LONDON (Reuters) - Strong rental demand will underpin the buy-to-let market and help the country avoid a more painful housing crash, though some investors will be caught out as a number of mortgage lenders exit.
The buy-to-let market has surged in a decade that has seen house prices triple, attracting a range of investors since the market began in 1998 and growing to represent 10 percent of the total market and 12 percent of new mortgages in 2007.
The housing market, which has triped in value in the past decade, has slowed rapidly in the wake of the global credit crunch. Analysts see falls of 10 percent or more this year.
Some inexperienced buy-to-let investors are sure to get burnt, not least those who have snapped up new build city centre apartments, sold at discounts by developers at the peak of the market but now in oversupply in many towns.
But so-called professional investors who make up the bulk of the buy-to-let market will make it through and may even be in a position to expand their portfolios, compensating for higher mortgage costs by raising rents, the sector’s top lenders say.
“All our anecdotal feedback is that significant landlords… are absolutely seeing the current market environment as an ideal opportunity for them either to continue to expand their portfolio or to start expanding them again,” said Jeremy Law, head of buy-to-let at mortgage lender Bradford & Bingley.
“In many ways (buy-to-let) is counter-cyclical. If these people were not interested and were not purchasing, the slowdown would be far more severe,” he told Reuters.
Bradford & Bingley, the number two player in the buy-to-let sector through specialist arm Mortgage Express, has reported strong demand and said this week it would use proceeds from a 300 million pound cash call to continue lending.
There is also little evidence of significant fire sales or of an unmanageable jump in arrears, the lenders say, though bad debts have risen off recent lows.
Data from the Council of Mortgage Lenders shows 0.7 percent of all buy-to-let UK mortgage loans were more than 3 months in arrears at the end of 2007, compared with 1.1 percent in the case of all mortgages.
BOOM CONTINUES?
Like other banks, B&B says the fundamental drivers behind buy-to-let — immigration, fewer people per household, a more mobile workforce, first-time-buyers unable to get on the property ladder — remain, and are driving rents higher.
Rising rental yields in turn mean landlords are able to pass on the impact of rising mortgage rates straight to tenants.
“(Buy-to-let) is likely to remain double digits in terms of the size of the broader mortgage market. It’s now well over 10 pct and that is likely to continue,” Law said.
There is little doubt buy-to-let borrowers, particularly newcomers, are facing a drought of new mortgage products but lenders say that is due to markets and not credit quality.
“The major factors slowing the buy-to-let market are confidence and mortgage supply,” said Andy McQueen, managing director of specialist lending at building society Nationwide, which owns number-nine specialist lender Mortgage Works. “Many of the fundamentals of the business, however, are still strong.”
With banks under pressure from shareholders and securitisation markets still running dry, denying banks an opportunity to fund more loans by parcelling out their risk, mortgage deals across the UK have been scrapped and buy-to-let, along with other non-standard lending areas, has been hard hit.
According to price comparison site Moneysupermarket.com, the number of British mortgage products on offer has dropped to around 670 now from 4,025 a year ago. Almost 600 of them have been removed since the end of March.
In part, this is due to the retreat of specialist vehicles, often backed by investment banks, who piled in over the past few years on the back of a booming securitisation market, but have since jettisoned their originate-and-distribute models.
Morgan Stanley’s Advantage Home Loans and Merrill Lynch’s Wave and MPLC have wound up operations, with Merrill cutting some 200 jobs in the sector earlier this month. DB Mortgages, part of Deutsche Bank, is still in business but has seen volumes drop sharply.
The result is a “choking” of buy-to-let demand, with few new investors able to afford the necessary higher deposits.
“The growth in buy-to-let will have to flatten off, given there isn’t as much appetite from lenders,” Louise Cuming, head of mortgages at Moneysupermarket.com, said.
“I don’t think it is more vulnerable than the residential market, where it is vulnerable is it’s ability to grow.”