Be grateful for buy to let?

The claim in a report for the Association of Residential Letting Agents (ARLA) yesterday makes you wonder how much worse things might be now if the organisation had not invented the idea.

Housing starts are at their lowest since the 1940s, mortgage lending is at levels last seen in the early 1970s and house prices are falling at the fastest rates since records began. Thank goodness a bunch of selfless investors were prepared to shoulder the burden and prevent real instability.

The report claims that the modern private rented sector is helping stabilise housing because it accommodated people who would otherwise be over-stretched borrowers with rising negative equity. And it says a re-run of the 1990s, when negative equity prolonged the recession, is less likely as a result.

‘It was as a result of the appalling effects on young owner occupiers last time that ARLA took the initiative and launched buy to let to re-build and re-finance the private rented sector and to mitigate the dreadful social consequences of housing boom and bust,’ said ARLA head of operations Ian Potter. ‘It has proved to be remarkably successful.”

Successful? The boom in buy-to-let mortgages from none to over a million testifies to that. Mitigating the effects of boom and bust? Even if predictions of falls of up to 35% in house prices turn out to be true, ARLA could still claim that buy to let stopped more first-time buyers getting into the market over the last five years. The problem is that it also contributed to that boom and bust.

Much of its analysis is sound. Countries like Germany with a bigger private rented sector where people buy a home later in life do have more stable housing markets. The private rented sector does have a key role to play  providing good quality affordable homes and giving investors a reliable, long-term return and, yes, in stabilising the housing system. One of the fundamental causes of the boom was the collision between rising affluence and inadequate new supply.

Where it’s wrong is that, unlike the British Property Federation’s recent proposals on build to let, buy to let has had a negative impact on supply. Off-plan investment by buy to letters combined with planning rules pushed housebuilders into disastrous over-provision of inner city flats that now cannot be sold. And buy-to-let investment in the existing stock pushed house prices upwards long after first-time buyers could no longer afford them.

As the report acknowledges, ‘housing investment is driven by the prospect of capital gains’. Combine that with a tax system that encourages new landlords to borrow as much as possible to buy (because mortgage costs are tax deductible but up-front payments are not), the availability of easy credit and poor returns from other investments like pensions and you had a perfect recipe for a boom - and an inevitable bust. 

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