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.
Questions of Cash: What are my rights if my leak is caused by neighbours’ roofs?
Pension mortgages: 'The advice I was given was wrong and now I face losing my home'
Best savings rates are not all they might seem
The 10 Best money-saving sites
Mark Dampier: Maybe boom, maybe bust, but we'll probably just muddle along
- 1 Exclusive: Abusers using spyware apps to monitor partners reaches 'epidemic proportions'
- 2 Margaret Thatcher 'expressed fears of Asian rising' at Anglo-Irish summit in 1984
- 3 The 'Black Museum': After 150 years, public set to see exhibits from police’s grisly crime museum
- 4 The Unluckiest People of the Year 2014 (and one very unlucky giraffe)
- 5 Magna Carta will be 800 years old next year – the perfect reminder of the rights and freedoms we must hold dear
British actor Idris Elba cannot star as James Bond because he is black, says shock jock Rush Limbaugh
Rozanne Duncan: Ukip expels councillor for 'jaw-dropping' comments made in BBC TV interview
Germany anti-Islam protests: 17,000 march on Dresden against 'Islamification of the West'
Ukip member gets into Christmas spirit with Union Flag plea to Santa 'for our country back'
Immigrants make UK racist, says Ukip councillor Trevor Shonk
BBC director Danny Cohen: Rising UK antisemitism makes me feel more uncomfortable than ever
iJobs Money & Business
Not specified: Selby Jennings: VP/SVP Credit Quant Top tier investment bank i...
Not specified: Selby Jennings: Quantitative Research | Global Equity | New Yor...
Not specified: Selby Jennings: SVP Model Validation This top tiered investment...
Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...
Day In a Page
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens