No matter where you turn at the moment, there is a pervasive sense of doom and gloom surrounding the health of the buy-to-let market.
A stream of stories predicting the death of buy-to-let (BTL) as an asset class seemed to come thick and fast last year, particularly after September’s ill-fated mini-Budget.
Recently, one national newspaper even went as far to predict the “collapse” of the entire BTL market, citing higher rates and soaring costs as the driving forces.
Is that a true and fair assessment of where the market really is in 2023? Or are the doomsayers overplaying the headwinds facing the sector?
You may or not remember, but I issued a staunch defence of the BTL sector on these very pages last summer.
But conditions have shifted significantly since then and, therefore, I felt it was time to reassess the health of the market.
Lending
There’s no doubt activity in the buy-to-let will be quieter in 2023 than it was last year, mainly due to higher mortgage rates and waning confidence in the housing market.
UK Finance predicts gross buy-to-let lending of £43bn in 2023, or 22.8% less than the £55.7bn lenders advanced last year.
However, that’s not exactly a fair comparison. Last year, lending was artificially boosted by an unusually high number of landlords remortgaging at the same time.
It would not be fair to compare 2023’s predicted lending total against the £47.4bn advanced in 2021 either, as the ending of the stamp duty significantly lifted activity.
Strip away those two years and the £43bn of lending predicted for this year doesn’t look that bad. It would be slightly less than the £44.bn lenders advanced in 2019 but more than every other year on record.
Viewed through that lens, the predicted slump in activity doesn’t look like the disaster it is being painted as by some commentators.
Mortgage rates
Buy-to-let mortgage rates had been rising steadily since the start of 2022 but they really went into overdrive following the mini-Budget.
Data from Moneyfacts reveals the average 75% LTV two-year fixed rate has shot up 278 basis points to 5.78% over the past year. The average five-year fixed rate at the same LTV band has risen by 268 basis points over the same period.
While that is a significant increase, remember we have been living in an artificially low interest rate environment for 15 years and so rates had to rise sooner or later.
If you go back to the period immediately before the crisis in 2008, rates were not too dissimilar to where they are now.
Yields
Over the past few years, landlords have had to face higher taxes and reams of new legislation, all of which have raised their costs.
However, many argue that an inability to hike rents enough to cover higher increased monthly mortgage payments will be the last straw for many landlords.
While that may well be the case for some, it’s not the case for the majority, according to the data.
According to Zoopla, rents rose more than 12% last year, with the UK’s largest cities – where most landlords are based – registering the fastest growth rates.
While Zoopla predicts rental growth will slow in 2023, it believes the ongoing mismatch between supply and demand means rents should rise a further 4 to 5% this year.
If that happens, yields will rise, which will help cushion the blow from rising interest rates and also enhance buy-to-let’s appeal as an asset class.
The new landscape
Of course it would be foolish to argue that buy-to-let doesn’t face challenges at the moment.
However, I hope I have shown that the sector is not about to fall off a cliff either.
Of course, the landscape has changed significantly over the past six months and challenges remain.
Some smaller landlords may decide to jump ship, but I am convinced others will see this as a golden opportunity to expand their portfolios.
The buy-to-let sector has been through tough times before – somewhat tougher than this, I must add – and it has always bounced back.
For that reason, I remain confident in the sector’s medium-to-long-term prospects. And you should, too.
Phil Riches is sales director of specialist buy-to-let lender Keystone Property Finance
