COMMENT: Buy-to-let and the housing time bomb

Sarah Davidson

July 27, 2012

Perhaps those with most to lose thought it best to ignore it or perhaps with so many other things going so obviously wrong in banking, more immediate problems stole the news.

Whatever the reason there were no headlines. No one debated the methodology of the new indices or what might be the consequences for both buy-to-let landlords and their lenders if The Model Works were right – that the projections of other indices have been unrealistic and that over time the market is cyclical and as volatile as any other form of investment.

Brian Hall, claims that if the buy-to-let sector was regulated it would be unlikely that any of the existing indices would be compliant – an allegation which if true might well put the buy-to-let lenders firmly in the mis-selling frame should letting prove no more than just another bandwagon.

But more fundamentally than that, The Model Works indices is the bi-product of a wider in-depth study by Brian Hall of first-time buyer exclusion and the buy-to-let market and was designed to test the claims and assumptions made by the vested interests in the buy-to-let sector visa vie those indices.

In modelling the dynamics of the mortgage and housing market and how the different components interact, Hall’s larger study shows that the so-called buy-to-let revolution is not irreversible or the result of a burning desire of people to rent. Rather the evidence demonstrates that the buy-to-let revolution is the result of a market heavily weighted in favour of the buy-to-let investor.

The problem is structural – unlike a buy-to-let investor a first-time buyers does not receive mortgage tax relief, nor is their income guaranteed by the state in the form of housing benefit. Taken together mortgage tax relief and housing benefit are subsidising the private rented sector by an eye watering £15.3bn per annum.

Add to this the stringent lending criteria facing first-time buyers, changing work patterns and the growth of student debt and the problem of saving for a hefty deposit and it is easy to see how aspiring home-owners are being displaced by a new class of landlord.

Landlords see their investment both as an income stream and as their nest egg in retirement. Their problem is that the return on investment claimed by many in the sector does not quite stack up and some returns modelled by Hall actually fall into the negative over time, spelling big problems for both investors and their lenders.

The private rented sector may offer a short-term solution to our housing needs but the growth in buy-to-let has not led to a big investment in new housing. Moreover if a growing number of households are forced to enter their retirement years as tenants, Hall predicts that by 2050 housing benefit will cost the taxpayer an additional £52bn per annum.

It is curious that the Prime Minister would like to cut the cost of housing benefit to the under 25s but seems oblivious to the £50bn time bomb that awaits the taxpayer as a new generation of renters reach retirement.

So a future generation will pay dearly if the inequalities in the housing market are not addressed but Hall not only identifies the problems facing us but also offers some simple solutions. Obviously the tax and benefits regime needs to be reformed with a degree of pain for landlords and their lenders but on the positive side some of the money thus saved could be used for stamp duty breaks and other incentives.

Hall also proposes that lenders too could play a positive role with special savings scheme for first-time buyers. So rather than using the savings of first-time buyer hopefuls to lend to buy-to-let landlords, building societies could work together with builders and use these funds to regenerate the new-build market. At the very least this would be a small step in the right direction.

Hall’s study is available in a short video presentation – visit www.themodelworks.com/website/presentations

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