rise in first-time buy-to-let borrowers. It said it was getting an increasing number of applications from homeowners in their late 40s and 50s – normally those with substantial amounts of equity –choosing to let rather than sell their homes.
Another reason for the increase in landlords, many mortgage brokers believe, is the availability of the loans. Buy-to-let mortgages are not regulated in the same way as normal homebuyer loans so are not subject to the same lending restrictions – including the stricter criteria introduced as part of the Mortgage Market Review in April.
Buy-to-let mortgages do have higher interest rates and a much higher minimum deposit, usually a quarter of the property's value, but investors can use equity in an existing property to help with the purchase of another.
For all the bright prospects for the market, however, there is also a cloud. This week, MPs on a Treasury select committee expressed concern that buy-to-let could be causing issues for first-time buyers, by reducing the supply of available properties and forcing up prices still further.
They said they were worried that it had the potential to destabilise the housing market and asked Mark Carney, Governor of the Bank of England, if there was anything the central bank or regulators could do to restrict it.
The MPs also expressed concern that huge amounts of investors' cash could be pumped into buy-to-let when pension fund liberalisation comes into force next year.
Mr Carney said there were no immediate plans to restrict lending but said the bank would be watching the market 'very closely'.
Andrew Bailey, Deputy Governor of the Bank, also reiterated its concern that a continuing rise in house prices remained the biggest threat to the stability of the UK economy. He said it would be keeping an eye on investors who had bought multiple properties and whether the trend could cause the housing market to overheat in some areas.
One disgruntled buyer, who has a deposit of £25,000 and is trying to buy a flat in a Home Counties town, contacted The Independent: "I earn £62,000 a year and cannot find a three- bedroom place for my family. We may be forced to rent at around £1000 plus a month. A lot of the properties where I want to buy tend to end up with cash buyers and are then let out. In effect these people are getting people like me, who can't buy a mortgage, to pay their mortgage."
This week one bank brought in restrictions. The Royal Bank of Scotland (RBS) group, which owns NatWest, introduced a 4.99 times income multiple limit per application for all buy-to-let business, with effect from Monday.
The maximum loan to value (LTV) for buy-to-let mortgages will remain at 75 per cent and the maximum loan size will still be £500,000.
NatWest said the measure was needed to maintain affordability and to safeguard its customers from borrowing too much. It added that the change is designed to achieve greater consistency between buy-to-let and residential lending.
Trevor Abrahmsohn, managing director of the estate agency Glentree, admitted that buying multiple properties using equity in other properties was questionable in areas where first-time buyers are struggling to get on the property ladder.
He said: "The problem is, a lot of people have been forced into looking at property because of changes made to pensions. Disillusionment with state and private pensions has been rife and, quite rightly, consumers are turning to buy-to-let investments as an alternative.
"This process has been exacerbated by the constant clawing back that successive governments have done with private pensions to the extent that buy-to-let investments, despite their tax inefficiency, have done far better by way of yield and capital growth than most other investments."
Mr Abrahmsohn added: "Only 80,000 new homes are built per annum. There is a finite supply of homes and demand is not only from the local market but also the international market where buyers from the far-flung parts of the world want a part of English heritage.
He said that the Government's Help to Buy scheme was also pushing up demand.
"Would I recommend buy-to-let as an investment?" Mr Abrahmsohn asked. "Well I still would, as long as everyone is reasonably savvy that investments do go up as well as down at any point in time."
David Cox at the Association of Residential Letting Agents claimed that buy-to- let lenders were already in effect regulating themselves, but he acknowledged that more could be done to prevent amateur property speculation.
He said: "Lenders could impose additional criteria on landlords, such as becoming accredited or using a licensed agent, in order to ensure potential investors understand their responsibilities when letting property.
"Currently, anyone is able to invest in a buy-to-let property, and this growing trend has the potential to boom further next year when pension reforms come into effect and allow investors to pour freed-up pensions into buy-to-let properties, which are currently seen as attractive income investments."
Simon Zutshi, founder of the Property Investors Network, claimed that the lending restrictions introduced in April by the Mortgage Market Review may have had the unintended consequence of boosting buy-to-let. He said: "Ironic as it may be, I believe that some of the controls ... introduced to the residential mortgage market may be indirectly fuelling the buy-to-let market boom.
