Buy-to-let or lend-to-lose

25 August 2009

Once upon a time buy-to-let was celebrated as the next best thing to sliced bread.

The money pages of the nationals hailed it as the perfect pension safety net as a particularly nasty bear market seriously damaged the profitability of pension funds.

It was a win-win situation because investors jumping on board the bandwagon drove up house prices, so in addition to an income stream from the rent, the investor could look forward to a bigger pot of gold at the end of the rainbow when it came to selling up and retiring to a villa in by the Med.

Moreover, rising property prices made it difficult for aspiring homebuyers to get a foothold on the housing ladder, leaving them no choice but become tenants.

But this too wasn’t regarded as a downside, even by the building societies who owe their origins to hardworking artisans clubbing together to build homes of their own back in the bad old days of the industrial revolution when most people lived in rented housing hurriedly thrown up by speculative builders.

So the building societies wanted a slice of the action too and why not? The perceived wisdom was that buy-to-let was counter cyclical, so that if there was a downturn in the housing market more people would defer the decision to buy and turn to rented accommodation.

This in turn, pundits reasoned, would encourage more buy-to-let landlords to come into the market, attracted by lower entry costs and by a tide of new tenants who were either deferring the decision to buy or who had lost their homes as a result of repossession.

In addition there was the ethical argument – the growth of buy-to-let was supposed to be for the greater good as the social rented sector declined, giving people, especially the young, more tenure choice and perhaps increased job mobility at the front end of their careers.

In short the market was fuelled by an irrational exuberance, to the extent that Bradford & Bingley gambled its future on becoming a specialist buy-to-let lender and West Bromwich Building Society even became a landlord with a portfolio of around 1,000 properties.

As assets go, property is fairly illiquid – it’s a tough market for both landlords and lenders to exit when things start to go wrong. Indeed, the now nationalised B&B has recently posted first half bad debt problems of £328m with £270.8m being put down to fraud and professional negligence.

Building societies have been suffering too – some terminally – so does buy-to-let represent a no win situation for lenders, whatever their position in the market?

I’ll be exploring the issues in more depth in the October edition of Lending Strategy. In the meantime it is worth noting that a few of the specialist buy-to-let lenders are still in business though just how much the market has shrunk can be judged by Paragon’s HI results (reported in March). These show completions down from £855.6m in 2008 to £10.7m this year but to be fair Paragon’s funding model left it very exposed to the current credit crisis.

And in the last few days the Coventry’s HI results show that not all building societies are tarred with the same brush. In the six months to June it grew its balance sheet with net lending of £338m while others saw their mortgage books shrink.

Its arrears figures look good too, even in the buy-to-let sector where its portfolio, valued at £2.9bn, represents 22% of its mortgage book. However, it has negligible exposure to the higher risk city centre flats and loan portfolio markets, and insisted from the start that all buy-to-let borrowers had substantial deposits.

As a result it reports that its buy-to-let mortgages are continuing to perform exceptionally well and “substantially better than industry norms”.
It adds, “At 30 June 2009, just 0.68% of buy-to-let cases were more than three months in arrears – only 27% of the CML average of 2.49%.”

Perhaps the rest of the market should be sent to Coventry?