Rented Housing and the Buy-To-Let Boom
Renting rather than buying
The size of the rented sector in Britain is below other European countries. But there are
signs that the private “buy-to-let” market has partly reversed the long run trend towards
greater owner-occupation.

Renting is an alternative to buying.

The average cost of renting a property from private sector landlords has risen by over
30% since the start of 2000, well above the general increase in the cost of living.

One reason for the steeper price of rented property has been the large rise in demand
for rented accommodation from the influx of migrant workers into the UK.

Demand for rented property has also been stimulated by the worsening affordability for
owner-occupied housing.

If people are “priced out” of the housing market, unless they are prepared to stay with
family and friends or find somewhere to live from local councils or other social landlords,
they are driven into the private sector market.

Expansion of Buy-To-Let Schemes

Private letting has been a big growth area

“Buy-to-let” occurs where people purchase properties and then let them out to tenants.
This has the effect of increasing the supply of rented properties.

There are now more than two and a half million households living in a property rented
from a private landlord.

Most buy-to-let property buyers regard it as a financial investment which will generate a
flow of
rental income from their tenants.

Others are in the market in the hope of
making capital gains when they sell one or
more of the properties in their portfolio, For many landlords, it is their major source of
income.

According to research from the Council for Mortgage Lenders, the two biggest factors that
might cause buy to let investors to reduce the size of their property portfolios were rents
being insufficient to cover the mortgage and secondly, rising interest rates. Many buy to
let investors remortgage their existing homes to free up funds to buy and then let out
new properties.



What Explains the Growth in Buy-to-Let?

The demand for rented properties has increased leading to increase rents and therefore
profit motives for private landlords. Demand for rented property has increased for a
number of economic and social factors:

Social factors: Social change has played an important role - for example increased job
mobility; greater student numbers; graduating students burdened with loans; and the
increase of single-person households. Some commentators attribute the recovery in
renting down to the appeal of flat and house-sharing like the young professionals in
Friends, the successful US television sitcom!

Financial incentives: Private investors like owning rental homes because they see
good returns - from both rental income and capital growth. Over the past decade
residential property has returned a higher return that stock market.

Specialised mortgages: The buy-to-let market has been stimulated by the rise of
estate agents dedicated to letting - and lenders keen to provide specialist mortgages.
There are now more than 40 banks and building societies that offer buy-to-let money. Big
players are Nationwide, Paragon, Bank of Scotland and Britannic Money, among others.
Typically, landlords can borrow up to 85 per cent of the value of a home at interest rates
of less than 2 per cent over the base interest rate.

Some believe that
demand for rental property should grow over the long term. Some
analysts expect almost 4m new households to be created in the next 20 years - and more
than a quarter of these are expected to rent.

The
supply of new homes being built is limited - helping to keep rent levels high.
Some are concerned that about pressure on rents and the effects of
over-supply of
rented property especially in London.
If interest rates rise this will slow property inflation and damage the economics of
buy-to-let.
Often landlords underestimate the costs of management and repairs and re-lettings.
Average rents in the rental sector like any market depend on the balance between
demand and supply!