Landlords are hurting the housing market

As homeowners and first-time buyers suffer, landlords are cashing in on a surge of tenants and a buy-to-let mortgage sector that's bouncing back from recession

It’s a well-worn mantra that you should never let a good crisis go to waste. And the financial crisis is no exception.

Earlier this year the government reported that the number of renting households had risen by one million between 2006 and 2010. Unsurprisingly, half of all these households are under 35; young people prevented from getting onto the housing ladder by a paralysed mortgage sector and the need for large deposits.

But as first-time buyers suffer, the private rental sector is thriving. The surge in tenants – along with general rising costs – has  pushed up rents, with half of all landlords planning to increase their rates in 2011.

But it’s not just an expensive, deposit-sapping rental sector that is hurting potential home buyers. The resurgent buy-to-let market is also transforming the housing landscape as properties that would be traditionally available to first-time buyers are snapped up by landlords.

But can the rental sector really be blamed for our crippled housing market? And if so, what's the cure?

Muscling out first-time buyers

The recent surge in tenant demand has jolted the buy-to-let mortgage market back into life. Figures from Moneyfacts show that the number of buy-to-let products has bounced back recently, shooting up from 312 in November 2010 to 463 in May this year, the highest level since October 2008. The average interest rate paid by landlords on their mortgage has also taken a nosedive, shrinking to 4.97%.

Put these figures together with Nationwide’s recent admission that it would ‘rather lend 75% loan-to-value (LTV) on a buy-to-let mortgage to an experienced investor than to a first-time buyer at 95%’ and it becomes obvious that this buy-to-let bounce is not doing first-time buyers any favours.

And what’s more, as buy-to-let landlords continue to muscle first-time buyers out of the mortgage market, availability within the country's housing stock is taking a hit. According to Lloyds TSB, 44% of homeowners looking to move out of their first property expect to sell to a buy-to-let landlord. This takes properties that would usually be made available for next generation first-time buyers out of the residential housing market and suppresses supply even further.

Restrict buy-to-let?

So if the buy-to-let bounce is blocking out first-time buyers from the housing ladder, what can be done?

Taken in a completely contemporary context, it’s hard to justify any interference in the current buy-to-let surge. After all, any restrictions placed on buy-to-let investors in the name of first-time buyers would surely prove counterproductive by reducing the private rented stock and pushing up rents in the process.

Moreover, there’s no guarantee that a sudden regulation of buy-to-let would provide the immediate financing options and housing stock craved by so many first-time buyers. Rising costs and rock-bottom interest rates would still make it difficult for first time buyers to save for a deposit. And those pre-crash first-time buyers currently stuck in negative equity will still be blocking up properties suited to the new generation of property owners.

It’s also very hard to condemn – in a post-housing bubble age – the lending of 75% mortgages over 95% mortgages, even if the former is to a buy-to-let landlord. In fact, in many ways an increase in low LTV buy-to-let mortgages can be seen as a natural and positive reaction to a risk-averse and cash-strapped lending sector and an oversubscribed rental market.

The danger is that this natural reaction, when transposed into an unstable and unregulated buy-to-let mortgage market could easily spread into something far more dangerous; especially when you consider the sector’s volatile history.

Buy-to-let’s volatile history

Campaign group PricedOut argues that the buy-to-let sector was at the forefront of the housing bubble as it took advantage of the excess credit available primarily through risky interest-only mortgages.

The number of outstanding buy-to-let mortgages increased ten-fold from 2000 to reach over one million by 2007. By this time buy-to-let accounted for over 29% of total house purchase mortgages, up from just 4.3% in 2000. This surge – along with the speculative mindset held by several credit-boom investors, expecting prices to rise – in a market with a fairly fixed housing stock can almost certainly be considered a significant factor in residential house price rises.

Unsurprisingly, when the bubble burst in 2008, buy-to-let lending fell by half when compared to the 2007 peak, and then by half again in 2009. If you need more proof of the sector's volatility, just consider that eight of the top nine buy-to-let lenders in 2007 were bailed out by the taxpayer.

For affordable house price campaign groups liked PricedOut, the fear is that without the introduction of regulation, the recent resurgence in buy-to-let could rapidly snowball into another bubble.

Separating the bounce from the bubble

History teaches us that some form of regulation is needed within the buy-to-let market, if only to put a leash on risky investments and prevent the price distortion that this volatile sector pushes onto residential homebuyers. Indeed it seems perverse that a market run (in a majority of cases anyway) solely in the interest of profit remains unregulated while the residential sector must jump through the hoops of the FSA.

But we must be careful not to let a rigid McCarthyite attitude towards another housing bubble stamp out a sensible and natural bounce in buy-to-let. Hastily restricting the borrowing power of landlords will not, after all, immediately push down residential LTVs or increase the chance of lenders granting first-time buyers mortgages. But it will reduce the rental housing stock and push up rents.

It is also wrong to think that regulation within buy-to-let would be wholly to the detriment of the private rented sector.  A majority of established and sensible landlords would certainly welcome more stability and less volatility within the market. Factor in the current financial squeeze on both both the landlord’s purse and the tenant’s rent funds and this seems to be the perfect the time to introduce some form of stabilising regulation.

In this light, perhaps my headline is a touch unfair. Just as it is vital to separate the buy-to-let bounce from the buy-to-let bubble, it is also right to distinguish between the savvy but sensible landlords and unruly investors that cause both of these phenomena.

Yes, a good crisis should not be left to go to waste, but neither should a good recovery.

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In addition to buy-to-let regulation, the wider housing market is in need of stabilising reform. Read Four ways to fix the housing market for a few of my suggestions.

What do you think?

Are we set for a buy-to-let bubble? Is the resurgent rental sector harming the housing market?

Have your say in the comment box below.

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