Bradford and Bingley House price worries and challenging lending conditions are taking their toll on the buy-to-let market.
There has been a notable slowdown in the number of landlords buying properties for investment purposes, according to most commentators.
“There is a slowdown in demand reflecting the five interest rate rises and the credit crunch,” says Ray Boulger of mortgage adviser John Charcol. “The market will flatline for six to 12 months. Before the summer, there was a good reason to buy quickly as capital values were going up so much but now people can, and should, wait.”
This week, further signs emerged that the market is not in robust health, when the Council for Mortgage Lenders (CML) warned that demand for buy-to-let borrowing is expected to ease.
Lee Grandin, managing director for Landlord Mortgages, says there has been a slowdown in new business across the industry.
Landlord Mortgages carried out an internal audit this week, and its figures show a 25 per cent reduction in business from the firm’s existing client base over the past 12 months. Overall, Grandin adds, business has been flat as Landlord Mortgages has taken clients from other lenders following a cut in fees.
There was more potentially bad news for the sector this week after the Institute of Directors urged the government to close a tax loophole on buy-to-let properties. The tax rules currently allow investors to deduct interest costs from rental income.
Up to the first half of the year, the market was looking sound. According to CML, the number of buy-to-let loans outstanding had reached a record 938,500, although the actual number of loans taken was 3 per cent lower than in the second half of 2006.
Buy-to-let lending accounted for 10 per cent of mortgage balances, compared with 3 per cent five years ago.
But almost every lender has since raised rates as it has become more expensive for them to borrow money on the wholesale money markets, with many also changing criteria such as fees, loan-to-value (LTV) allowance and rental income cover.
The Association of Residential Letting Agents (Arla) said 67 per cent of landlords realised a rental return of 5 per cent or less in August, which means they may not be able to cover payments with rates now more than 5.5 per cent if they were to remortgage.
During September, several lenders changed buy-to-let rates and criteria, including the second-largest provider, BM Solutions, which also increased fees on tracker mortgages.
Northern Rock, the fourth-largest buy-to-let lender in the UK, has cut its range by up to two-thirds, and moved its maximum LTVs.
“Some lenders seem to be competing on how uncompetitive they can be,” says Boulger. “They can’t withdraw but they are making themselves unattractive.”
The effect has been more pronounced in the subprime end of the lending market. Mortgage providers Advantage and Edeus both increased their minimum rental cover – the rent required to cover a given mortgage repayment – while Wave has increased its fees, withdrawn products and reduced maximum LTVs and overall loan sizes.
Close Brothers even suspended its specialist lender Close Mortgages, “in light of uneconomic returns available from the specialist mortgage sector”, and Merrill Lynch subsidiary Mortgages Plc pulled all adverse buy-to-let products. Paragon Mortgages withdrew all trackers and amended the rate used in its rental calculation.
Julia Harris, mortgage expert at Moneyfacts.co.uk, says: “The buy-to-let sector is beginning to show signs reminiscent of the subprime market over the last few weeks with tightening credit criteria, the withdrawal of products and rising fees.”
The problem for the buy-to-let market is that as borrowing becomes harder, the returns being offered have also been affected by the uncertain housing market.
Buy-to-let landlords rely on capital appreciation of their properties to make money and, with house prices either stagnant or falling depending on which data you believe, this is no longer a guaranteed investment strategy.
The latest figures from both the Nationwide Building Society and the British Bankers’ Association suggest the housing market is slowing down.
But Andy Wiggans, director of mortgage products at Bradford & Bingley, says the buy-to-let market is counter-cyclical: when house prices falter, it normally means more renters and so better returns for landlords.
“The market is not flying but demand has not tailed off too much. The prime reason for buy-to-let is capital appreciation, but most see this in the long term over a few cycles, so a short-term downturn shouldn’t affect the market too much.”
A flourishing rental market could now be the saviour for landlords. Fionnuala Earley, Nationwide’s chief economist, says: “You’d expect some dampening because of what is happening in the market and there is greater caution among lenders. But tenant demand is still there and still strong and so we don’t expect a market crash.”
Paragon Mortgages believes the softening market is actually allowing buy-to-let landlords to add to property portfolios. Its September buy-to-let index shows demand for rented accommodation is running at record levels as potential housebuyers defer, placing upward pressure on rents.
The research says rents grew 2.4 per cent over the past year and rental yields remain steady at 6 per cent. The index indicates that landlords plan to increase their portfolios by 5 per cent over the next year, with the average portfolio expected to be worth £1.5m by summer 2008.
Arla’s quarterly survey last week also showed rental demand was outstripping supply in all areas of the market.
It revealed that more than half of buy-to-let investors expected to increase portfolios over the next 12 months, partly because many have relatively low loans on their existing investment properties.
Only 28 per cent said they would certainly sell some property, while 10 per cent said they would sell out of the sector altogether.
“The days of cleaning up are gone but that’s hardly surprising,” says an Arla spokesman.
“The average investor is in it for the long term, and that is what is going to keep this market going.”
