Newsletter April 2008
Buy to Let Provides The Sustainable Option to Meet Housing Demand
Buy to Let investors have seen increases in their returns during the first quarter of 2008, according to the quarterly ARLA Review and Index. The average return on a geared (mortgaged) investment is 21.7%, up 0.27%, and returns on cash purchases average 10.91%. Flats show a marginally higher return than houses, except in the North. All returns on rental investments include capital appreciation and rents.
This quarter, the number of Buy to Let investors reporting a significant impact on the rental market due to immigration has increased by nearly 10% since the question was last asked at the end of 2006.
Unsurprisingly, given this increase in immigrant demand and the domestic demographic trends, nine out of ten investment landlords continue to state that they have no intention of selling their investment properties should house prices fall. This majority proportion is virtually unchanged on the last quarter.
About half, 46%, of all investment landlords report their intention to buy further property during the next twelve months and the average life expectancy of their investments remains unchanged, at close on 17 years.
However, irrespective of house prices, 18% of landlords will sell some or all of their property investments during the coming year. Retirement has more than doubled as a reason this quarter, while others cited the purchase of other properties and realising gains.
Across their portfolios, landlords report an average Loan to Value ratio of 57%. The proportion with Loans to Value of more than 75% has dropped considerably over the last two quarters, falling from nearly 30% in the autumn of last year to 23.9% in March.
Commented ARLA Operations Manager Ian Potter, There can be no doubt from these figures that Buy to Let landlords are well aware of the opportunities but behave with caution. In fact, caution has been the watchword in the Buy to Let market since its inception. Buy to Let remains the sustainable option for housing.
The average portfolio contains just under seven properties, although half of all respondents only hold one or two properties. The most likely Buy to Let purchase is a property between 50 and 100 years old in good condition. The least likely purchase is of properties that have never been occupied or bought off plan.
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Buy to Let mortgage market sees further criteria changes
A number of new criteria changes amongst the UK's Buy to Let lenders will affect funding for newly renovated properties classed as new builds and also the deposit size now required for most loans.
New builds which many lenders also classify as properties, flats or houses built or converted in the last twelve months have been a particular cause of anxiety for Buy to Let lenders, and it is increasingly common for lenders to refuse to lend on this type of property altogether. Capital Home Loans are the latest organisation to decline to lend on new builds including newly converted properties.
The second major change is the size of deposit required. Some lenders are now asking investors to put down larger deposits by lowering the maximum loan to value they will lend at. For example some lenders are asking borrowers to put down a 25% deposit, from the previous requirement for a 15% deposit.
Meanwhile other major lenders have lowered their maximum loan to value to 80%, meaning there is a requirement for a 20% deposit. Mortgage Express (The UK's largest Buy to Let lender according to Council of Mortgage Lender statistics) have also withdrawn their 90% loan to value Buy to Let products. In the last five years Buy to Let lenders have lent at 85% loan to value, with many lending up to 90% loan to value last year. However some lenders are now introducing a maximum loan to value of 75% or 80%.
First time Buy to Let investors are also likely to find their mortgage options decreasing. The Mortgage Works will no longer be lending to first time landlords, a stance also taken by UCB Home Loans.
It remains to be seen if these changes will become the market norm and if other lenders will follow suit.
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Gross lending declines in February
Gross lending declined to an estimated £24 billion in February, down 7% from £25.9 billion in January and 6% from £25.6 billion February 2007, according to the Council of Mortgage Lenders.
The Bank of England approvals data for January showed subdued levels of house purchase activity and a sharp rise in remortgage approvals, which is likely to be supporting current lending volumes.
CML director general Michael Coogan said:
We have entered a substantially slower phase in the housing market and there will be ongoing problems in the mortgage funding markets unless the Bank of England makes new, broader based attempts to improve levels of liquidity in the UK.
Demand for mortgages remains strong but cannot be fully met from existing funding. This has led many lenders to reduce their product ranges, increase their mortgage prices and in some cases, to reduce their lending capacity.
As credit conditions change markedly from day to day, lenders will continue to rapidly adapt their products and pricing to match. This is a vital response to the uncertain conditions.
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