The rise of the buy to let mortgage and fall of the first-time buyer

Landlord Expert
By Landlord Expert April 5, 2012 13:27

Richard Sexton, business development director of e.surv chartered surveyors, looks at the rise of buy-to-let mortgages and the fall of the first-time buyer

First-time buyers’ pain is landlords’ gain, and so it has proved since the implosion of the sub and near prime markets in 2008. While the rest of the market has fallen to its knees, and is only slowly beginning to pick itself up, buy-to-let has gone from strength-to-strength.

When the sub prime and near prime markets were basking in the glow of unsustainably easy access to credit, and the Brown administration perhaps prematurely proclaimed an end to boom and bust, buy-to-let was the junior cousin of a rapidly expanding owner-occupier market.

Ironic, then, that it is now cushioning a further fall in net mortgage lending and taking on a more prominent role in lenders’ mortgage books.

Low lending levels

Net mortgage lending totalled only £9.5 billion in 2011, way down on the £108 billion during the heady days of 2007. And it looks set to fall even further this year, with the Council of Mortgage Lenders predicting the figure will be somewhere in the realms of £5 billion.

Even if the economy improves and credit conditions loosen, we’ll only see a trickle of first-time buyers. As a result buy-to-let is proving extremely lucrative for professional property investors and landlords.

According to LSL Property Services, the average rent in England and Wales hit £712 in January, up 4.3 per cent year-on-year. Rental yields have hit highs of 5.3 per cent, which are attracting droves of new landlords and encouraging existing ones to expand their portfolios.

Low property prices by historic standards add to the allure. All the major house price indices show house prices down year-on-year. Zoopla.co.uk revealed recently that two in every five properties on the market have had their asking price reduced at least once, with the average discount standing at £19,500.

In a stark snapshot of just how subdued the residential market is, the Land Registry shows housing transactions are 9 per cent lower year-on-year, and less than half the level in 2007. Fragile credit conditions mean swathes of first-time buyers are being frozen out of the market.

Around 190,000 potential first-time buyers are being displaced into the rental sector every year as a result, which is swelling the tenant population considerably with each passing month. Nor is there any immediate sign of this abating thanks to a rapidly congealing economy.

Against this backdrop, it’s easy to see why buy-to-let investors are gobbling up cheap bricks and mortar. Lenders are all too aware of the high demand, and have been falling over themselves to grow their buy-to-let portfolios by offering tantalisingly low rates on high LTV mortgages.

Indeed, Mortgages For Business says there are now 24 lenders offering 450 buy-to-let deals in total, compared to just 18 lenders offering 250 products in November 2010.

First-time buyers

Buy-to-let aside, embattled lenders have plenty to keep them awake at night. The turmoil in the wholesale markets is pushing up their funding costs, and in private they remain terrified by the prospect of another serious downturn in the Euro-area.

Their response will be to rein in the amount they lend, particularly to new buyers. Our Mortgage Monitor, which analyses trends across the market, already tells that tale.

Analysis of our valuations data reveals lenders are lending more to buy-to-let investors, at the expense of first-timers. The increase in first-time buyer numbers seen over the summer and early months of this year was only ever likely to be transient.

Lenders pushed out higher loan-to-value mortgages in a calculated attempt to increase their market share in controlled fashion. It certainly wasn’t a sign that funding conditions are loosening in the long-term.

And so it has proved, as LTVs have begun to trend downwards again after a brief renaissance where they peaked at an average of 62 per cent (still well below the highs of pre-2008, when it regularly crossed the 70 per cent threshold).

The surge in activity we’ve seen recently is artificial, with first-time buyers apparently erupting – as Boris Johnson might say – from every orifice of the rental market. Worried first-timers have seen the end of the stamp duty holiday on the horizon, and have decided to take the plunge and buy, rather than stomach an average charge of £1,600 after the scheme expired on 24 March.

Higher rates

If the end of the tax break aligns with a further deterioration in the economy, as the Bank of England predicts, then the first-time buyer market will dip sharply and slow to a glacial pace.

There are already signs lenders are starting to pass their increased funding costs onto the consumer in the form of higher rates. Halifax has increased rates on its SVR mortgages from 3.50 per cent to 3.99 per cent, which is set to affect 850,000 borrowers. A few other lenders followed suit.

The problems afflicting the owner-occupier market will make buy-to-let all the more important to lenders this year. It will be the harness supporting the market and preventing it from falling too dramatically.

Landlord Expert
By Landlord Expert April 5, 2012 13:27

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