The buy-to-let market has become the topic of the moment. The CML estimates that £14.7 billion has been invested in buy-to-let in the past six years and outstanding balances were estimated to have reached £600 billion by the end of 2001. Headlines everywhere shout of the 'Buy-to-let boom coming to an end', 'Buy-to-let reaching saturation point' and talks of the bottom dropping out of the buy-to-let market.
Just last week the Sunday Times' influential Money section splashed its front page with news of the demise of the buy-to-let market. Is this a realistic evaluation of the current market situation or is it just a good story to fill the financial pages of the newspapers?
It is true that buy-to-let has taken off at a rate that could barely have been anticipated back in 1988 when the laws changed, giving greater protection to the private landlord. But then market specialists hardly predicted the present downturn in the stock market and the sustained low-interest-rate environment that we are experiencing.
Investors are worried about the value of their pension funds and other investments and feel that bricks and mortar provide a safer option. There is a sense of security in being able to drive round the corner and look at your investment, especially when you can almost see it rising in value.
However, rising house prices are a double-edged sword. Rents have doubled over the past ten years and house prices have increased by four-fifths. But house prices are now rising at a rate faster than rents so borrowers continue to make money on their investment, while rental yields drop.
The demand for buy-to-let properties is regional. London, it is true, is reaching saturation point. Large numbers of properties have been bought in London, relying on the commercial market, but demand has dropped and landlords are finding it increasingly difficult to get tenants. Other areas are not finding it so challenging however; places like Bristol and the north of England are seeing strong demand.
As house prices vary from region to region, so does the rental yield that an investor can expect. Where yields in London can be as low as 4-5%, in the north of the country, where house prices are significantly lower and rental yields have remained stable, yields of 10-12% can still be found.
The old adage of 'location, location, location' holds even truer for buy-to-let than for residential properties. Brokers should be advising their clients to look very carefully at the area in which they are hoping to buy. Bristol & West Mortgages thinks investors should consider the kind of tenants they are hoping to attract and then look at demand in that area as well as factors such as:
Is the property on a bus/train/commuter route?
Is it near leisure facilities or parks?
Is it near schools / offices / shops?
Some areas will have a glut of supply so it is better to research the demand and avoid these areas.
So where is the demand coming from? The housing market is changing and this will have a significant and lasting effect on investment in property. A more mobile workforce combined with fewer children, rising divorce, rapidly rising house prices and an increasing student population along with other lifestyle changes is dramatically altering the traditional owner-occupied market. These people will be more likely to rent than to buy. There is also a greater acceptance of people living in rented accommodation, even if only for a temporary period. The number of people in privately rented accommodation has gone up by more than 23% in the past 15 years.
In addition, the number of households is increasing while the number of persons per household is decreasing fast. The average age of the first time buyer has also gone up from 21 in 1988 to 33 now, influenced by the high numbers of young people now going to university – and high house prices. In fact, the number of under 30s who are likely to rent is higher than at any point in the past ten years. As the average house price is now over four and a half times that of the average income, the market for affordable rented accommodation for this age group is set to continue rising.
All of these factors are increasing the number of single-person households, which is expected to double over the next 15 years. The government forecasts that an extra 3.8 million homes will be required by 2016, 30% of which are expected to be rented if they are available. There are now more than two million households who rent from private landlords – up by over 250,000 since 1988. Yet if the total forecast demand is to be satisfied, the buy-to-let market will have to nearly double in size.
Who should brokers be looking at? The profile of customers looking at buy-to-let as an investment is predominantly that of a younger customer who has a mortgage. It is especially popular with those in the 31-to-40 age group, closely followed by those aged 41-50. A survey by Mintel found those considering it most favourably were either wealthier males living in the south of the country or well-off families aged between 25 to 34. They also found that 42% of consumers would consider buy-to-let as an investment.
The market is also split between borrowers with just one property and professional investors with large portfolios. Many private investors are using buy-to-let to supplement their income as part of their longer-term investment planning while there is a growing demand from people wishing to increase their investment and purchase up to ten properties, a development that Bristol & West Mortgages has recently catered for by doubling their offering to ten properties with a maximum total borrowing of £1 million.
While the average buy-to-let property is of a lower value than the average residential property, the average loan size is larger. The sensible advice for brokers to be giving their clients is to consider a buy-to-let investment for the long term. Over that long term, house prices will invariably rise and investors should see a good return on their money.