Buy-to-let presents challenges to lenders and landlords alike
Mark Davies is managing director of Link Mortgage Services
From seeing the opportunity to underwriting complicated company structures, lenders need commercial underwriters to assess properly the opportunity to lend in buy-to-let.
A year on from last September and the aftershock of the buy-to-let changes issued by the Prudential Regulation Authority are still being felt as a market so long left to its own devices has started adapting to increased regulatory scrutiny.
The more stringent rules on mortgage lending for buy-to-let landlords has meant the near two million ‘hobby’ landlords who own 15% of the housing market have found it increasingly difficult to raise finance from traditional lenders.
This is not the only headwind. The government’s introduction of the 3% stamp duty surcharge on second homes in April 2016 and withdrawal of tax relief by 2020 also present challenges for the sector.
As with all regulatory change the desired outcomes have also inspired some less desirable behaviour. There has been a rush to place buy-to-let investments to into limited company structures by some brokers with an impact on clients’ tax positions and consequently and unwillingness of some lenders to support lending to these structures.
But in addition, the skills in lenders to read balance sheets and understand how company structures and law affect lending positions are thin on the ground.
Equally many ‘hobby’ BTL landlords have turned to Houses of Multiple Occupancy in an effort to improve yields unaware of the many more stringent rules that accompany these kinds of dwellings.
The BTL landlord has been hit, albeit slowly over the last few years. Although the powers-that-be seem to be managing the ‘hobby’ investor out, whether they are going to succeed is less clear. Foreign property investment funds are already operating successfully in London and benefitting from the discount that our ‘post brexit’ currency offers.
If it was the government’s intention to flood the market with ex-BTL property as a vote winning strategy and an attempt to ease the housing crisis, It’s not clear this is working.
More property is on the market in London but because so much hobby BTL is funded on residential borrowing there is little hard data to know if this stock was rental or not.
Notwithstanding this technical point, owner-occupiers are still finding it hard to save a deposit (according to ONS data, tenants in London spent nearly half (49%) of their salary on rent). A look nationwide at the cost of a property relative to earnings is even more illuminating; for England and Wales in 1997 it was around 3.6 times earnings, whilst in 2016 it had more than doubled to 7.6 times.
But we should remember that the housing market is not homogenous. In a recent survey of over 680 landlords carried out on behalf of the firm Paragon, it was revealed that buy-to-let mortgages for property purchases have fallen by around 40% overall since 2015.
But landlords in the Midlands, however, seem to be bucking the trend, amplified by strong economic growth in the region, a thriving higher education sector and successful regeneration of Birmingham.
There is also a boost from the relocation of head office and operational functions outside of London to Birmingham by financial service firms – including HSBC and Deutsche Bank – with heightened activity ahead of the Birmingham 2022 Commonwealth Games.
What’s more, 42% of landlords in the East Midlands and 33% of landlords in the West Midlands said tenant demand was increasing, compared with just under a quarter of all landlords (24%) who indicated rising demand.
There is evidence to suggest that the sales are not as desired to owner-occupiers but simply the transfer of assets from one investor to another. These investors have full knowledge of the tax environment, and at the appropriate LTV and rent to withstand the stress testing.
As a result, property is becoming less about instant and fast capital gain to compensate for the low yield and more about a sensible yield from purchase with a projected modest capital gain. This is far more in line with why property as an asset class has historically been viewed as a desirable investment instrument.
What is clear is that proper investing in the sector now requires levels of expertise previously not required. From seeing the opportunity to underwriting complicated company structures, lenders need commercial underwriters to assess properly the opportunity to lend.
The sector may not offer the eye-catching capital returns it once did, but it has returned to its historic asset characteristics, offering investors a reasonable yield and a hedge against inflation. Buy-to-let is alive and well.