Buy-to-let – Dead as a Dodo, or just resting?
Jonathan Moore is head of credit at Dudley building Society.
It might be a case of understatement but there is little doubt that the buy-to-let market has undergone a significant period of change. The introduction of higher stamp duty, removal of the 10% wear and tear allowance, announcement of the reduction of tax relief for higher rate borrowers from 2017, and even Brexit, have already had an impact. Few market commentators would suggest that the market today is as confident as it was 18 months ago.
Looking to the future, it is clear that there are other clouds on the horizon. The upcoming Bank of England changes to underwriting standards will create a further tightening of the market. Brexit could also result in an outflow of the EU migrants who have been a cornerstone of the tenant market in the last decade. Finally, an ever tightening approach to legislation, designed to improve standards for tenants, could result in some landlords finding that they either don’t qualify for the loans they want, or it is all too much trouble if they can borrow.
So is the market doomed to wither away to a shadow of its former self? I don’t think it is.
Firstly, we Brits have an almost insatiable love affair with property. The baby boomer generation has done fantastically well out of property, and although that generation’s borrowing appetite may now be coming to an end, successor generations will have grown up seeing the financial benefits that owning property can bring.
Secondly, pension freedoms have the potential to unlock the capital needed to form deposits for those old enough to access it, but also have the potential to make the world a much more complicated and scary place for the majority, those with insufficient funds to be able to access affordable bespoke pension advice. For many of these, buying a property will be far simpler and understandable than trying to navigate their way round equity-based investment decisions for which their experience in life does not equip them.
Thirdly, Brexit notwithstanding, the fundamentals of the tenant market remain strong. Even the most optimistic commentators have little expectation of house building matching demand any time soon. For as long as demand outstrips supply, property will remain unaffordable for many, a situation made worse by many lenders continuing to only have an appetite for low risk, high deposit, vanilla applicants. People unable to access the mortgage market still need homes, and the private rental sector will be where many of them turn.
Finally, whilst some of the changes outlined above present challenges, they could in time prove positive for those who continue invest in property, making property investment even more appealing. Better underwriting should result in borrowing being more sustainable, and borrowers being more able to withstand shocks. Legislatively induced improvements to the housing stock should lead to happier, longer term tenants. A reduction in buy-to-let applications is likely to lead to greater competition and product innovation, which should result in more attractive mortgages for the borrower.
The near future might be a little uncertain, but property is durable, tangible and certain to have ongoing appeal. The buy-to-let market will endure.