Turning the buy to let market in its head
The 1988 Housing Act, was a major turning point in residential homes in the UK. Although it did not have any immediate significant impact, it was when an important milestone came in 1996 when the Association of Residential Letting Agents (ARLA) and a number of innovative mortgage lenders launched the buy-to-let mortgage initiative.
At that point, a deposit of between 15/25% enabled ordinary people to purchase property and rent it out legally on an AST.
The Intermediary Mortgage Lenders Association came to the following conclusions as far back as 2014:
- Higher demand has been the main driver of growth in the private rented sector over the past two and a half decades. Rent deregulation in 1988 and the launch of buy-to-let mortgages in 1996 have allowed individual landlords to respond to this demand.
- However, a surprisingly high proportion of new private rented property has been acquired without a mortgage. Only 420,000 of the additional 1,310,000 properties in the private rented sector between 2007 and 2012 were financed by buy-to-let loans.
- The failure to build enough houses to meet rising demand is chiefly responsible for first time buyer frustrations. But low interest rates and quantitative easing (QE) have advantaged landlords by lowering interest costs and underpinning house prices.
- The “triple lock” of the new regulatory landscape – the mortgage market review (MMR), Basel 3 capital adequacy rules and macroprudential regime, disadvantages first-time buyers relative to buy-tolet borrowers and may help to entrench the decline of owner occupation going forward.
- For example under the MMR at an interest rate of 4%, first time buyers required to take out a capital repayment mortgage will face monthly mortgage payments 58% higher than a landlord borrowing the same amount on an interest only basis.
- If current trends in tenure continue, two decades from now the majority of Britons will rent their home for the first time since the early 1970s. By 2032, 49% will own their home, 35% will rent privately and 16% will be in the social rented sector.
The IMLA went on to summarise with the following:
There has been much misunderstanding about the role of buy-to-let in the UK housing market since the association of residential letting agents (ARLA) and innovative mortgage lenders launched the buy-to-let mortgage
initiative 18 years ago. This report surveys the evidence to take a fresh look at this controversial question. The last couple of decades have seen a sea change in the evolution of housing tenures in the UK with the private rented sector taking over from owner-occupation as the engine of growth. On the latest figures, 18% of households rent privately, compared to 9% in 2000. Many of the factors behind the growth of private renting are secular trends
which are driving higher demand. These include the lack of availability of social housing, greater numbers of students and immigrant workers, employment trends, and home ownership becoming less accessible due to
rising prices and tighter lending criteria, including the virtual disappearance of mortgages above 95% loan-to-value (LTV). Individual landlords have been responsible for the majority of the extra supply1, which we estimate from the number of extra rented properties, has amounted to a net investment of some £50bn per annum in recent years. Probably the most significant factor which facilitated this investment was the introduction of the assured shorthold tenancy contract in 1988, which restored market pricing to the sector and gave landlords the right of possession.
The buy-to-let mortgage, first launched in 1996, has also helped to expand supply. But comparing the growth of buy-to-let mortgages with the growth of the private rented sector as a whole shows that buy-to-let lending has
been responding to rather than leading the growth: only 1.4m of the additional 2.6m properties in the private rented sector between 1996 and 2012 were financed by buy-to-let loans. While many first time buyers may feel that buy-to-let investors are making it harder for them to get onto the property ladder, a heightened sense of competition is the inevitable result of insufficient growth in the housing stock as a whole in the face of a rapidly growing population. With population growth projected to remain high for the next two decades and, as yet, no sign that the supply of new social rented or private housing will keep pace, this sense of competition is set to remain. Barring a major clearing of the logjam of inadequate supply, current trends projected forward point to a majority of households renting by 2032 and 35% in the private rented sector.
One irony given the government’s preference for homeownership is that the “triple lock” of new regulation: the Basel 3 capital adequacy regime, mortgage market review (MMR) and macro-prudential rules, seem to advantage buy-to-let landlords over first time buyers. The concerns that the Financial Conduct Authority (FCA) has expressed about the gaming of buy-to-let mortgages (where first time buyers claim to be buy-to-let investors) seem to confirm that even the regulator agrees that the new rules put first time buyers at a disadvantage.
Editorial Comment by Antony Antoniou
Over the last two decades, the buy-to-let market exploded, with many everyday people investing in property, then benefiting from capital growth and rental income, but there have been some tragic side-effects. By virtue of the workings of the industry, more often than not, landlords preferred choice of investment has been small flats and first-time-buyer homes. Following the tightening up of regulations following the crash of 2008, residential borrowers are forced to undertake ‘affordability tests’ before they qualify for a residential mortgage. At the same time, they have been facing increasing competition from landlords who are in a much better position, do not need to provide any evidence of affordability, for the main part, the property does need to meet certain ‘stress tests’ which are based upon the rent to mortgage interest payments, rather than the landlord’s income.
