The problem that is the Buy to Let sector in the UK

A long running theme of this website has been that too much economic effort is put into the housing sector except in the area of building houses. This has been reinforced in the credit crunch era where a litany of economic measures have boosted the housing market. We had a Bank Rate cut to 0.5% ( one of the longest running emergency measures ever) , £375 billion of Quantitative Easing and when they did not work July 2012 saw the Funding for Lending Scheme. The latter saw mortgage rates pushed lower by up to 2% according to the Bank of England and was the trigger for the house prices to rise again. There have also been other measures under the “Help To Buy” banner. But the overall effect has been to create a put option for house prices as we seen a Baron King and then Mark Carney put in play here.

This has reinforced the long running view that investments in housing are “as safe as houses” and lead to the UK economy being tilted that way. Some of this is self-reinforcing in that as house prices rise those who buy them as a business make a profit and of course contrary to the official “Help” theme it becomes more difficult for people to afford to buy and thus more rental customers are created. As long as it lasts it is pretty much self-fulfilling.

As I pointed out on the 7th of this month the situation has gathered pace in recent times.

From 2012 to mid-2013, annual changes in house prices and annual weekly earnings remained similar; since then, house price growth has outstripped earnings growth……Affordability has decreased in recent periods, with annual house price inflation at 8.3% in April 2016, while the annual increase in earnings was 2.5%

You may note the use of the number 8 for house price to earnings ratios. A consequence of this is that there are fewer owner occupiers these days as the numbers have fallen from 18.2 million (2008) to 17.7 million (2014). The slack has been taken up surprise,surprise by the private rented sector where numbers have risen from 3.9 million to 5.3 million over the same time period. We can only suspect and infer that those trends have continued since then.

As to the future well it looks as though it will be a rental one.

In 1991, 67% of the 25 to 34 age group were homeowners. By the financial year ending 2014, this had declined to 36%.There were also reductions in home ownership over the same period for the 16 to 24 age group (from 36% to 9%) and for the 35 to 44 age group (from 78% to 59%).

There is something of an offset from more older people being homeowners but overall the numbers are falling.

Putting this another way I noticed this in a report from the Institute of Fiscal Studies this week.

Twenty years ago over two-thirds of middle-income children lived in owner-occupied housing, compared to 40% of the poorest fifth of kids. Today only half of middle-income children are in owner-occupied housing.

Where have they gone?

But they ( the poor) have shifted away from social housing towards private rented accommodation, which – you’ve guessed it – is where those in the middle are increasingly found as well.

The Bank of England

It has weighed in on the subject this morning as it analyses whether there is a bubble here. At the risk of spoiling the suspense the answer will be no unless somebody actually wants their employment to be terminated today. However we do get more data on the subject.

Since 2008, the number of outstanding buy-to-let mortgages grew by 6.1% per annum on average, while the number of owner-occupier mortgages fell by 1.7%.

This has led to this.

Rapid growth rates in the buy-to-let market have caught the attention of policymakers.

Indeed, they have regularly told us that they are “vigilant”. Anyway let us continue.

The share of the PRS (Private Rental Sector)  as a proportion of all properties in the UK has been rising since 2002, financed in part through the expansion of buy-to-let lending.

Tenant Demand

We get an analysis of why there is more demand to rent.

Demographics matter because there are cohorts of the population, such as students, immigrants and younger people, who are more likely to rent. If these groups expand, all else equal, we expect there to be more demand for PRS properties.

There are one or two sub-plots there as of course much of the increase in students was centrally planned vis the expansion of universities as we note it missed out the implications for housing in another in the long list of central planning failures.

Then we get an enormous swerve as the Bank of England turns a Nelsonian style blind eye to the issue of affordability.

We think of affordability constraints as borrowers’ ability to secure a mortgage given a set of credit conditions…….Our analysis focuses on credit conditions, which we can quantify more readily.

This is really quite poor as we measure something regardless of it being more minor and ignore the bigger issue. However it is not without value as there was a change in credit conditions.

Our estimates suggest that, as a result of the withdrawal of high LTV mortgages, ‘frustrated’ demand for mortgages from prospective home owners meant one million additional households required PRS accommodation, accounting for 66% of the growth in PRS properties during the period

Anyway they cannot completely ignore affordability.

We believe the unexplained growth is related to housing becoming less affordable.

