Buy to Let has been making a lot of headlines lately in the UK – the rising number of mortgage products available, higher LTVs, and low interest rates all fuelling debate about the sector along with suggestions that regulation might be round the corner for lenders.
The mortgage world has hit back at calls for regulation – basically claiming that no-one understands and the calls would damage the industry, citing that regulation would not protect investors and hinder lending. What the mortgage world failed to see was the calls for regulation are not about protecting investors at all – more to protect the public from reckless lending by the banks that caused the rise in house prices in the first place.
The mortgage world has since hit out again with attention grabbing headlines such as “BTL stealing FTB homes is baloney” following discussion at the Sesame Conference in London this week with one speaker (Matthew Wyles, group distribution director at Nationwide) stating “Quite unfairly some commentators have blamed first-time buyers’ inability to buy on Buy-to-Let investors. I think that’s just utter, unadulterated baloney.” Several other high profile bankers echoed Wyles sentiment, amongst them Mike Jones (director of intermediaries at Lloyds Banking Group) and David Finlay (intermediary channel director at Barclays).
Quite aside from whether one enjoys ones baloney adulterated or otherwise – once again, the banking world appears to have missed the point. Whilst I will agree there is some anecdotal evidence to suggest that some are laying the blame on Buy to Let investors, the reality is, if Buy to Let mortgages were not being touted as extensively as they are, and the Government had not opened up REITs to be able to invest into residential property – demand would have come down.
With demand falling – house prices would have fallen too, bringing them back in-line to more affordable levels within the current economic situation.
The problem is not, and never has been, Buy to Let investors – the problem is the banks believing they understand house prices – and gambling with lending products to fuel the market based upon average statistics that have all the use and accuracy of a chocolate tea-pot full of piping hot Earl Grey.
Wind the clock back 20 years – Buy To Let existed largely in student towns like Oxford and Cambridge because the market existed and demand was there. Landlords went about their business in their Rising Damp style and life was good, they made a few quid, their tenants didn’t really like them – but no-one came to any harm.
Out of nowhere the Buy To Let mortgage appeared followed promptly by “Other Peoples’ Money” style investing, often under the guise of “own a whole street of property in under a year and be a bazillionaire before you are 30”. The idea being to put down a small deposit, grab an interest only mortgage, rent the property out and cash will simply fall from the sky!
The problem was of course that property prices could not continue to rise at the rate they were, the rise was based on the increase of lending products, and compounded by the risk the banks were taking. At the time 100% mortgages were available, NINJA’s (No Income, No Job, No Assets) were commonplace and the bankers were raking it in at the same time exposing themselves to more and more risk.
Then of course the crash – someone noticed somewhere that the banks’ mortgage books couldn’t continue to hold the levels of risk they were exposed to, the US subprime debacle started to surface and the proverbial hit the very fast spinning fan.
So let’s just take a step back for a moment and cover a couple of easy to digest points in case any mortgage providers are reading:
Why did the housing market start to boom?
- Mortgages were easier to get
- LTV rates increased
- Interest only options were available for longer
- Buy to let mortgages were invented
This being the case – Why were the above points allowed to happen?
- No regulation on lending volumes against risk
- Creation of mortgage products with only limited knowledge of the property markets
Ask yourself a simple question – If lending had been better regulated, and Buy to Let mortgages did not exist, would the housing market be in the state it is now?
The vast majority of people that own Buy to Let property now (as opposed to 20 years ago) only do so because the finance was made available – not because they all wanted to become landlords.
The banks have no excuse. They almost all provide house price indexes to tell us all what’s going on – the only problem is the data they use is limited to their own products, and only shows averages for large regions or in some cases only the entire country.
Either the banks have higher quality data and don’t want to share it because it isn’t as favourable, or they are basing mortgage product decisions and lending off the back of useless data in the first place!