The rise of Buy-to-Let (BTL) in the UK has been a phenomenon of the last 20 years. One of the key developments which encouraged both aspiring landlords and lenders was the Housing Act of 1988 which introduced the Assured Shorthold Tenancy, the instrument which enabled landlords to offer homes for rent for fixed periods protected under law.
According to the Council of Mortgage Lenders, over 1.7 million BTL mortgages were advanced between 1999 and 2015 and it’s estimated that this represents somewhere in the region of £200 billion. The surging BTL market has undoubtedly bolstered the demand for mortgage funds when demand for traditional mortgages from young families and first time buyers to purchase their own homes cooled off, around the time of the credit crunch and the years immediately afterwards. This has been good news for mortgage lenders which might otherwise have struggled to maintain their lending volumes.
However, one side effect of BTL is that, in my view, it has contributed significantly to house price increases in some areas, most predominantly in London but in other major cities too. Unfortunately, once BTL became popular it added to the fuel which powered the price rises because BTL landlords have had tax relief on their mortgage interest and this enabled them to outbid their home buying competition in any like for like situation.
Although new homes were and continue to be built, once snapped up by landlords they are effectively taken out of circulation as they are generally bought and held in portfolios rather than brought back to the market every few years. As a result, the availability of homes to purchase remains stubbornly low which in turn supports higher prices. As more would-be buyers are priced out of the market and resort to renting, so the demand for more private rental properties increases which pushes rents up and creates even more demand from existing landlords to increase their portfolios and encourages new landlords to jump on the bandwagon.
However, in the last year of his tenancy at 11 Downing Street, George Osborne announced measures unpopular amongst smaller landlords and which may take some heat out of the BTL market. The additional 3% Stamp Duty Land Tax levy, the loss of high rate tax relief on BTL mortgage interest and making gains on second properties exempt from the lowered Capital Gains Tax rates, make being an amateur landlord less attractive. The playing field where home buyers and landlords face off now looks decidedly less sloped but it’s still too early to tell if the former Chancellor’s tinkering has had the desired effect. Anecdotally there’s still plenty of demand for BTL funding and plenty of lenders willing to provide it, though perhaps those with larger portfolios are transferring them to corporate ownership vehicles where the financials are more palatable.
[color_quote]The UK’s chronic housing shortage cannot be fully blamed on the rise of BTL however. The housing planning system frustrates developers and creates additional hoops for new homes builders to jump through rather than encouraging them to crack on and build the targeted 1m new homes we need by 2020. Anyone who suggests we don’t have the space for all these new homes should read Colin Wiles article for Inside Housing. He calculated that the area of land taken up by England’s 2000 or so 18-hole golf courses plus 9 hole courses, driving ranges and practice courses is around 2% of England’s total land area. He’s got nothing against golf and he’s not suggesting we build on every golf course, but when you realise that there’s room for 8m new homes to be built on England’s golf courses alone, the problem really isn’t space.[/color_quote]
‘But we’re too built up already!’ you cry. Think again. Between 2009 and 2011, the UK National Ecosystem Assessment (NEA) was carried out and concluded that although 6.8% of the UK is classified as urban (and that includes all towns, villages and roads etc.), half of that is designated as greenspace – parks, sports pitches and allotments. Then there are domestic gardens, lakes, rivers and canals which account for a further 25% of ‘urban development’. The percentage of the UK which is actually built upon is just over 2.2%. In the words of the NEA, just under 98% of the UK’s land is ‘natural’. The next time you’re flying over the UK, look out the window and the view will be overwhelmingly green (unless it has snowed!) So, if all the Town and Cities and roads and factories were pushed together, the concrete would cover an area slightly larger than Dorset. So really the issue is not land shortage, rather, how do we deal with the ‘I’m all right Jack’ NIMBY’s brigade who think their right to live somewhere includes a right to debar others.
A long term vision for new homes planning in this country is what’s required and nothing should be off the table. High rise living fell out of favour mainly because close knit communities and families were transported from Victorian streets to modern blocks of flats. Yes they welcomed ‘luxury’ features like central heating, hot water and inside toilets but the community feeling was lost. But that was in the 60s and 70s and modern living and modern families are very different now. Young children played in the streets until dusk and parents never gave it a thought as the extended family and close friends kept an eye out. Nowadays perhaps an apartment block could have a communal multi-media room for children to meet and play in as well as a gym for the grown-ups.
We have an ageing population and many elderly people reside in homes which are too large for them to manage. We don’t make it easy or attractive enough for older people to make what may be their last home move. Most don’t want or need a care home but somewhere with low maintenance and help as and when they need it. The actual act of moving home can be stressful for anyone but it’s doubly so if you’re elderly and moving from a large family home to something much smaller. Houses and furniture carry memories for people and the thought of having to downsize can be a daunting one. In America some new homes builders provide their buyers with additional storage space for several weeks after moving in so that the buyer has time to arrange and rearrange their furniture in their home several times and gradually let their surplus furniture and belongings go over time. This, they say, removes a lot of the stress from the process of moving from a large home to a smaller one . As someone with elderly parents myself I think this is a great idea.
BTL mortgages have filled some of the void left by falling volumes of sales to owner occupiers and that has been good news for lenders. I expect this will continue for some time yet as alternative investments produce such low yields. And yes, the popularity of BTL has supported and probably increased property values in some areas, but it’s not the villain of the UK’s housing shortage piece. The key problem of rising house prices and rents is due to the most fundamental of economic laws. Supply has not kept anything like the pace of demand. If we are to have a stable and affordable residential property market we simply have to build more homes. Millions of them.