SPECIAL FEATURE: The future of buy-to-let
David Catt, chief operating officer of Hometrack, assesses the prospects for buy-to-let as new rules continue to come into force
Last month saw the introduction of the 3% stamp duty land tax surcharge. The government announcement has led to huge amounts of speculation and reams of column inches in the past few months discussing the potential impact on buy-to-let landlords, house prices, housing supply and the wider housing market.
It seems the current landlords targeted by the new rules have been paying close attention to the debate and moved quickly to beat the deadline. Buy-to-let lending for home purchase has totalled £4.3bn in the three months to February 2016 according to CML, up from £3.0bn in same period a year ago as landlords rushed to push transactions through. And that is just the start of the upheaval. From next year landlords will no longer be able to offset all of their mortgage interest against their tax bill and lenders are also in the process of tightening lending criteria on interest-only mortgages and BTL lending more generally.
So how will these changes land and what will be the impact? Well, of the 5.2 million privately rented homes in the UK, approximately 3.7 million (71%) are currently owned by private landlords. Private investors account for circa 1 in 5 residential sales and these purchases are split roughly 50:50 between cash and mortgage backed buyers.
The overall growth of house prices is positively correlated to the size of the private rented sector too and the Bank of England has concluded there is no evidence of ‘dual’ pricing or systematic over paying for property by investors. This leaves us in no doubt that, although maligned by many, BTL is an important strategic pillar maintaining the stability of UK house prices. Believe it or not policymakers are treading carefully as a result.
Most likely the changes will usher in a period of consolidation for private investors and the amount of BTL take up will plateau. Consequently there will be a slower rate of net growth in rental supply as landlords re-size their portfolios to manage their new tax liabilities – especially in low yielding markets. BTL will remain an attractive option for many of the perennial reasons we have seen over the years i.e. strength of cash-flow, the option for leveraged investment and portfolio diversification.
However, the investment risks remain in the shape of high entry and exit costs, the fact property is an illiquid asset, concentration risk, increased operating costs and regulation and the reduction in interest tax relief. BTL will still seem as an attractive option by many but it seems much of the government’s work in this area is to make it less of a ‘no-brainer’ and tip the balance a little towards first-time buyers.
Concerns remain though. In the near term we will have to wait and see what will happen once interest rates rise or funding costs increase. This is likely to be detrimental to the attractiveness of BTL vs. other assets and this in turn could impact house price growth expectations. Perhaps another concern is that these market, fiscal and regulatory trends may well see investors move up the yield curve into riskier property markets looking for value.
If investors move into properties with lower capital values to chase a higher yield they are opening themselves up to house price fluctuations that could cause problems for the housing market as a whole. That is not to say there isn’t an opportunity here, but the risks will need to be managed carefully by landlord and lender alike.
It’s crucial that those that move up this curve assess the risk profile of their current book as well as recent originations and consider additional data to make informed decisions. Factors such as yield, true achievable rent and the overall prospects for the market will need to be carefully considered by anyone looking to construct a coherent BTL business plan. For many years BTL has proven to be a sound investment and while the landscape may have changed recently with good quality data analysis and a clear view of the prevailing market trends BTL investors and lenders still have a huge part to play in the continued health of the UK housing market.