Paragon Buy-to-Let Debate

Buy-to-let is a growing investment opportunity and the fifth Paragon Buy-to-Let Debate held last week in Westminster was proof that it’s a topic that provides much discussion. Questions covered during the morning included whether tenants were getting a fair deal, if first-time-buyers were losing out to landlords and the much debated increase in stamp duty on second homes.

The BBC Question Time-style event was chaired by John Wriglesworth, Managing Partner, Instinctif Partners. The panel included John Heron, Managing Director, Paragon Mortgages; David Whittaker, Managing Director of Mortgages for Business; Richard Lambert, Chief Executive Officer, National Landlords Association; Patrick Collinson, Personal Finance Editor of The Guardian and Stuart Law, Chief Executive and founder of Assetz for Investors.

Where will Buy-to-Let go in 2016

In the context of the near 40% growth in gross buy-to-let mortgage lending in 2015, John Heron said that the last few months had seen an increase in applications to beat the stamp duty increase deadline. He explained that landlords are now less confident in the market, largely as a result of the upcoming 3% stamp duty surcharge and new tax on mortgage interest, which is leading to a slower rate of growth.

Stuart Law boldly stated that ‘buy-to-let is dead, long live buy-to-let’! In his opinion estate agents will likely be most affected and will instead look at changing their buying habits. He predicted a 20-30% reduction in high street agent sales in the buy-to-let sector over the next 2-3 years. He anticipates a significant increase in specialist firms facilitating buy-to-let investment through a company however as buyers look for more creative buying solutions.

David Whittaker highlighted that, according to Mortgages for Business data, investment via limited companies has gone up from 20% to 46% in the past 6 months alone. David Whittaker said that we should expect a growth slowdown in the buy-to-let market in Q2. However, Q3 and Q4 would become far more active. He expects total lending of between £42 billion and £45 billion (a 10% annual increase). Richard Lambert agreed, explaining that only 13% of recently surveyed landlords are looking to borrow more before April. He explained that we would probably see a rush of purchases in Q1, but that the market would decrease thereafter for a period.

Do the changes for landlords now create a level playing field for firt time buyers?

This question provoked much debate and comment. David Whittaker said that landlords were being used as a scapegoat and the real issue with the state of the housing market lies with the lack of new homes available to meet demand.

He stated that, should landlords look to leave the buy-to-let market, they will do so progressively over a number of years, rather than the market witnessing a mass exodus of investors.

He questioned how landlords could be the victims having made such huge profits over the years. Patrick said that he would like to see the Government implement further measures, citing rent controls as one option and restrictions on the type of buy-to-let property which landlords could purchase as another.

Both David Whittaker and Richard Lambert felt that the 3% stamp duty surcharge is largely a measure by the Conservative Government to plug the deficit. Richard also made the point that there seems to be very little long term vision for housing and that it is vital the Government wait’s to see the outcome of recent changes to the housing market, before implementing any further measures.

Patrick Collinson replied that he was surprised by phrases such as ‘landlord bashing’ and landlords being the ‘victim’, as in his opinion the last 15 years have provided a very uneven playing field in favour of first time buyers.

Enforcement and not regulation the key to tenant protection.

Richard Lambert highlighted the significant amount of protection that exists already but it all amounts to “hot air” due to the lack of enforcement. Lambert suggested accreditation as a possible system for assuring quality but the many reputable landlords would need to see credibility in securing this in order for the system to be effective and accreditation would need to be advertised and perceived as a badge of good repute.

Patrick Collinson agreed that excessive layers of regulation are counterproductive and future options might include “ASBOs for bad landlords” or striking people from sitting as a director on the Board of a company for misconduct in their landlord capacity.

Sue Anderson at the Council of Mortgage Lenders, from the audience, posed a specific question about rogue letting agents. John Heron said people must be prevented from setting up a letting agent overnight, which leaves vast amounts of tenant and landlord money at risk – this, he says, must be achieved through a statutory approach.

The panel all agreed that any sort of protection for tenants must be backed by additional resource. Lambert criticised the “clogged” UK courts system.

Are the FPC‘s plans to introduce macro prudential tools to limit buy-to-let lending unnecessary?

John Heron said that intervention from the FPC wasn’t warranted, the Bank of England already has powers of recommendation and would have already intervened if they wanted to. Implementing recommendations could damage the industry and makes little logical sense on the whole; buy to let arrears are half those seen by owner occupiers so essentially buy-to-let investors are the least risky to lend to.

David Whittaker commented that the FPC shouldn’t be looking to introduce new tools at this point, but rather wait to see the results from the current changes being implemented for buy-to-let first, especially given that the credit standards are improving, and have been doing so steadily since the credit crisis.

Patrick Collinson explained that there is a deep mistrust of the banks amongst the public. He agreed with the panel that it’s unfair to implement changes in this area given the current climate. He said that as the Bank of England can no longer use interest rates as a tool to intervene in regulating the mortgage market, they need something new and although he welcomes macro prudential tools, they shouldn’t be deployed at this point.

Stuart Law said that stabilising the banks is key. He said that Basel III will increase interest rates and asked whether we need this on top of mortgage interest tax, adding that the concept of banks needing to hold more capital is an “interesting one”.

John Heron came back into the discussion to say that banks have improved their standards but in order to support first time buyers we do need some high loan to value lending, but it is currently difficult for banks to provide these given capital requirements.

There are essentially two options: on one hand we can have conservative banks and low levels of lending, or on the other, a more permissive environment that serves the interest of society and industry. We can’t have it both ways however.

Stuart Law stated that the increasing % of people privately renting in the UK could only be good for the housing market as a whole. He made the point that flexible living arrangements can be beneficial for the economy – the workforce being able to transfer quickly to new locations. He noted that while renting can be a good solution for those who need to move regularly for work, in retirement, home ownership is a far better option as renting then effectively becomes a tax on retirement. Richard Lambert noted that the UK is currently in the midst of a shift in how the nation is housed.

While the Government is clearly more aligned with home ownership, the number of people needing to rent is rising and it is therefore vital that we as a nation understand what the ideal figure is for a tenure split as a healthy rental market is also very important. All agreed that clear analysis of the UKs housing needs were required in order to assess what is truly required in the future.

As a final point, Patrick Collinson questioned how many in the audience would be happy to rent for the rest of their lives, stating that in his opinion those who felt long-term renting was a viable option were often those who wouldn’t consider it for themselves.

The need for more affordable homes to rent must be understood

Patrick Collinson said we need a proper examination of both demand and supply of social housing in the UK. In his view, Right-to-Buy is an “upside down” policy in the sense that once a council house is bought by its occupant it often makes its way over to the private rented sector.

John Heron said we will struggle to build more affordable housing in the UK due to limited funds and there is too much emphasis on affordable ownership over affordable rental. Heron explained how the UK must go “back to basics” for a “root and branch” review of housing demand and use this as a basis to create a market based on need.

Stuart Law put forward an innovative approach to creating more affordable rental property; he argued that private investors with high levels of capital could directly fund housing associations.

Richard Lambert highlighted the problem that 30- 40% of the UK population need housing subsidies but social housing is in decline and fewer private landlords are willing to accept tenants receiving housing benefits. The government must find

Finally, when the audience was asked which investment, residential property, bonds or equities, would perform best over the next 5 years, the overwhelming majority (80%+) voted in favour of property. a way to subsidise the affordable housing need.