Without a doubt, 2007 was an important year for buy-to-let (BTL).
On the back of successive years of continuous growth it was on the verge of becoming more of a mainstream area of the industry than ever before and shedding its specialist lending shackles.
The year started off well and BTL’s march into the mainstream arena seemed to be gathering pace as more lenders moved into the market.
In order for these lenders who were new to BTL to gain market share they needed to be competitive and so began struggle for supremacy between lenders.
Suddenly rental calculations – previously traditionally set at 120 per cent – started to tumble and it wasn’t long until 100 per cent seemed the norm, but it didn’t stop there.
Soon enough we were seeing below 100 per cent rental calculations – the lowest I recall was 75 per cent from Unity Homeloans. This trend in loosening criteria also continued with rising loan-to-values (LTV), and although not as dramatic as the change in rental calculations, we did see a good 5 per cent on average.
So, was this oversaturation and competition in the lending arena good or bad for BTL?
No simple answer
Unfortunately there is no simple answer to this question. As a professional landlord, you can’t argue with getting a cheaper deal. The loosening in criteria provided ample opportunity for portfolio remortgaging and expansion.
After all it was easier to release more equity with increased LTV and take considered risks on properties that in the short term would not produce decent yield but certainly had the potential to in the near to medium future.
However, the loosening in criteria led to the rise of the amateur landlord. Suddenly you didn’t need a sizeable deposit for a BTL property, and the masses of inexperienced wannabe landlords, spurred on by the media and the need to provide financial security in retirement to replace their ailing pension plans began their assault on the market.
Good for lenders, bad for professional landlords. More competition for properties and lower yields due to the sheer number of properties now available for rent made the BTL arena very frustrating for the professional.
At this point it seemed as though BTL really had hit the mainstream market, and then came the credit crunch.
Unpublicised effects
While the credit crunch was busy systematically destroying the non-conforming market, the knock-on effects to BTL passed by largely unpublicised. The once loose criteria in combination with the rising interest rates meant criteria tightened up even faster than it had loosened just months before.
The more cautious attitude adopted by lenders saw rental calculations rise back up to an average 110 per cent and LTV settle around the 85 per cent mark. This was followed up by an increase in fees; BM Solutions, for example, increased fees on several of its two and three-year trackers to 3 per cent of the advance, and both Mortgage Trust and Paragon completely withdrew their tracker ranges.
All in all, I’ve heard quoted that 20 per cent of all prime BTL products were withdrawn between early September and mid-October. Despite the upheaval from credit crunch, BTL still showed positive growth throughout 2007 its market share grew from 11 per cent in 2006 to 12 per cent of all advances in the first half of 2007.
So, what can we expect for 2008 and what effects will the events of 2007 have on this?
Another good year ahead?
Despite a general consensus of a downturn in the rest of the market it seems as though the experts believe that BTL will not suffer as badly as the rest of the market, with gross advances set to fall from £25 billion in 2007 to £22 billion in 2008. Although this is downward, it’s still higher than 2006 and 2005.
As expected in the rest of the market, remortgaging will be on the up with BTL remortgaging set to rise by £5 billion in 2008.
In my opinion 2008 will be another good year for BTL. To start with, we have a well-documented gulf in supply and demand, employment is at its highest for a very long time and in an historical context, interest rates are low and will get lower, if only slightly, through 2008.
One thing that is for certain is that the credit crunch and the subsequent collapse of the non-conforming market will see an increase in repossessions, with research by Experian predicting them to reach a 15-year high.
While bad news for the individuals involved, the increase in repossessions are positive for experienced BTL landlords. These properties will, of course, be back on the market and BTL investors will be looking to make the most of a flood of relatively cheap properties onto the market.
There will also be a lot of amateur landlords getting cold feet about the potential of their investments and looking to offload properties – again, easy pickings for the experienced BTL investor.
Not to mention that those that are forced into repossession will need to live somewhere, so I predict a continued supply problem in certain market sectors as the affordable housing sector continues to struggle with the lack of reasonable stock to rent.
2008 is a year where advisers should be finding ways to meet professional landlords and build new contacts. Why not attend a local house auction? You are bound to meet investors and it should be an ideal place to network and learn about the local market.
A potential blot
The only potential blot on the landscape is the change in the local housing allowance. From April 2008 all new claimants will have the way benefit is paid treated differently.
Up until now, once set up, the benefit could be paid directly to the landlord. From this date, new tenants’ benefits will have to be paid to the tenant and then passed onto the landlord.
This, of course, at the lower end of the market could potentially lead to greater arrears as some tenants will utilise these monies for other things. These changes will also affect existing claimants if they decide to move to another property.
So, for 2008 I believe BTL will go back to its roots, as a specialist mortgage market for a specialist market of investors. However, BTL will continue to grow as the market re-adjusts itself.
The part-time amateur landlord will become only a niche area of the wider BTL market as cautious lenders go back to realistic products to maintain margins to support the rest of their business.
Yes, the market will be tighter and yes, mortgage products won’t be as competitive, but the market will be full of opportunity for those who know where to look, and how to make the most of it.
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