It is ironic that one of the sectors of the UK mortgage market which has performed so well over the course of the past decade, is beset by so many problems at the moment.
Buy-to-let (BTL) has undoubtedly been one of the great success stories of recent years. Not only has the market grown at a phenomenal pace but, despite prediction to the contrary, it has continued to hold up well.
However, that does not mean it is immune to the many challenges facing the mortgage and housing markets, which include falling house prices, tighter credit controls, weakening consumer confidence and talk of economic recession.
As if these problems were not enough by themselves, the BTL market is also facing a few specific issues of its own.
Rental yields are languishing at about 5 per cent, there has been conjecture that tax relief on mortgage interest paid on residential investments may be disallowed in future, and there are calls by some to regulate BTL in the same way as other residential mortgages.
Unsurprisingly, the combined effect of these issues has been to dampen activity the BTL market.
However, we need to keep the slowdown in perspective. It does appear to be speculative investors who are nervous and holding back and not professional landlords and those with larger portfolios of properties, who constitute the bulk of the market.
Most professional investors are committed for the long term to the housing market and a report published in January 2008 by the Association of Residential Letting Agents (ARLA) shows that 40 per cent of landlords expect to make further investments in the private rented sector during 2008.
Demand driving investment
Landlords are continuing to invest because they understand that demand for private rented property not only remains strong but is increasing.
A report published last Autumn by the Royal Institution of Chartered Surveyors showed that declining accessibility, rising uncertainty and slowing house prices reduced the desire of first-time house buyers to enter the market and, as a result, demand for rented property increased rapidly.
Rising immigration, a need for job mobility and lack of social rented housing are also fuelling the demand for private rented property.
Landlords understand these are long-term factors which will underpin the BTL market for many years to come, and so it is unsurprising that ARLA says that nine out of 10 landlords intend keeping their properties until 2025.
A primarily commercial transaction?
One of the issues being debated within the mortgage industry is whether the BTL market should be regulated on the same basis as the rest of the residential mortgage market.
BTL currently falls outside the Financial Services Authority’s regulatory remit. One of the reasons for this is that BTL is primarily a commercial transaction and not a one being made by ordinary consumers in order to put a roof over their heads.
Therefore, brokers who specialise in BTL do not need to be regulated.
This, however, is seen by many as an anomaly. They argue that many thousands of BTL mortgages are taken out by ordinary people who have a not unreasonable expectation that their BTL application is subject to the same regulatory controls as their residential mortgage.
They also argue that most brokers span the divide between residential and BTL mortgages and it therefore makes sense to have a single regulatory regime which encompasses a broker’s entire mortgage advisory portfolio.
Fundamental questions
As logical as these arguments may appear, I suggest the industry needs to ask a few fundamental questions before imposing further regulation on the mortgage market.
Firstly, is there an identifiable issue in the BTL sector that regulation needs to address? I don’t mean hypothetical issues but actual ones; problems which have occurred which put potential BTL investors at risk? As far as I’m aware, the BTL market is not facing any issues which it needs regulation to resolve.
Secondly, can the costs of further regulation be justified? Regulation can only be justified if the benefits outweigh the costs and I’m not sure the potential benefits have yet been identified.
We have now lived with regulation in the residential market for more than three years and, while there have undoubtedly been benefits, I’m still to see a compelling cost-benefit argument which supports regulation.
Thirdly, we need to consider what effect regulation may have on the market. The BTL sector is important, not only for lenders and brokers, but also for thousands of individuals seeking good quality private rented accommodation.
Today, more people are electing to put off buying until later in life, preferring instead the greater freedom and job mobility offered by renting.
What’s more, increased immigration is also fuelling demand for rented property at a time when there is less public sector rented housing available than there has been for many decades. Anything which reduces the supply of rented accommodation should be a concern to government.
Will regulation reduce consumer demand? Not by itself, but it will inevitably contribute to increased costs which will be passed on to consumers and cost is a factor which is close to most consumers’ hearts.
Regulation also needs to be taken within the context of everything else happening to the sector such as falling yields, lower confidence and speculation about tax benefits being removed.
In isolation, regulation may not be a major issue; as part of a number of changes taking place in the market, it could be the straw that breaks the camel’s back.
Fourthly, the government needs to resist the temptation to impose regulation simply for the sake of tidiness. It may be neat to have a single regulatory regime, but is it necessary?
If it ain’t broke...
The truth is that many brokers are already treating BTL applications in a similar way to residential mortgages and are applying the same ‘Treating Customers Fairly’ ethos to the way in which they go about their BTL business.
In other words, there doesn’t appear to be a regulatory problem which needs fixing.
Unless, of course, someone can provide evidence to the contrary. I haven’t yet seen any but that doesn’t mean it doesn’t exist. It must surely be incumbent on government and the regulator to provide such evidence before even considering any proposal to extend regulation into the BTL sector?
In assessing any evidence, the government needs to clearly separate theoretical problems from actual ones.
Unfortunately, the residential market is littered with examples of hypothetical issues which regulation has addressed but which weren’t resulting in consumer detriment in the first place.
The BTL sector is important to the economy and the mortgage industry shouldn’t let half-baked ideas gather momentum unless there is good reason for them to do so.
Regulation of BTL may be appropriate, but I don’t believe there is sufficient evidence to justify further work and expenditure. Just because somebody thinks it is a good idea doesn’t necessarily mean it is.
