The end of 2006 saw yet more rumbling about the possibility of a housing market crash, with the suggestion that history could be about to repeat itself as house prices grew to six times average earnings for the first time since 1988.
But the housing market has altered radically in the last 20 years with the growth of both the sub-prime and buy-to-let markets.
There are varying opinions as to whether the buy-to-let market is as much at risk as the wider housing market or whether it is almost immune, and that it is in fact the sector that will sustain the housing market at some level in the event of a slump.
Regardless of whether distributors, lenders and brokers take a positive or negative view of buy-to-let, all are probably best advised to review their strategies and shore up their place in the market.
The latest Halifax house price index says that while house prices fell by 1% in December, they were still 4.2% higher in the fourth quarter of 2006 than in the third quarter.
Martin Ellis, chief economist at the Halifax says: “Continued economic growth, rising employment and an ongoing lack of supply will continue to drive up house prices over the coming months. Higher interest rates, greater pressure on household finances and subdued real earnings growth will, however, constrain housing demand. We expect house prices to increase by 4% in 2007.”
So this is a cautious but not particularly downbeat view of the market, and it could be argued that itis a positive one for buy-to-let, even if it means landlords are not increasing their portfolios in terms of additional properties. But even this is in question.
The focus, of course, has to be on tenant demand, on which Paragon, in its latest buy-to-let index, has positive views. The index cites HM Treasury estimates that new immigration will continue at an annual rate of between 185,000 and 190,000 over the next three years, bringing with it a steady supply of new buy-to-let tenants.
But however bullish those in the market may be, the consensus view is that it might not be enough.
“Buy-to-let mortgages represent around 8% of mortgage transactions, according to Council of Mortgage Lender statistics for 2006, so this would translate to the approximate percentage of buy-to-let ownership,” says David Whittaker, managing director of Mortgages for Business, “Conversely, the buy-to-let market is dependent on residential activity in the housing market and not vice versa. If the residential housing market were to experience a downturn the buy-to-let market would follow suit.”
Buy-to-let fulfils an important function within the housing market, giving individuals a real choice of lifestyle, says Bob Stanworth, senior product manager at Bristol & West Mortgages, although he adds: “The UK benefits from around 70% owner occupancy and 30% rented, of which about one third is supplied by the private rented sector. Buy-to-let purchases probably account for about 10% of all new purchases and therefore it does not seem likely that, in itself, the housing market is reliant on the success of buy-to-let.”
Martin Reynolds, director of corporate accounts at edeus, agrees. “Although buy-to-let is an important and growing sector of the market it is yet to reach such a size that its future performance or lack of it will destabilise the mortgage market. Commentators that espouse this view are incorrect,” he says.
So it is every sector for itself. Within the whole, therefore, is the buy-to-let market sustainable?
Jonathan Burridge, director of Quantum, argues the buy-to-let market is as sustainable as all other sectors of the industry. “It has enjoyed a prolonged period of prosperity. However, if rental yields fail to keep pace with property prices and interest rates rise, there could be clouds on the horizon. This said, our industry is extremely innovative and so long as demand exists there will be a willingness to provide a solution.”
But the peculiarities of the buy-to-let market are such that it can benefit where the mainstream residential market may lose out.
“The housing market is thriving currently, and many have decided that bricks and mortar are a dependable way to invest,” says Payam Azardi, head of marketing and corporate relations at The Mortgage Times, “The sustenance of the market is obviously dependent on economic stability. A lot has been said about the current Labour government but one consistent factor is that economic growth has continued throughout its tenure. This has led to a growth in jobs and, in turn, a need for rented accommodation, and I don’t envisage any slowdowns in this trend, so sustainability in the market looks healthy.”
While there has been an influx of tenants as a result of immigration, other social factors have had a part to play as well, as Reynolds states. “People are leaving it later to get married and settle down,” he says. “They want to be free to move where the jobs and opportunities are very quickly. The rental sector will again satisfy this demand. The student population also shows ” Rental growth fails to keep pace with property prices and interest rate rises and as such there are clouds growing on the horizon”no real signs of reducing. If it is not parents buying for their children and renting out spare rooms it will be professional landlords who will fill the void.”
Whatever the positive signs, with any investment there are some investors who will get nervous – whether this extends to professional landlords remains to be seen. But for lenders, distributors and brokers, the need to have diverse business channels would seem to be common sense.
“From a business owner’s perspective the answer has to be that you are either big or small enough so that the vagaries of the market place will not have a significant impact, or you are sufficiently diverse that a stutter in one aspect of your business will not lead to a fall over,” says Burridge.
David Whittaker agrees that many investors will look to the long term, but he also expects some re-grouping and says some will spread the risk.
“If there is a downturn in demand investors tend to consolidate rather than sell up, and this can lead to increased levels of remortgage business,” he says. “However the majority of buy-to-let brokers will also be active in secondary markets to spread their risk, in Mortgages for Business’s case this would be the commercial mortgage market.”
Riding the storm is the way Azardi sees it as well: “Buy-to-let investing is a serious long-term objective, and the gains made in property prices are healthy enough to encourage further long-standing investment. The healthy growth in the UK marketplace should ensure that a downturn doesn’t take place, but firms having a varied proposition would ensure that any potential stutters could be ridden out.”
The bottom line for the market is what mortgage brokers are going to do and how they do it. If there is a belt-tightening exercise ahead – or a re-focus on pinpointing those professional landlords eager to continue to expand and re-mortgage – streamlining the process of advice and sourcing deals is fundamental.
Increasingly, technology has a huge role to play in the buy-to-let broking market, says Whittaker. “The market has hundreds of products, with a huge variety of availability criteria. The only way to effectively collate this level of information is through the use of technology. In order to provide clients with the most appropriate product in a speedy fashion, technology is essential,” he says.
The point is that technology has to be consistent across the advice, lending and distributing markets. Reynolds says technology can speed the application process considerably and he goes so far as to argue that any lender that does not offer this facility is doing brokers a disservice and affecting their future earning potential. “Brokers should not just be looking at technology. Once they have the business they should be using it to help them originate leads,” he adds. “All brokers should have their own website. Many companies offer hosting facilities at very little cost.”
Distributors have a key role to play in straddling the path between lenders and brokers and facilitating the provision and demand for the right buy-to-let deals in what all agree will be an interesting time for the market.
In the light of recent Financial Services Authority concerns over advice given to borrowers across the market the message of Matthew Wyles, group develop” Distributors have a key role to play in straddling the path between lenders and brokers and facilitating the provision and demand for the right buy-to-let deals”ment director at The Mortgage Works, should be seen as salutary: “We believe that the buy-to-let market will continue to offer opportunities for experienced and astute investors who know what they are doing. But we also continue to be concerned about the activities of buy-to-let investor clubs who generally target naive and inexperienced investors.”
For the rest of the market, Wyles believes competition among buy-to-let lenders will intensify as margins continue to contract and many players will relax lending criteria further in an effort to differentiate themselves.
“The compression of margins will impact most of all on lenders who fund primarily via securitisation,” he says, “These lenders, in particular, will find the economics of the marketplace increasingly challenging.”
All of which leaves plenty of opportunity for distributors.