SPECIAL FEATURE: Buy-to-let isn’t undermining FTBs

Sarah Davidson

July 31, 2012

“The recent comments from Brian Hall at Model Works regarding the perceived weaknesses of the indices for the buy-to-let market prompted John Murray to add his views in a recent Mortgage Introducer article published on 27 July.

“In this he offered up a wide spread of arguments including that buy-to-let was distorting the housing market and freezing out first-time buyers as well as exposing buy-to-let investors to very considerable risks.

“I have a considerable interest in indices, buy-to-let and the housing market in general through my work with the Intermediary Mortgage Lenders Association, LSL Acadametrics and Cambridge University.

“John’s comments have prompted me to offer a reaction to him and Brian, not as an apologist for buy-to-let but rather as an active participant and analyst.

“First clearly all indices have their strengths and weaknesses but whatever these are, the strength of an index is how it tracks change over time. In other words is the market rising or falling?

“Indices are often used in the sales process to illustrate trends and to help inform customers who would normally recognise that the index is an average which does not necessarily apply to every specific case.

“Second, it is very clear we do have house price cycles and that these have varied in amplitude over time.

“Again you can choose your measure but there is little to suggest that housing is more volatile than other asset classes though much turns on the time period chosen.

“The idea that buy-to-let excludes first-time buyers is not a new one but the evidence for this is weak.

“It must be the case that in certain sub–markets there is competition between them and with the first-time buyer market shrinking and buy-to-let growing this tension has probably increased.

“However, there is little to suggest buy-to-let is driving prices and stressed affordability and most first-time buyers are currently excluded via lack of mortgage supply, deposit shortfalls and credit history rather than competition with buy-to-let investors.

“Third, both John and Brian suggest the market is heavily weighted towards buy-to-let, for example, via tax reliefs and state support and that there is no burning desire to rent.

“Let’s be clear, landlords do not receive tax relief on mortgage payments but as with any other business they are taxed on profits and as with any other business, the cost of finance is a legitimate business expense and can be offset against taxable income.

“Their rental income is not state guaranteed in the way John and Brian imply but tenants who qualify for housing benefit may indeed get it.

“The growth of the private rented sector and its increasing role across income groups has meant that the housing benefit bill has grown significantly –indeed the expansion of the private rented sector has been the main driver in the rise in the housing benefit bill.

“But it is not guaranteed and it is quite clear that home ownership is the most subsidised tenure and the private rented sector the least.

“Fourth, survey evidence does suggest there has been a significant increase in the demand for private renting and this is a product of both choice and constraints.

“Consumers like easy access to quality homes in locations of their choice and well aligned to their mobility in the job market.

“One issue will be getting some of these households to opt back into home ownership when their incomes have risen and they have accumulated a sufficient deposit.

“At the same time many have been excluded from home ownership and forced to rent. So it is both.

“Fifth, nobody has ever suggested that the private rented sector provides a total solution for our housing ills but it is an important element, with some 17% of households in the sector and it continues to grow.

“Increasingly it provides homes for families who cannot afford to own and cannot secure a social rented property.

“It clearly isn’t a short term feature of the market and there is no fixed notion of how large the sector should be in a properly balanced tenure neutral housing market.

“Other modern economies might provide some guidance and the most successful ones have much larger private rented sectors than we have in the UK and offer landlords considerably more support than we do in the UK.

“Sixth, the rise of the private rented sector has also been helpful to investors searching for return to supplement pensions and given turbulence in stock markets.

“Many buy-to-let investors have benefitted from house price inflation alongside rental growth but this does not hold everywhere or forever.

“Right now capital growth is less likely and more reliance has to be placed on rental income.

“I think the creation of a buy-to-let market has been a valuable addition both to households and investors looking for a home (in the latter case for their savings).

“Certainly it does increase many households exposure to property but right now what are the options?

“Finally both John and Brian want to see more support to home ownership from lenders.

“Five big lenders are supporting the government NewBuy scheme and two of these lenders have their own schemes aimed at easing the pressures on first-time buyers.

“All lenders recognise the value of helping the first-time buyer market and many do so though the scale of these actions is probably limited by the capital constraints that are widespread at present.”

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