A lot is made in the press about why the buy-to-let market is booming. Explanations include first-time buyers being unable to get on the property ladder, additional migration taking place across Europe via the acceptance of new member states, confidence levels in pensions, etc.
Of course, all of these points are valid in their own right but there are also some underlying factors which appear to exist away from the media microscope.
New build
One of the key factors is the new build market. It seems to me that all the plots around my local habitat – the borough of Croydon – that have festered for years, have magically had their planning permission applications accepted in the last 12 months – maybe as a result of Red Ken’s quest to provide more homes?
The flats on these sites have flown up, which is a tribute to the builders involved, who have perfected the art of Meccano construction.
The real value of the properties has been the subject of much debate within our industry. This is because of the undisclosed incentives for quick-sale that are often dished out by the builders. These are more prevalent later on in the development as the final plots are rapidly offloaded at a lower price so that a NHBC certificate can be granted releasing the builder to concentrate on his next project. Cash flow is the key and the modern phenomenon of property clubs – a conglomerate of investors – who know exactly how to tap into this weakness. Nevertheless, it accelerates the builders’ efficiency and the end result will be more landlords.
Some lenders seemingly cottoned on to this activity late in the day as they got hurt with inferior collateral to support their loans. Let’s not forget a shiny new house is like a shiny new car – its depreciation in value is initially sharp. Also a few of the lenders who operated multiple brands caught colds through over-exposure to specific sites as there appeared to be no central accounting of loans, which consequently compounded their misery.
To further compound the valuation assessment problem, not all of the valuers are totally independent, including those with national chains. Why? Well, sometimes the surveyors are intertwined with the estate agency division that was tasked with selling the properties.
The closing of ranks appeared to be inevitable, with noises being made by lenders in many quarters that they would pull out of the market or restrict their exposure to houses or very low loan-to-values (LTV). The builders and landlords are nimble though and incentives were quickly moved from a deposit to post-completion incentives either by way of cashback or white goods. These are notoriously difficult for the valuer to spot and are likely to be detected only by chance because understandably it’s not in the builders or landlords interest to let the truth be known.
Another solution to keep the builders and landlords growing was bridging finance. This works off the open market value rather than the purchase price – thus eliminating any question over whether the deposit was paid by the builder. The bridging finance was then remortgaged by the landlord into a mortgage – remortgages of course working on valuation.
The net effect to the lenders was identical – loans against properties without a handle on their ‘true’ worth. To protect themselves, many imposed a restriction preventing remortgages from taking place immediately after purchase, typically a buffer of at least six months.
Sensing opportunity
But new build continues to rage with the demand for the builders and investors still in ascendancy. So while the existing lenders moved towards tightening their policies, new entrants with a greater appetite for risk saw the opportunity to move in and establish themselves.
Freedom Lending, for example, allows an uncapped builder deposit, provided the applicant puts in 5 per cent, and often accepts post-completion incentives. And, indeed Infinity Mortgages and Mortgages plc will lend without an applicant deposit. West Bromwich for Intermediaries and Abbey allow for day one remortgages with the former offering an option without early repayment charges, which will inevitably be churned again to a better rate as any buy-to-let provider will take the deal from an existing buy-to-let provider.
So to recap, the landlords are getting their teeth stuck into properties for the cost of mortgage product and legal fees but without the need to supply a deposit. I repeat myself – this market is about cash flow and the un-utilised money can go towards the next property venture. Even more good news for landlords is while they fight among themselves for more properties, the price becomes increasingly out of reach of those first-time buyers who are their target audience as tenants.
Repossession stoppers
Another fad that is now increasingly spread across the radio waves is repossession stopping services.
According to the Council of Mortgage Lenders (CML), this is an increasing market with 8,140 properties being taken into possession in the first half of 2006 alone. This compares to 5,690 in the second half of 2005 and the low of 3,000 in the second half of 2004.
This is likely to increase in time given the rise in Bank of England Repo rate in August and fixed mortgage rates in the second quarter of this year. In fact the CML specifically predicts possessions close to 15,000 a year for the next two years.
The ‘repossession stopper’ services play on this growing market offering a seemingly impossible depressing situation a solution and in turn creating a new breed of landlords into the buy-to-let market.
Again the advice is key, with bridging finance being utilised quickly by the client to take out the poorly conducted mortgage which relieves any pressure of heavies breathing down their necks. The mortgage bridging finance payments can also be rolled onto the loan so that cash flow is not an immediate problem.
The service provider then becomes a landlord by buying the property from the client at a price below the market value. Later they will refinance this to cash-in on the true value.
The client is then given the opportunity to remain in the family home as a tenant. They have already furnished the property to their taste and they will be more respectful than a tenant who has no affiliation to the premises. A re-purchase option is simultaneously offered, provided the rent is paid, creating an almost model tenant, and a guaranteed purchaser – who will be willing to pay above market price.
Realising the rewards
The other underlying factor in this market is the fact it has been proven to work thus far. We have seen morecustomers come back, having enjoyed the success of their first foray into investment property ownership. Of course, lessons have been learnt along the way, such as over-furnishing with luxuries and ensuring the outlays seemingly counter-balance the clutches of the Inland Revenue’s income tax claims. The mortgage processes make this easier than ever with the computer assessing the conduct of the mortgages rather than individual references on each property in the portfolio. The increase in LTVs from 80 per cent to 90 per cent means capital can be released immediately for extra purchases rather than having to wait for the house prices to rise.
Mortgage intermediaries have also seen the rewards. They are free to operate in an unregulated environment for investments. Even the modest investor is often a more valuable commodity than the previous holy grail of an adverse customer and one per cent proc fee. This means they are actively seeking them, which again self-perpetuates the market.
So next time the press spouts on about why the buy-to-let market is booming, smile – because you know the devil is in the detail rather than a top-level generalisation.