Mr Zutshi explained that the 90 per cent LTV cap on residential mortgages, with a maximum multiplier of 4.5 times combined income, had led to more people having to rent because they could not meet the stricter criteria. He said: "Investors will buy investment properties for as long as there is a rental demand."
James Priday, managing director of Prydis Wealth, warned that buy-to-let may not be quite the great investment that it seems.
He said a mortgage against a property is a loan, and this means any capital gains and losses are multiplied in a way that would not apply to a wholly owned asset.
"This can be a good and bad thing but a risky business. As a simple example, if you buy a property for £100,000, putting down a £20,000 deposit and borrowing £80,000, a 10 per cent rise in property prices increases your deposit by 50 per cent. But if property prices fall by 10 per cent, you will have lost 50 per cent of your original money, which is a large loss in anybody's book, and a potentially risky investment if you need to sell in the short term."
Property investment also comes with additional costs. Mr Priday said: "The gross return is the combination of the rental income and any capital growth, but people must deduct any costs from this – be they legal fees, mortgage interest, repairs and maintenance etc. They must then factor in the capital gains and income tax payable on the returns to arrive at the net amount that ends up in their pocket. All costs and tax can easily erode 30 to 40 per cent of the gross return."
Independent Partners: Get fee-free expert mortgage advice and find the right mortgage deal for you.
Buying property overseas? Check out these hotspots
Bargain Hunter: Exclusive discount on a SmartGlider - a self-balancing electric scooter
Kate Hudson's online sports brand Fabletics drains your account if you don't say 'stop'
House prices plummeting in London's most expensive boroughs, but going up in the suburbs
Peer-to-peer lending rates put Nisas to shame
- 1 Hair loss explained: How and why men go bald
- 2 Game of Thrones season 6: Jon Snow theorists believe the Stark may have a twin sister
- 3 Artist takes LSD, draws herself over different stages of the 9-hour trip to show its effects
- 4 A pint of water every day is the key to losing weight, scientists say
- 5 Russia 'accidentally reveals' number of its soldiers killed in eastern Ukraine
Dresden riots: Protesters in Germany attack refugee buses shouting 'foreigners out'
France train shooting: US soldiers speak of the moment they stopped gunman and 'beat him until he was unconscious'
Labour leadership: Jeremy Corbyn accused of 'deluding' young supporters with 'claptrap'
'Women only' train carriages: Jeremy Corbyn unveils radical move to tackle public harassment
Black holes are a passage to another universe, says Stephen Hawking
Iain Duncan Smith calls for urgent ESA overhaul as part of drive to cut down welfare costs
iJobs Money & Business
£13000 - £25000 per annum: Recruitment Genius: Would you like to be part of a ...
£20000 - £25000 per annum + competitive: SThree: Are you passionate about sale...
£25000 per annum + benefits: Ashdown Group: A large financial services company...
£20400 per annum: Ashdown Group: An established and highly reputable organisat...
Day In a Page
This four-bedroom home has an annexe accessed from the side of the house, with potential for improvement and conversion subject to the necessary permissions.
In the heart of the hamlet of Wardley, this five-bedroom period home offers countryside views and a stylish interior, with original features and open fireplaces.
Offering countryside views and landscaped gardens, this three-bedroom Grade II-listed lodge has a spacious conservatory and a large cellar that could serve as a workshop.
Set in approximately 1.5 acres, this four-bedroom home comes with a second, detached property that's currently used as an annexe.
In the hamlet of Newchurch, this former parish church is now a four-bedroom home complete with clock tower and eyrie.
Offering scenic views from a large balcony and sun terrace, this four-bedroom home has a wraparound garden and a heated swimming pool.
Offering views across the Humber and East Yorkshire Wolds from a glass panelled balcony, this four-bedroom barn-style home befits a life of leisure.
This four-bedroom home offers versatile accommodation with annexe potential; features include a hot tub, sauna and Norwegian BBQ hut.
Well-located for schools, colleges and the town centre, this contemporary thatched cottage offers flexible living space with six bedrooms.
Built in 1907, this four-bedroom Edwardian period home has been refurbished by the current owners, retaining many original period features.
