With all the initial furore around what was happening to pricing and affordability in the residential space, for a time the nature of the overwhelming impact this situation would be having on the buy-to-let and private rental sectors was perhaps initially ignored.
This is not the case anymore, and you will have seen in recent weeks a growing disquiet about what this means for landlords and their tenants, but also the buy-to-let lending market in general, and of course the entire PRS.
Let’s just say that things are clearly not good at the moment, and the immediate outlook doesn’t look particularly healthy either.
We recently dealt with two couples who have a handful of rental properties each – in different parts of the country – but for whom the conclusion ended up being exactly the same.
That is, with the way the buy-to-let mortgage market is, the difficulty in getting past lenders’ rental calculations, the impact of measures hitting profitability over the last decade with more to come, the threat of rental freezes, etc, it was looking increasingly likely they would divest themselves of their properties in the very near future.
If we are seeing clients in such a situation, you can guarantee that many advisers all over the UK are also doing the same, particularly for those who are at the point where they need to refinance, and are finding that to do so – if possible at all – is going to cost them perhaps two/three times as more in monthly payments. And that’s if they can meet the rental calculations which many lenders have changed in recent weeks.
We talk a lot in financial services about ‘perfect storm’ situations, but this is undoubtedly one for buy-to-let landlords, and those clients we are working with now are just the tip of the iceberg in terms of the rest of the community who are going to be dealing with the same situation in the months and years ahead. The payment shock is going to be considerable.
And that is just dealing with clients trying to get refinance, let alone, those who might wish to add to portfolios. In a sector where demand outstrips supply by a huge amount – just look at what is happening in University towns and cities such as Durham and Edinburgh – how can landlords make the financial case to try and meet that demand by adding to portfolios?
Answer: In the current situation you can’t. Landlords need a 40%-60% deposit and then rates are, at best, in the 6.5/7% region, which can only be achieved with a rental coverage far in excess of what can be achieved. One of the couples mentioned above was trying to remortgage £400k on an £850k property – the best we could do for them in the current market was a maximum loan of £220k.
No wonder they are thinking of selling up. After all, with rates going up, they could put their money in fixed-rate savings or bond account over a two/three-year period and probably achieve a 5% return, plus they do not have any of the stress and hassle that comes with being a landlord.
Of course, there is time for the market to calm down slightly and for prices, stress testing and overall criteria to fall back in line with a pre-‘Mini Budget’ environment, however nothing is certain here and we may well see things get a lot worse before they get even the tiniest bit better.
What we are likely to see is a two-tier lending market, split between those who rely on the capital markets for their funding, and those who are able to access deposits in order to lend. Unless we see a major drop in swaps, it is the latter lender community who are going to hoover up what business there is, cherry picking the very best and the lowest risk, while still making a significant profit because of what landlords will need to accept rate-wise in order to secure the funding they need.
And, overall, the supply crisis in the PRS is likely to get worse. Many amateur landlords will simply sell up, leaving tenants having to pay more for what limited supply there is.
In this scenario, the Government might get what it has always seemed to want – corporates replacing individual landlords but nowhere near to the extent of the property numbers required and with the added bonus that these organisations are unlikely to support tenants, freeze rents when required, and generally treat them like human beings, as individual landlords do.
The buy-to-let market is not dead but it will certainly need to see an injection or two of adrenaline to get its heart beating briskly again, and we’re afraid for many landlords, this will be the time to pull the plug.
Only then, will the Government perhaps understand just how important this borrower demographic has been, how a policy of demonisation has ultimately caused far more harm than good, and that it will be tenants who ultimately suffer the most.
Rory Joseph is director and Sebastian Murphy is head of mortgage finance at JLM Mortgage Services, the mortgage and protection network
