Newsletter March 2007

Don’t blame Buy to Let for House prices, Arla conference told.

The belief that buy to let investors are pricing first time buyers out of the housing market was dismissed by a leading expert in property economics at the Annual Conference of the Association of Residential Letting Agents, ARLA, held in London, February 7th.

Professor Michael Ball, Professor of Urban and Property Economics, University of Reading Business School, told delegates that there is only one way to lower house prices. “It is to build more houses that people actually want to live in and in places where they want to live,” he said.Professor Ball said that Buy to Let has substantially improved housing market stability. Without Buy to Let and a stable rental market, young households would be forced to enter owner-occupation earlier, at a more financially precarious time of their lives.

“Buy to Let has increased the size of the private rented sector and extended the alternatives to both owner-occupation and social housing,” Professor Ball explained. “It has also spread renting wider, to towns and suburbs that had little or no private renting before. It has assisted in the regeneration of inner city neighbourhoods and in some areas it has helped to revive the housing market.” As a result, Professor Ball said that it is not clear that house prices would have been lower without Buy to Let, as housing demand is still with us but supply is likely to have been less.

Turning to the effect of Buy to Let on tenants, Professor Ball said that it has sheltered many households from the full impact of house price rises, as renting is often a cheaper monthly-money-outgoings option. “It enables households to build up their own equity and, although tenants do not share in capital gains directly, they do so through lower rents and lower risk. They can do this while living in good standard accommodation, as competition in the rental market is now greater. This appeals to young, mobile people in employment. Overwhelmingly these are the client base of the Buy to Let landlord.”

Professor Ball pointed out that younger people rent rather than own property compared to previous decades. He said that this is due to changing lifestyles, employment patterns and affluence, as well as other financial circumstances, including the rising costs of equity requirements for house purchase.

Two thirds of rented property is owned by private individuals. This is up from 50% ten years ago, when Buy to Let was initiated. This change has occurred as corporate landlords have left the market but more individuals have wanted to invest in residential property. “Without Buy to Let, the private rented sector would probably be much smaller. The quitters would have exceeded new entrants,” Professor Ball said.

Many of these new investor landlords have substantial equity in their rental properties as well as in their own homes and they work or have other sources of income. Many Buy to Let properties have no mortgages on them and many have loan-to-value ratios well below mortgage lenders’ cap limits.“Landlords are generally very secure financially and this helps to explain the low default rates among Buy to Let borrowers,” said Professor Ball.

Buy to Let is now over ten years old, with over a million households living in Buy to Let properties. This 10-year-old initiative accounts for the housing of 5-6% of all households in the country. It contributes over £30 billion to the UK economy every year.Investment in residential property is a mainstream personal investment activity with 750,000 Buy to Let mortgages, £84 billion in outstanding mortgages and well over £120 billion in property assets (2003 figure).

This is a bigger industry than all pubs, hotels and restaurants put together and it is four times larger than the car industry.The forecast for the next decade is for an annual growth of between 20,000 and 30,000 Buy to Let properties becoming available to rent.

RICS UK Commercial Property survey Q4 2006

Investor and occupier demand has continued undeterred despite interest rate rises, says the RICS UK Commercial Property Survey.

Despite a rise in borrowing costs during Q4, property investment continued rising firmly though a mild slowdown has occurred in retail and the industrial property markets.

26% more surveyors reported a rise in investor demand as opposed to a fall down from 29% in the second quarter. Interest rate rises have had little dampening impact on new business occupier enquiries for space as a stronger economy has supported business expansion. Equally, the booming City economy has led to office occupier demand in central London rising at the fastest pace in the survey’s history. 63% more chartered surveyors reported a rise than a fall in demand, up from 44% in the previous quarter.

However the greatest strengthening in occupier demand occurred in the north of England, underpinned by a resurgent office and industrial sector. Retailer appetite for shop space remained poor despite buoyant high street trading but the pace of fall in demand slowed somewhat across most regions. Occupier enquiries though began to stabilise having been in decline since mid 2004.

The amount of available property on the market fell for the first time in 18 months, lifting surveyor confidence over the rental outlook to a six-year high.

Strengthening occupier fundamentals will be well received by those members of the public that have increased exposure to commercial property funds in recent years - IMA statistics show that retail investment into property funds rose to £4.3bn in 2006 up from £0.6bn in 2005.

Growth in Buy to Let faster than market as whole, says CML

330,000 Buy to Let mortgages, worth a total of £38.4 billion, were taken out in 2006, according to figures released by the Council of Mortgage Lenders. This represents 11% of all new lending, and is a 48% increase in volume and 57% increase in value over 2005.