This contributed to making it even harder for first-time-buyers to enter the market. Add to this the atrocious way that many private tenants have been treated, forcing the Government to introduce the Gas Safety Certificate after people had died from dangerous Gas Appliances, then there were changes to the eviction process, to prevent what is referred to as ‘Revenge Evictions’
The 12 month AST is abhorrent, to say the least. By the time people move in and settle down, they are literally 8/9 months away from their next section 21, resulting in millions of families living in little more than temporary accommodation. There are two main reasons that innocent, prompt-paying tenants are evicted.
- The Landlord has decided to sell the property and due to the fact that lenders make it so difficult, when there is a tenant in situ, that in order to achieve the best price, landlords need to sell the property with vacant possession. This is simply down to the unreasonable criteria, imposed by lenders in the UK. In mainland Europe, tenants rent property for years and it can be bought and sold without any adverse effect on them.
- The rents have risen exponentially and the landlord could not raise the rent in keeping with the market, therefore, it is easier to vacate the property, then re-rent it at a much higher figure.
When the right-to-buy was introduced, it had admirable intentions, but the idea was that local authorities would take the funds from the sales and build more properties, therefore, tenants could eventually become homeowners, with incoming tenants having new properties made available to them, but as we now know, this did not happen. What actually happened is that the housing stock has ended up in the hands of landlords and young families have had not alternative, creating the worst housing crisis since the last war.
Local authorities have tried to counter the eviction of tenants by Section 21, by advising tenants who are most in need, to ignore the Section 21 and not vacate the property until they are taken to court and evicted, resulting in expensive legal costs for landlords, bad feeling, but most importantly, it has forced landlords to be even more particular in who they will rent to, which has actually exacerbated the problem, as those most in need, are least able to rent.
It is not only immoral for millions of people to be forced to live this way, but the longer the problem persists, the worse the crisis is getting. Another side-effect of the punitive laws and the advice given to tenants by local authorities, is that an increasing number of landlords are choosing to rent their properties on a short-term basis to ‘guests’ via platforms like AIRBNB. This is reducing the available housing stock even further.
What is the solution?
There needs to be a profound change in the rental market landscape and for the Government to start building houses will not even scratch the surface, increasing the right to buy, will only further reduce the ability for young families to find a long term home, so what do I suggest?
I propose a carefully thought out strategy, to ensure that families can not only find a home that is not short-term, but to give them the opportunity to put down roots and create a family home, but how do we do this? Having been in property for three decades and experiencing all sides of argument, I stand by my words that the twelve month AST is immoral and change is needed, but this change must be encouraged, rather than enforced, as the enforcement of strict regulation in housing can convey undertones of a socialist state, that could damage investment and create more harm than good.
Therefore, as part of my company Trellows Investments, I will be launching a revolutionary investment initiative, both in our own acquisitions in the future, as well as in partnership with our investors.
The basis of our strategy is as follows:
- We will seek to find properties that are in a poor state of repair, un-mortgageable or those with an EPC rating that falls below par.
- We will completely renovate these properties, ensuring that they are brought up to top-spec, along with suitable insulation that will raise them above the impending minimum EPC level 3, although we will endeavour to exceed this where possible.
- We will offer the properties for rent on an Assured Shorthold Tenancy of FIVE YEARS, with a clear scale of rental increases, based on RPI, to ensure that everyone knows where they stand. This of course is dependant on securing a fixed five year term with the lenders, as we must know our outgoings, before we can commit to income.
- In month 53, the tenants will be offered the ‘Right-to-Buy’ the property at the median of three independent valuations, which they must accept by the end of month 54.
- We will offer to contribute 10% of the purchase price to the tenants by way of a gifted deposit, this will only be made available if they choose to exercise their ‘Right-to-Buy’ and will not be available for any other reason.
- The tenants must exchange before the end of month 59, with completion set any time after the end of month 60. This is to ensure that should the sale not proceed, we have time to prepare another fixed term, with the same option.
- We will pay for a financial adviser to give the tenants a ‘Financial Health Check’ early on in the tenancy and this adviser will be available at our expense, to advise them on how to prepare themselves financially, so that they will be able to purchase the property, should they wish.
- At the end of the period, we will have brought a derelict property back in to use for a family, made that property available on a long-term AST, we will have achieved some capital growth and rental income for five years. Thereafter, we will re-invest the proceeds of the sale, in to another property, repeating the process.
- We would like to petition the Government to match our gifted deposit, by re-introducing ‘Help-to-Buy’ for resale property, which will leave the tenants only needing find 5% of the deposit, to qualify them for the best and cheapest mortgage deals. It is unfair, that those who are most in need, should be paying the most in interest.
- We aim to encourage our investors, partners and the industry as a whole to adopt this model, thereby creating an ethical property market, that will also be open to those in need.
- The UK housing stock is a national asset and our strategy is to encourage properties throughout the country to be renovated, insulated and rented on similar terms, this strategy could also be applied to new-build homes, where investors contribute to the build and subsequently rent the properties on similar terms, offer people a real and stable home to build a future.
We will need your support to make this happen, if you would like to get involved, contribute, or invest, please contact me directly.
Last but not least…………………..REMEMBER THAT YOU HEARD THIS PROPOSAL HERE FIRST!