This project is funded by the Financial Services Research Forum.
Duration: April 2008-March 2009
Principal Investigators: Andrew Leyshon and Shaun French
The growth of the buy to let (BTL) market is a notable achievement of the UK financial services industry. The re-regulation of the private rented sector in the late 1980s encouraged the Association of Residential Letting Agents (ARLA) and private sector lenders to develop BTL in 1996; by 2007 it accounted for 12% of all mortgage lending in the UK (939,000 outstanding BTL loans collectively valued at £108 billion). The development of the BTL market has produced social benefits, such as the revival of the private rented sector increasing housing tenure choice. It has also enabled the market to respond to the growing demand for rented property as a result of social change, the rapid growth in the number of students, and increases in the number of immigrants in the UK. Moreover, the BTL market has provided an alternative investment channel for those seeking regular returns through rental income and/or long-term financial security through capital gains in the value of property.
BTL has been subject to a number of studies in recent years (for example, Pannel and Heron, 2001; Rhodes and Bevan, 2003; Scanlon and Whitehead, 2005; Thomas, 2006) which suggest that the market is relatively robust, due to the long-term aspirations of BTL investors, lower levels of repossession for BTL mortgages and the fact that BTL borrowers tend to be less highly geared than do first-time buyers. However, despite general optimism such studies have also highlighted a source for concern; the stability of the BTL market will be severely threatened by interest rate rises and/or declines in rental income. We are currently at such a moment of risk due to shifts both in the domestic and international economies. There have been five interest rate rises within the space of a year, while the continued expansion of the BTL sector has seen the supply of property on the market increase, exerting downward pressure on rents. In August 2007, ARLA estimated that 67% of BTL landlords realised a rental return of 5% or less while interest rates are currently at 5.5% (Thomas, 2007), casting doubt on the future growth potential of the market and limiting the scope for remortgaging. In addition, recent problems in the sub prime mortgage market, the crisis in interbank lending, and growing evidence of a credit crunch, means that many financial institutions are assessing their approach to the BTL market. A number of institutions have abandoned the market altogether, while others have reduced their range of BTL products and/or increased interest rates to control for increased exposure to risk. Finally, the burden of regulation has increased, adding to the cost of compliance for BLT landlords. Such changes are taking place against a background of growing public concern about the impacts of the BTL market, such as the crowding out of first-time buyers and the homogenisation of some local housing markets, with implications for the provision of local services such as schools, as families are priced out of some local housing markets in favour of multiple occupancy properties.
This project aims to undertake a survey of the BTL market in 2008 to determine the implications of interest rate rises, a change in the appetite of financial institutions for the market and increases in the regulatory burden. It will explore the response of the main stakeholders to these changes through a case study of the BTL market in Nottingham, one of the most important markets for BTL outside London (The Guardian, 2007). The sustainability of the BLT market will be determined through an examination of key actors positioned along the BTL value chain, which will include BTL investors, lenders, local government and community groups, and regulators. A desk-based review of extant reports and databases will provide a context for the research through an analysis of the characteristics of buy-to let investors. Through a case study approach the project will combine a focus on broader processes of change with attention to substantive material outcomes through empirical examples. In particular, the research will provide a detailed assessment of the robustness and sensitivity of the BTL market to external shocks and will contain an assessment of its future prospects in terms of its size and value.
This research project is relevant to both practice and policy in the field of financial services and will provide critical insight into the consequences of macroeconomic and regulatory change for the BTL market in the UK. Interviews will be conducted across the range of the BTL value chain and will indicate how the market is adapting to exogenous pressures, and will provide pointers to ongoing and future developments. The case study approach will provide an insight into the ways in which the BTL has local impacts, and how both local and national regulators and activists seek to understand this phenomenon.
Pannel B, Heron, J, 2001, Goodbye to But-to-Let? Housing Finance, November, 18-25
Rhodes D, Bevan M, 2003, Private Landlords and buy-to-let, Joseph Rowntree Foundation, October (http://www.jrf.org.uk)
Scanlon K, Whitehead C, 2005, The Profile and Intentions of Buy-to-Let Investors, Council of Mortgage Lenders, London
The Guardian, 2007, Nottingham’s forest of housing despair, June 16 (http://money.guardian.co.uk)
Thomas R, 2006, The growth of buy-to-let, Housing Finance, September, 1-14
Thomas D, 2007, Lending slows for but-to-let, Financial Times, October 5 (http://www.ft.com).
Contact Andrew Leyshon (firstname.lastname@example.org) or Shaun French (email@example.com)