On a half-yearly basis, Buy to Let lending of £21 billion (178,000 loans) took place in the second half of 2006, the highest figures since the survey started in 1998.
The total number of Buy to Let mortgages outstanding now stands at around 850,000, worth a total of £94.8 billion. Since the end of 2005, when the corresponding figures stood at 702,000 and £73.4 billion, the number of mortgages has risen by 21% and their value by 29%. By value, Buy to Let lending represented 9% of all mortgage balances at the end of 2006, up from 8% in 2005.

In terms of arrears, the proportion of Buy to Let mortgages 3 months or more in arrears continued to fall from 0.64% at the end of the first half of 2006 to 0.59% at the end of the second half of the year. This is lower than the 0.89% of loans in arrears in the wider mortgage market.
The CML now splits out Buy to Let arrears cases into those where a court-appointed receiver of rent has been appointed, and those where there is no receiver of rent. Where a receiver of rent exists (who takes receipt of rental income relating to properties where the mortgage is in arrears, and pays it to the lender), these loans are now quantified separately.

Lenders regard the receiver of rent option as an alternative to repossession in the Buy to Let market. The number of Buy to Let properties taken into possession during 2006 was 1,142 (0.14% of all Buy to Let mortgages), compared with 0.15% in the wider market.  The number of cases where a receiver of rent was appointed in 2006 was 494 (0.06%). Taken together, this represents 0.2% of all Buy to Let loans.

Commenting on the figures, CML Director General Michael Coogan said: "The Buy to Let market has performed even more strongly than the wider market over the course of 2006. With evidence from other sources of strong tenant demand, rising rents and falling void periods, Buy to Let looks set to continue to remain popular and successful."

How does Tenancy Deposit Protection affect me?
Landlords and letting agents

Communities and Local Government is working closely with landlord and letting agent representative organisations to ensure that information will be readily available to landlords and letting agents about Tenancy Deposit Protection (TDP) from April 2007. Deposit protection will apply to all deposits taken by landlords in relation to assured shorthold tenancies (AST) - the most common form of new tenancy - in England and Wales. The most recent Survey of English Housing (05/06) found that the average deposit for an AST in England is £695.
 
These provisions need to be put into place to ensure the minority of bad landlords act responsibly by safeguarding tenancy deposits. Most landlords deal fairly with tenancy deposits and are already acting responsibly by safeguarding deposits. TDP puts into place a simple process for all landlords to ensure tenancy deposits are safeguarded. This is in the interests of both landlords and tenants.

There are two types of scheme involved in the TDP: a custodial scheme and two insurance-based schemes. The landlord – not the tenant – will have the option to choose whether to safeguard the deposit in the custodial or insurance-based scheme. A landlord will have 14 days to safeguard a deposit from the day he receives it. The landlord will have to provide the tenant prescribed information about the scheme safeguarding the deposit within these 14 days.

To avoid disputes having to go to the courts, both schemes will be supported by an Alternative Dispute Resolution (ADR) service - although the use of this will not be compulsory. In terms of when the deposits should be paid back, the landlord and tenant agree how the deposit should be returned, in full or in part and it must be paid back within 10 days.

In the custodial scheme: within ten days of the scheme being notified of agreement between the landlord and tenant or notified of an ADR/court decision. In the insurance-based scheme: within ten days of the tenant requesting that the landlord return his deposit. In case of a dispute: within ten days of the scheme being notified of the ADR service's, or court's, decision.

It can also be paid back before then. Ten days is the maximum. In practice, Communities and Local Government would like to see deposits returned more quickly and will be working with scheme administrators to see how this can best be achieved.

Many landlords currently pay the deposit back on the last day of the tenancy. In the insurance-based scheme, if the landlord and tenant agree on the amount to be returned, the deposit can be returned on the last day of the tenancy.

If a deposit hasn’t been protected a landlord is unable to use ‘notice only’ and will also incur a fine.Currently, a landlord can obtain an order for possession of an AST at any point after the first six months of the tenancy providing any fixed term has expired and the landlord gives the tenant at least two months' written notice (Under Section 21 of the Housing Act 1988). This is known as ‘notice-only’.

However, under TDP, the landlord is unable to regain possession of the property using the usual 'notice only grounds', if the deposit has not been safeguarded and the prescribed information passed onto the tenant within 14 days of the landlord receiving it. Tenants can apply for a court order requiring the deposit to be safeguarded or the prescribed information to be given to him about the scheme in which the deposit is safeguarded.

Where the court believes that the landlord has failed to comply with these requirements, or the deposit is not being held in an authorised scheme, the court must either order the landlord within 14 days of the making of the order to repay the deposit; or order the landlord to pay the deposit to the custodial scheme administrator. The court must also order the landlord to pay to the tenant a fine of three times the deposit amount within 14 days of the making of the order.