I was fascinated recently to see John Heron, managing director of Paragon Mortgages, warning in Mortgage Strategy that a potential housing crisis was brewing.
He said it could lead to renters being priced out of the market, adding darkly that a shrinking owner-occupier sector, lack of new homes and fewer social rented homes has put tenant demand at an all-time high.
But it could equally be argued that buy-to-let landlords have priced first-time buyers out of the market. And that’s hardly surprising while their investment is subsidised by £1.9bn a year in mortgage tax relief and their rents inflated by £19.8bn housing benefit and that’s just to 4.8 million recipients.
When Gordon Brown as chancellor abolished Mortgage Interest Relief at Source for roughly double that number of home buyers back in April 2000 he saved around £14bn. But the move wasn’t prompted solely by the desire to save public money it was widely held that a state subsidy of that order fuelled house prices and distorted the market and tenure choice. Surely the same logic applies to the private rental sector.
Given its small size, the huge sums being lavished on it and the increase in the housing subsidy it has leapt from £11.18bn in 1997/98 that distortion is all the more pronounced. It is no wonder so many people are jumping on the buy-to-let bandwagon. The problem for Heron’s buy-to-let landlords is that there is not enough property around to satisfy their appetite for what they see as an inflation-busting return.
But while rents have been moving faster than the consumer prices index, the link between housing benefit and housing costs which has supported this development is scheduled to come to an end. And that could present another and possibly more serious problem for the buy-to-let sector.
The government is planning to save £1.76bn on housing benefit by 2014, according to a House of Commons Library paper and the implications of the June 2010 budget and October 2010 Spending Review.
As interest rates can only go up perhaps we are looking for a correction in the market. A correction might or might not be a cataclysmic event but some observers believe it is already becoming difficult for landlords to reap the levels of return projected by lenders like Paragon and Nationwide, and that is at a time when the base rate is at an all-time low and state subsidy of the sector at an all-time high.
Industry expert Brian Hall is doing some number crunching on this issue and the preliminary figures, even without taking housing benefit into account, look scary.
You can’t blame Heron for arguing his corner and I agree with much of what he says, especially when he cites the need for a co-ordinated housing policy to expand the supply of housing and says this can only come from the government. But I’m not convinced that a big expansion of the buy-to-let market is sustainable or that the population is experiencing a voluntary or spontaneous move away from home ownership to renting.
True, we may be in the middle of a major socio-economic change and, as Heron said, there are many in their early 20s and even their 40s, to honestly reflect a recent Halifax survey he quoted who are without spare cash and savings, and who haven’t a hope in heaven of getting on the housing ladder.
However, all things being equal would they prefer to rent or own? Of course renting offers a valuable alternative to homelessness or living with parents but the downside is that it has tended to grow at the expense of first-time buyers who don’t have the benefit of mortgage tax relief or even the sympathy of lenders such as Nationwide which incidentally started out life as the Co-operative Building Society with the laudable aim of helping working class people become home owners.
Given that ethos one wonders what its founding fathers would have made of a statement on April 22 by Matthew Wyles, group distribution director of Nationwide, who said he would rather lend at 75% LTV on buy-to-let to an experienced investor than to a 22 year old plumber who wants a 95% LTV loan.
If Nationwide, a beacon of mutuality and one of the country’s largest lenders, would rather not lend to a skilled tradesman then what hope is there for a generation burdened by student debt, limited job prospects and job insecurity, and interest rates so far below the rate of inflation that saving for a deposit is a fairly futile proposition?
So Heron is right unless everyone involved in housing starts working together to address the problem and build more homes, rents could rise beyond acceptable levels and lead to people being priced out of the rental market.