Buy-to-let provides housing market stability

The buy-to-let market continues to remain robust in the face of rising borrowing costs, according to Paragon’s July Buy-to-Let Index.

Increasing property prices and higher borrowing costs are causing a slowdown in the mainstream mortgage market, but with strong rental demand landlords are able to raise rents to cover the increased mortgage repayments. Rents rose by an average of 3.04% over the past three months - an annualised growth rate of 12.7%.

Yields have remained stable at around the 6% mark for over a year - although when landlords’ gearing is taken into account the rental return is much higher. The average landlord property value rose 1% during the month to £181,533, while annual total returns, including capital gains plus rental income, stood at 11.6% – the highest level since April.

Recent figures from the Council of Mortgage Lenders revealed that buy-to-let mortgages accounted for a record 12% of all new mortgage loans in the UK in the first half of the year. The sector continues to attract investors as the number of people wishing to rent property grows.

The average age of a first-time buyer now stands at 34, although many people put off purchasing property until much later in life as affordability issues, lifestyles and a lack of savings make house purchase a less attractive option. Although home ownership remains the long-term goal for the majority of young people, there is an increasing preference towards renting during their twenties for mobility, flexibility and affordability.

Nigel Terrington, chief executive of Paragon Group, said: “Buy-to-let provides housing for young people, who otherwise would be forced to buy and be stretched beyond their means. It would result in dramatically higher levels of repossessions in the housing market.

“As owner occupiers are increasingly struggling under the weight of higher borrowing costs, buy-to-let landlords can provide accommodation for the growing number of young people who want a flexible lifestyle or who aren’t yet ready to step on the property ladder.”

With mainstream arrears on the rise, the stability of the buy-to-let market is crucial for the health of the whole housing market. Landlords have been able to absorb the interest rate rises as the average gearing on their portfolios is low at just 38%. According to the CML, only 0.63% of buy-to-let loans were in arrears of more than three months during the first half of the year, compared to 1.06% of the wider mortgage market.

Terrington added: “Unlike owner occupiers, landlords earn income on their property, and can raise rents too. They are not completely sheltered from the effects of rising rates but we would expect arrears in the sector to continue to perform better than those in the mainstream market. With low average gearing on portfolios and strict LTV and rental cover guidelines in place, most landlords are well placed to weather higher interest rates.”