Blow by blow: the case for BTL versus FTBs
In July Mortgage Introducer published analysis by industry consultant Brian Hall claiming buy-to-let is locking first-time buyers out of the mortgage market – it caused consternation among buy-to-let big wigs and housing analysts.
Peter Williams, executive chairman of the Intermediary Mortgage Lenders Association and a housing analyst at Cambridge University, refuted Hall’s assertions and defended the case for buy-to-let.
Since then housing economist John Wriglesworth has waded into the debate speaking on the Today Programme recently, claiming that renting is a much cheaper option than buying.
Hall has since come back calling this “yet another example of the disinformation being propagated by the industry”.
Here is Hall’s blow by blow rebuttal of both Williams and Wriglesworth.
Wriglesworth – renting is a much cheaper option
Hall: “BM Solutions says the average buy-to-let yield is 6.2%, the average rent is £734 per month and the Halifax average house price is currently £161,094.
“Dividing the rent by £161,094 gives a yield of 5.5% not 6.2%. It suggests the average rental property value is below the national average. So working back from the yield and rent we get an average rental property value of £142,064.
“Keeping with Lloyds Banking Group brands, they offer a Lend a Hand mortgage with a deposit as low as 5%, at an APR of 4.4%. So assuming a 10% deposit and taking the APR as a flat rate, a first-time buyer would pay £711 per month to buy this rental property.
“So we can say that renting is not cheaper than buying and research highlights that most tenants would rather pay off their own mortgage than pay rent.”
Williams – indices are primarily intended to track changes over time
Hall: “ARLA’s index use a 20-year moving average on house prices, which over-dampens the data. As a result yield figures haven’t varied much in recent years, giving the impression that the buy to let sector is stable and investing is safe.
“This index is supported by over 500 letting agents so maybe clients are being informed that as a geared investor they can still make a 21.96% annual return.”
Williams – house prices are volatile but then so are other investments
Hall: “Buy-to-let investors may be lulled into a false sense of security by ARLA’s data and data provided from other sources. If house prices were to fall by say 10% then a geared investor, with a 25% deposit, will lose 40% of their equity.
“Some argue that buy-to-let is a long-term investment. But if one knew there was a likelihood of any losses, one might invest elsewhere, in short term at least.
“It is suggested that buy-to-let has little effect on first-time buyer exclusion.
“But buy-to-let investors buy multiple properties and keep them indefinitely. So they have a disproportionate impact on the potential supply of properties.
“Exclusion also increases demand, which pushes up rents, making it difficult for first-time buyers to save a deposit, which increases first-time buyer exclusion.”
Williams – comparisons of first-time buyers and buy-to-let investors
Hall: “Buy-to-let investors get tax relief on their mortgage interest and other expenses and, in addition, buy-to-let investors often borrow on an interest-only basis.
“For example, acquiring a £150,000 property, with a 75% loan, at a rate of 5%, would cost £665.17 with a repayment loan but just £468.75 with an interest-only loan.
“Furthermore, the buy-to-let investor can then include £5,525 (£468.75*12) in their annual tax return. For the homeowner MIRAS has been abolished.
“It is further suggested that landlords don’t benefit from housing benefit.
“But if they were abolished, circa £13bn would be removed from the private rental sector. This would hit buy-to-let investors hard. Housing benefits mollify landlord attitudes to the risks and by doing so create a moral hazard.
“Incomplete, inaccurate and biased data, coupled with landlords’ disregard for the risk are two reasons why the buy-to-let sector has grown by 18% in a one year.”
Williams – many choose to rent and buy-to-let facilitates mobility
Hall: “This argument is patronising. Young people already loaded down with student loans and facing an uncertain future, with rising taxation to pay for a doubling in the retired population by 2050, don’t want to hear this sort of propaganda from an industry that exists simply to make a minority rich at their expense.
“They want these experts to resolve the problem of first-time buyer exclusion.”
Williams – buy-to-let as part of a balanced tenure neutral housing market and comparisons with high renting levels in other countries
“A thriving PRS is an important part of the equation and I am supportive of specialist lenders and brokers and the larger professional landlords. My concern is the smaller naive buy-to-let investors that are taken in by the incomplete, inaccurate and biased data being provided by some in the industry.
“Regarding renting in, say, Germany, during most of the period when we were building an empire, industrialising, getting richer and just beginning to move from a house-renting to a home-owning society, Germany didn’t even exist.
“It consisted of dozens of sovereign states. It was unified, and then the Austro-Hungarian Empire sucked it into WWI. Starved by blockading, it called for an armistice and then the Allies demanded 100,000 tonnes of gold in reparations. It saw hyperinflation in the early 1920s, with more starvation and carpet bagging.
“The mortgage sector collapsed and then was reinstated at 25% of its original value in Reichsmarks (effectively 25,000,000,000 times its value in old marks). It was hit badly by the 1929 stock market crash. Then the fascists arrived.
“WWII concluded in destruction of the economy, with 25% of all properties damaged or destroyed, followed by partitioning into East and West and the expulsion of millions of Germans from countries like Poland. More starvation followed, then rebuilding, the costs reunification and now the Euro crisis.
“All these factors contributed to the situation now, in which most Germans rent.
“But Germany hasn’t experienced a house price boom as we have and so generally rent levels are lower. The sector is more tightly regulated and landlords face increases in Grunderwerbsteuer (property transfer tax) and Grundsteuer (annual land tax) and Eigenheimzulage (mortgage relief) was dropped in 2006.
“I think the system that gradually evolved in the UK with most citizens becoming homeowners, being able to cap their accommodation costs when their mortgage is repaid and having equity to draw on in their old age is vastly preferable.”
The value of buy-to-let as an investment and the work of the government and lenders to resolve first-time buyer exclusion
Hall: “Geared investors have made losses recently and so I question the value of buy-to-let as an investment. I also predict changes that could further disadvantage these investors. In short, I view the rapid growth of buy-to-let as a bubble.
“Regarding the efforts of the Government and lenders, the current initiatives are far too modest in scope and scale to address the massive pent up demand.
“Given lenders’ proclivity towards lending in buy-to-let rather than fixing first-time buyer exclusion, I wonder what percentage of the government’s £80bn Funding for Lending scheme will find its way to helping first-time buyers?
“The solution requires collaboration between government, local authorities, lenders and builders. Currently there is no incentive for lenders to do this.
“One reasons the government hasn’t taken action is because there is so much disinformation (and subjective opinion based on this disinformation) out there.”