Posted by: Jules Birch26/09/2011
Saturday was the 15th birthday of something that will have had some people reaching for the cake and jelly and others hoping they choke on it.
So it’s happy birthday to buy to let, which was officially launched by the Association of Residential Letting Agents (ARLA) on 24 September, 1996.
The timing alone ensured that the idea would quite literally offer many happy returns to early investors who could benefit from plentiful mortgages secured against the rents of properties that would rocket in value over the next 11 years.
The number of buy-to-let loans outstanding soared from just 28,700 in 1998, when the Council of Mortgage Lenders (CML) started recording the figures, to 1.3m last year. By value they increased from £2bn to £151.5bn by 2010. The strongest growth happened between 2000 and 2007.
In the process the private rented sector in England doubled from 2m homes to almost 4m and the proportion of people living in it increased from 10.1% to 15.6%.
The other side of the coin is what happened to first-time buyers. There were 465,000 in 1996, rising to 568,000 in 2001. However, their numbers fell to 370,000 in 2003, 360,000 at the height of the boom in 2007 and just 192,000 as the credit crunch hit in 2008.
Defenders of buy to let claim that the private rented sector might have died without it and that it actually helped to stabilise the market and prevent repossessions by providing an alternative housing option for young people who would otherwise have been over-stretched borrowers with homes at risk in the downturn.
Opponents claim that buyers of second, third, fourth and nth homes simply inflated house prices beyond the reach of people attempting to buy their first.
The truth is a bit more complicated. The introduction of assured shortholds in 1988 had already started the private rented revival. The tax system encouraged investors to look at housing as an alternative to pensions and savings. The increase in buy-to-let lending was part of a much bigger boom in mortgage lending that priced people out of the market.
But the shift in the market is undeniable. Many people thought the credit crunch would kill off buy to let. Fergus and Judith Wilson, the ex-teachers who bought 700 homes, said it was ‘absolutely dead and will never return’ in 2010.
Instead, it appears to have returned from the grave. The number of new buy-to-let mortgages has been rising every quarter since the start of 2010 even though the total is still only a third of boom levels. Three-quarters of buy to let landlords are said to be planning to expand their portfolios. Buy-to-let mortgages are available from everywhere from the Cooperative Bank to the Bank of India.
In contrast, the number of loans to first-time buyers is actually down on last year and many of those who miss out are stuck paying far more in rent to a buy-to-let landlord than they would be paying in interest on a mortgage (if they could get one).
And the high house prices generated by the lending boom have in turn put off the one group of investors with enough cash to finance the sort of build to let programme that might change those dynamics.
Pension funds finance much of the private rented sector in other European countries (and used to here too). However, as the Financial Times reported over the weekend: ‘Income is what long-term investors such as pension schemes are on the lookout for, particularly during bond market crises, but strong capital appreciation in the UK residential property market in the past has pushed down yields.’
So happy birthday buy to let. Sorry I forgot to send a card.
From Inside edge
Housing commentator Jules Birch puts the latest news in context