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The amateurs may ruin it for us all

Kevin Paterson says that it&#39s time to regulate the booming buy-to-let market or face the real prospect of watching it go bust, with serious consequences for the economy as a whole. The combination of lower interest rates, ever-decreasing annuity rates and a more volatile stockmarket has caused investors to look for alternative sources of income. This has resulted in an unprecedented boom in the buy-to-let market. Anecdotal evidence suggests that more than two-thirds of these investors are new or amateur landlords. This fact alone brings a whole new set of problems and complications to a crowded market that – though the pace may be slowing – has witnessed frenetic and uncontrolled growth.

So should the buy-to-let market be regulated? After all, the knock-on effects to the rest of the residential housing market could be significant. The position of the Council of Mortgage Lenders is that the practice of buying-to-let is commercial and, therefore, outside its scope. There is, however, a strong argument in favour of regulation – perhaps applicable only to amateur landlords with, say, fewer than six properties.

As a national firm, Park Row Independent Mortgages is well placed to observe trends in property purchase across the country. One of our specialist buy-to-let mortgage advisers Paul Singleton, based in Selby, comments that there has been a shift in buy-to-let purchases further north and that this is being driven by southern buyers. Very often these investors are &#39buying blind&#39, with little or no local intelligence, only to find that they either cannot let the property for the required rental income or, indeed, that they cannot let it at all. Quite often the property is fundamentally wrong for letting – due to its poor location or poor condition. As a result, Paul has set up a letting agency to advise would-be landlords of the most appropriate areas in which to buy, available properties and likely rental yields. He then helps them to get a tenant.

This migration has been partly encouraged by lenders in the South reducing the amount they will lend. This is because the price of the property versus the rental yield no longer fits the mould on an 80% or 85% model and bigger deposits are therefore required. Given that a lot of amateur landlords invariably borrow more from their own residential property to raise the deposit, it is easy to see where the problems could arise.

Potentially more at risk are the serial amateur landlords who buy two or three properties in one go, raising the deposit each time by lifting the gearing on their existing properties. This leaves little or no margin for a downturn in property prices. So these buyers then have to lower their rental expectations (due to the surplus of rental properties available) just to get a tenant. The resulting lower income stream puts further pressure on the landlord, who may have mortgaged his own property to the maximum in order to buy the property for letting. An upturn in interest rates, combined with a drop in rental incomes, can be very dangerous to the &#39over-exposed&#39 landlord.

This is a difficult area to police as the majority of buy-to-let mortgages are on a self-certification basis, with the anticipated rental income being the only real guide to affordability. How many amateur landlords are aware that they are personally liable for any shortfall if the property has to be sold? The &#39saving grace&#39 for the landlords who have made mistakes over the past two years is that rising property prices have enabled them to re-sell, bail out and still come out on top. However, with prices peaking out in many areas, this option will soon disappear.

Another question that has to be asked is whether you would trust your family to an amateur landlord? Amateur landlords are na•ve when it comes to managing their rental property – with more than 50% of them choosing to &#39self-manage&#39.

From the landlord&#39s perspective, the &#39worst-case scenario&#39 would be to end up with the &#39tenant from hell&#39 and absolutely no protection. But there is a worse scenario still. Many landlords are blissfully unaware of their obligation to protect their tenants – by complying with fire regulations, ensuring that there have been adequate checks on gas appliances and that regular or routine maintenance works are taken care of.

Often, these landlords also let properties that were originally residential purchases (with residential mortgages), without informing either the current lender or the insurance company. This potentially compromises both landlord and tenant and leaves the lender or insurer exposed. Given that it will inevitably be part of any mortgage contract or insurance policy that a &#39change of use&#39 (or occupation) must be notified, failure to do so will have legal consequences.

A further, more disturbing consequence of the decrease in rental incomes is that more and more landlords are seeking to maximise the returns on their investment by letting out properties on a room-by-room basis. HMO&#39s (houses of multiple occupation) are becoming increasingly common in areas where rents are being forced down. In these cases, alarmingly little regard is being paid to the requirement to notify both the existing mortgage lender and the insurer. This can mean that strict fire regulations (a requirement of letting an HMO) are ignored – a potentially life-threatening development.

The real concern is not with the professional landlords (who usually work to very high standards) but with the growing army of amateur landlords who see owning rental property as a &#39simple&#39 alternative to investing in a pension or ISA. These are the people who often have little or no understanding of the complexities of the market.

If the unregulated boom continues unabated, the likely outcome is that the amateur landlord army will provide a glut of un-lettable property and lower the overall professional standard of the industry. (This is a real paradox at a time when there is a real shortage of affordable housing in certain parts of the UK.) The &#39worst&#39 outcome is that they could put lives at risk and expose themselves to financial ruin.

The CML must grasp this nettle. Perhaps this could be in conjunction with ARLA (the Association of Residential Letting Agents) and the NFL (National Federation of Landlords). To adopt the blanket position of “this is a commercial transaction and, therefore, the simple rule of &#39let the buyer beware&#39 (&#39caveat emptor&#39) applies” is not good enough. The housing market is the driving positive force in the whole economy. If the influence of an unregulated buy-to-let boom causes it to go bad, the consequences will be far-reaching and will impact on all of us.

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