Shahram Kordestani, who owns seven UK rental homes, has advice for investors eager to join the swelling ranks of landlords: Do so at your peril.
Kordestani, who has been renting homes in London and southeast England for about 12 years, said when interest rates rise, the jump in mortgage payments will hammer buy-to-let investors who have helped push up property values.
“There is going to be mayhem,” said Kordestani, 52. “Whoever pays those prices is going to suffer.”
The loan-to-income cap that Bank of England Governor Mark Carney introduced last month to cool Britain’s housing market does not apply to buy-to-let – the fastest-growing type of mortgage by value. Economists say a hike in the central bank’s benchmark interest rate or falling prices could result in a repeat of the past, when repossessions of private-landlord homes hit a record high after the 2008 financial crisis.
“It was a mistake not to include buy-to-let investment,” said Rob Wood, a former central bank official who is now an economist at Berenberg Bank in London. “It’s one way in which households can speculate on house prices rising and that is exactly the sort of dangerous debt build-up that Mark Carney was trying to avoid.”
Buy-to-let lending is climbing as Britons rent properties for longer periods. The proportion of amateur landlords – those who supplement their salaries with rental income – reached a record 72 per cent of the buy-to-let industry in the first quarter after rising by 10 per centage points in the two years through March, according to the National Landlords Association. There are 1.7 million residential landlords in the UK, the group said.
Private landlords
Lenders provided 2.2 billion pounds (US$3.8 billion) of private-landlord mortgages in April, a 57 per cent increase from a year earlier, according to the Council for Mortgage Lenders. Almost half of that by volume was refinancing. Gross mortgage lending increased 36 per cent to 16.6 billion pounds and loans to first-time buyers gained 47 per cent to 3.5 billion pounds in the same period.
Homes bought as rentals made up about 14 per cent of new mortgages during the second quarter, according to the CML Lenders offer a record 637 buy-to-let mortgage products, a 37 per cent rise from a year earlier, according to broker Mortgages for Business Ltd.
Lenders “who aren’t into it want to go into it; those that are there want to expand,” said Richard Sexton, a director at property appraiser e.surv. “It’s a different pool to fish in.”
Pre-crash surge
Financing for residential rentals became easier to obtain starting in the 1990s, when the government allowed more companies to provide mortgages. That fueled a 19-fold increase in buy-to-let lending in the decade through the end of 2007, during which UK home values tripled.
The market collapsed as the credit crisis spurred a 15 per cent drop in UK property prices in the 18 months through March 2009. In the first quarter of 2009, there were 1,700 repossessions of buy-to-let properties and lenders appointed 2,400 receivers, who collect rent payments when a landlord is in arrears, according to the CML.
The repossessions, at 0.15 per cent, were higher than the 0.12 per cent across the wider market, CML said. As the London real estate market began to recover, new lending to UK rental-property investors rose by 40 per cent in 2011, outpacing new residential lending.
Bank rules
Carney last month introduced limits on mortgages worth more than 4.5 times the borrower’s annual income and mandated an affordability test in an attempt to slow runaway prices in London. Values in the capital surged about 20 per cent in May from a year earlier, the most since 2002, the Office of National Statistics said. UK prices climbed 10.5 per cent, the biggest acceleration since May 2010.
Kordestani planned to add a seventh property this year in Kingston-upon-Thames, southwest London, only to find that values for properties like the two-bedroom Victorian cottage he sought had jumped by more than 50,000 pounds in six months. Instead, he bought a home in Woking, 15 miles (24 kilometres) from Kingston.
The Bank of England’s (BoE) new home-loan restrictions follow rules introduced in April after the Financial Conduct Authority’s Mortgage Market Review. The rules, which don’t apply to buy-to-let mortgages, require borrowers to prove they can afford to make payments even if interest rates rise.
Rate warning
One in three of the 50 economists surveyed by Bloomberg predict an increase this year from the record-low 0.5 per cent benchmark rate the BOE has maintained since March 2009.
Aldermore Bank Plc, which provided Kordestani with his last mortgage, offers a two-year fixed rate buy-to-let loan of 4.08 per cent for 70 per cent of a home’s value, according to the lender’s website. — Bloomberg