Buy, buy…rent

Four years after it was supposedly killed off by the credit crunch, buy to let continues to go from strength to strength as first-time buyers are squeezed out of the mortgage market.

Figures published by the Council of Mortgage Lenders (CML) yesterday confirm that the total number of buy-to-let mortgages has increased by 45 per cent since the third quarter of 2007 from 978,900 in the third quarter of 2007 to 1,415,000 now. According to CML director general Paul Smee it is ‘growing broadly in line with expectations’. He goes on: ‘The rental sector has grown strongly over the last decade or so, and buy-to-let continues to help deliver a wider choice for tenants.’

Wider choice? I doubt very much that would-be first-time buyers will see it that way when tighter lending criteria mean their only choice is to be a tenant. After all, the same banks who are unwilling to give them a loan against their future income unless they have a sizeable deposit seem quite willing to give an amateur landlord a buy-to-let loan to be repaid from the rents (and therefore the future incomes) of their tenants.

The result of that mortgage famine is that the total number of owner-occupied mortgages has shrunk by 10 per cent from 10,914,500 in the first half of 2007 to 9,819,500 now. Buy to let accounted for around 8 per cent of all mortgages in 2007. Its share is now 12.6 per cent.

Four other surveys out today confirm the changing dynamics of the market. According to BM Solutions, rental yields for buy-to-let landlords edged up from 6.0 per cent in June to 6.2 per cent in July thanks to a 5.3 per cent rise in rental income over the last year. In the red-hot London market, where sky-high house price depress yields, rents rose by 10.5 per cent thanks to ‘particularly strong’ demand for rental accommodation.

The RICS says the rents rose 4 per cent last year and will rise another 4 per cent this year. It added that rising yields meant fewer landlords were opting to sell their properties at the end of the tenancy. According to Peter Bolton King, its global residential director: ‘It is clear that we have seen rents grow steadily right across the UK for some time. This is partly down to the problem of the scarcity of mortgage finance and the large deposits required by lenders.’

LSL Property Services/Acadametrics say that increased buyer activity is being driven by the top of the market rather than the bottom and that ‘first-time buyers are bearing the brunt of lenders’ caution’.

Finally, the latest mortgage monitor chartered surveyor e.surv says that the tentative growth in high loan-to-value lending seen since last Autumn has now gone into reverse. In a  flat market, activity was dominated by equity-rich buyers as the banks focused on less risky buyers and tightening their lending criteria for high loan-to-value mortgages. Two-thirds of house purchase loans in July went to borrowers with a deposit of more than 25 per cent while only 10 per cent (the lowest proportion since last July) went to those with deposits of less than 15 per cent. According to Richard Sexton, business development director of e.surv: ‘While credit is so scarce, banks would rather focus on sustaining lending to wealthier borrowers and buy-to-let landlords.’

It is surely now clear that the credit crunch and subsequent restructuring of the mortgage market have led to a fundamental shift in the balance between owning and renting in this country. The trend was well established even before 2007 but those like Fergus and Judith Wilson who argued that the crunch had killed off buy to let (the teachers turned landlords said in 2010 that the sector was ‘absolutely dead and will never return’) have been proved completely wrong. As I argued in May, the undead have returned.

From the lenders’ point of view, the shift is understandable. Why would you want to give a first-time buyer a 95 per cent mortgage at a time when house prices and real wages are falling and unemployment is rising? Even if the economy recovers an increase in interest rates from their current record low would rapidly increase their monthly payments.

More limited lending to people who already have housing equity is surely a much better bet since they will be carrying the risk of falling prices. And if a buy-to-let landlord runs into problems you can simply make a business decision to repossess them without being worried about the political sensitivities involved in evicting someone from their home. According to the CML, the 0.12 per cent repossession rate for buy-to-let landlords is almost twice as high as the 0.7 per cent rate for owner-occupiers. Meanwhile, as I explain on my blog for Inside Housing, repossession actions are falling for home owners but rising for tenants.

As an illustration of what has changed in the mortgage market, look no further than BM Solutions, the firm behind one of the surveys I quoted above. It was once the Birmingham Midshires Building Society, part of the century old movement that funded the expansion of home ownership in Britain. It is now the ‘buy-to-let brand’ of Lloyds Banking Group.

The government has recognised the need for action with a succession of schemes – the latest are NewBuy and Funding for Lending – designed to boost lending to first-time buyers and people with smaller deposits. NewBuy does seem to be helping housebuilders to shift product but the benefits for buyers remain to be seen. Lenders have cut rates since the introduction of Funding for Lending but all the sub-3 per cent rates that have grabbed the headlines are only available to people with a deposit of more than 40 per cent.

At the height of the credit crunch, it was assumed that house prices would crash and that repossessions would soar. However, record low interest rates have come to the rescue of existing home owners, buy-to-let landlords and the banks (plus the odd £10 billion bail-out here and there).

How long it can all last remains to be seen. If and when interest rates rise, over-valued house prices must surely fall much further than they already have. For the moment though we seem set on a self-reinforcing cycle of rising buy-to-let, restricted conventional lending, rising rental demand and rising rents.