Surrounded by landscaped gardens, this five-bedroom home offers living space across three floors.
This lovely country home in Burnham Market is currently run as a popular holiday cottage, with five en suite bedrooms and colourful gardens.
This three-bedroom 17th-century former village bakery is just a few miles from the East Sussex coast.
Set on a landscaped plot, this light and airy four-bedroom home comes with a log burner in the lounge, a fitted kitchen and an open-plan ground-floor layout.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Built on a former chapel site, this impressive four-bedroom home boasts balconies, stunning views and contemporary modern living.
This three-bedroom house is situated in a quiet mews and set over three floors. Features include glazed staircases and high ceilings.
A period townhouse set over four floors, this five-bedroom home was built in the 18th Century and retains many original features.
With five bedrooms, this spacious home offers beautiful gardens and modern interiors - set within the popular market town of Bingley.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
In the pretty market town of Bungay, this grade II-listed Mill House is arranged over four floors, offering four bedrooms and three reception areas.
This first-floor flat comes with two bedrooms, an impressive open-plan reception room and two lovely roof terraces.
This five-bedroom home comes with a range of outbuildings including a large barn which could be converted into a self-contained granny-flat or rental.
Moored at Taggs Island and reached via a pretty garden, this two-bedroom houseboat has a vaulted reception room and skylit garden studio - currently a beauty salon.
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
A contemporary house spread over three storeys, this three-bedroom detached home has large sliding doors that open out to the River Quaggy.
Moored in Chelsea's Cheyne Walk, this houseboat offers two double bedrooms and a teak deck that's ideal for al-fresco dining.
This former village bakery, dating back to the 17th century, is now a three-bedroom detached home just a few miles from the East Sussex coast.
On the picturesque Isle of Man, this four-bedroom character home has a ground-floor shop that's currently run as a newsagents and a flat that would make an ideal holiday let.
In a new collection of flats, this first-floor two-bedroom apartment offers ample entertaining space and a prime view of Furze Green from a private balcony.
This three-bedroom stone-built cottage currently trades as the village store with a restaurant in the annexe and family accommodation on the upper floors.
Previously two semi-detached properties, this five-bedroom home is spread over three floors with a large breakfast kitchen, orangery, office and gym on the second floor.
This five-bedroom home enjoys countryside views over the Blyth estuary to Southwold, offering flexible living space with a ground-floor annexe - ideal for use as a holiday let.
Close to the market town of Eye, this four-bedroom detached home offers a double-height living room which takes the place of the original, 19th-century, chapel nave.
Dating back to the 19th century, this four-bedroom home needs modernising. Spanning three storeys, the red-brick house has a fireplace, a small terrace and a cellar.
Just outside of Cambridge, this single-storey home offers three double bedrooms, a living room with vaulted timber ceiling and ladder steps that lead to a mezzanine study area.
This six-bedroom Georgian home is on three floors with open fireplaces, a two oven Aga, an annexe, and cottage gardens with outbuildings and a car barn.
A former coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, an attached office, kennels and an outbuilding that's currently used as a gym.
Located beside an impressive Victorian viaduct, this four-bedroom home has an open-plan living area that is glazed on two sides, with skylights and high ceilings.
A former furniture workshop, this three-bedroom home has high ceilings and painted brick walls, in a village setting only fifteen miles from the coast.
This five-bedroom stone townhouse features a pine staircase and an Inglenuk fireplace, double doors from the lounge give access to an enclosed courtyard.
This five-bedroom, detached home blends traditional and modern design; the sleek kitchen features a gas hob and oven set within an exposed chimney breast.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B or countryside retreat, subject to change of use permissions.
This Grade II-listed three-bedroom home is situated on a private road, just a short walk from the sandy beaches of Frinton-on-Sea.
Less than five miles from Malmesbury, this four-bedroom cottage comes with equestrian facilities and gardens that extend to approximately three acres.
Spanning three storeys, this late-Victorian five-bedroom farmhouse is a spacious family home with a modern interior and B&B potential.
With an original church arch, this triplex one-bedroom church conversion has a light, spacious, feel and comes with a secure off-street parking space.
This recently-refurbished three-bedroom home has bi-folding doors that lead out to a decked seating area - ideal for alfresco dining this summer.