The buy to let business has been of real interest recently. There was a lot of concern for the future with the new legislation last year, and fears that the market could become depressed and start to falter. However, according to the latest Property Investor Surveyor, 44% of landlords were described to be ‘unperturbed’ by the new affordability calculations and specialist underwriting rules introduced by the Prudential Regulation Authority.
The report suggested that as many as 48% believed they had not been affected by the new affordability and tax changes, but did caution that this could be because some landlords have not yet applied for finance since the guidance was introduced.
While legislation might alter the dynamics of the market that many people are accustomed to, a change of this kind can present new opportunities and force those within the industry to adapt their approach in order to continue to thrive. Over the last year I’ve been keeping a close eye on market developments and a few trends have been quite revealing.
In January I read a good article in Mortgage Introducer, about the potential surge in the buy to let business which many are predicting will occur this spring. April 2018 is precisely two years after the clamour to get deals done before the 3% stamp duty surcharge was introduced. A significant number of landlords took out two year fixed rate deals, and could very soon now be making plans to refinance.
The article reported that the estate agent chain Haart saw a 35% increase in property exchange activity in the week before the regulation was enforced at the beginning of April 2016. With the recent predictions of rate rises later this year, buy to let landlords may well be looking to lock in their rates for the foreseeable future.
An alternative view was that less experienced landlords might decide they want to cash in and move on. They may decide to sell, rather than continuing in a period of tighter controls and reduced short-term profitability. This could increase the amount of available property on the market.
Pensions for the young
Is property still a good long term investment? While stock market values have been steadily increasing over the last two years, the recent falls have been a clear reminder about volatility. Is property about to become fashionable again? Research from the Commercial Trust showed that only one segment of the buy to let market (the 20-40 age group) has continued to increase since 2015. One explanation is that younger people may think it more worthwhile to invest in bricks and mortar than in other asset classes such as shares and government or corporate bonds.
The largest market share is still held by the 40-49 age group, which consistently accounts for just under a third of all purchase applications. In addition, with the increased cost of university education, some in the parents in their mid-40s are opting to buy a property for their children at university and use the extra income from rented rooms to subsidise this increasingly significant cost.
Maybe property and buy to let is starting to become a major part of long-term investment portfolios amongst the young?
Portfolio Landlords Struggle
While some market segments are reporting positive sentiment, other parts of the industry are clearly feeling the pain. According to Foundation Home Loans, nearly three-quarters of portfolio landlords have found it more difficult to secure a mortgage since the PRA changes were introduced. The study found that 70% of landlords with four or more buy to let (BTL) mortgages have found it hard to obtain finance, and 51% of those with three or fewer BTL properties said the same.
As with all new regulation there will be a period of difficulty as people adjust, so it’s important to look at the long term trend rather than to read too much into the immediate response. The change in regulation could drive out inexperienced landlords, leaving a higher concentration of professional ones who see property as a full time occupation. According to research from the Intermediary Mortgage Lenders Association, just over a fifth (21%) of landlords have indicated that they plan to reduce the size of their portfolios.
It will be interesting to see how the market develops over the next year.
I mentioned in last month’s article that I feel the industry is currently relying too much on robo-advice and artificial intelligence to make mortgage application decisions. I believe that lending decisions are becoming more complex with the change in working patterns, the uncertainty over Brexit and regulation. This particularly applies to buy to let, as regulation has left everyone sailing in unchartered waters.
That’s why I think experienced lenders with the flexibility to review complex cases will continue to be in high demand over the next year. So while these are certainly challenging times it is still possible to lend successfully in the buy to let sector.