Actually more than that as if it was in from the beginning the whole analysis would change. Oh and I told you so.

Without concrete evidence on the impact of buy-to-let mortgages on house prices, it is not possible to say whether the gap represents a buy-to-let ‘bubble’

Looking Forwards

The Bank of England suggests there will be a slow down in demand.

Our projection suggests that additional tenant demand for PRS properties could be less than half between 2014 and 2019 compared to the post-crisis period…This translates to an average annual growth for the number of outstanding buy-to-let loans in the range of 2-7%. By comparison, average annual growth for 2014 and 2015 was 7.6%.

The problem is that the elephant in the room returns as we are told this.

The extent to which demand for PRS properties falls primarily rests on whether frustrated prospective first-time buyers from the post-crisis period eventually secure a mortgage.

You see this links us to a past piece of research which did not ignore the elephant.

For first-time buyers, we expect the issue of affordability to persist. Increased availability of low deposit mortgages could help but are easily outweighed by continued house price increases.

Comment

There are quite a few factors to consider here. The nation is changing as fewer become owner occupiers and more rent especially from private sources. As I recall my grandparent renting nearly everything ( for younger readers they rented their TV for example) it makes me wonder if we are going back to the future as more and more things are rented rather than owned. If a rentier style culture and economy is a concern well it is getting a bigger concern.

Let me be clear there is no harm in individual examples of buy to letting or renting. My issue is that it has become perceived as a road to easy profits which shifts the economy towards it and weakens other productive sectors as resources are shifted. This road has been backed and supported by government policy and the money made is invariably out of capital gains rather than the rent itself. That does not look stable to me especially as governments are heading towards the limits of what they can do.

In a way it speaks for itself that in its road to concluding that there is no bubble the Bank of England does its best to ignore the biggest issue which is affordability. But they do remind us of an important issue which is that we discuss the availability of cheap credit but that it applies to far from everyone. It is of course another theme of this website that these days there are quite different effects on different economic groups as we become ever more heterogeneous. In a way it would appear that Andy Haldane agrees with me.

So far at least, this has been a recovery for the too few rather than the too many, a recovery delivering a little too little rather than far too much.

Meanwhile regrets already?

Andy Haldane has also said this today.

In my personal view, this means a material easing of monetary policy is likely to be needed,……..And this monetary response, if it is to buttress expectations and confidence, needs I think to be delivered promptly as well as muscularly.

He has been kind enough to help with a new definition of promptly for my financial lexicon for these times.

By promptly I mean next month

 

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30 thoughts on “The problem that is the Buy to Let sector in the UK

  1. There are more than financial reasons for the drop in younger home-owners, the prime amongst them being the deferred adulthood.

    I’d be interested in the difference between the average age of young people entering the workforce 40 years ago, with today’s university-attending, gap-yearing youth.

    This excellent article further gives the lie to the idea of a generation war, as BtL was an accelerating problem prior to drawdown of pensions.

    • Hi therrawbuzzin

      I like the phrase “deferred adulthood” :). The change in ages reminds me of a Yes Prime Minister episode where changes in school age were presented as a way of reducing unemployment as we mull again the expansion of university education.

  2. first off,

    this so called “generation” war is one that the TBTF Banks love us to believe.

    secondly

    these stupidly high house prices are stiffing not just first time buyers but anyone wishing to move up the scale 1bed > 2 bed > 3/4 Bed , etc,etc

    Home ownership the last time looked about 6 months ago has been steady in numbers

    What has changed is the rented sector – from local council housing to private and association

    so all across the first world and NZ /OZ the rush to pump up assets continues ( ie housing)

    this is the leaky QE effect surely ?

    because if these “assets” were based on the “old” measurement then the Banks are BUST

    pile on student loans ( not is yer scottish) and other debts , cant afford to rent , cant afford to buy .

    gonna be fun soon

    Forbin

    • Hi Forbin

      Yes you are right about the local authority housing numbers. I still have the ONS data on my laptop and in 1980 there were 6.7 million such households and only 2.2 million in 2014. Housing authorities have taken up some of the slack ( 0.4 million to 2.2) but private renting has gone from 2.5 million to 5.4.

  3. One of the things George Osborne was doing was to try to put a bit of a brake on BTL by gradually altering the tax rules so that the leveraged landlord model wouldn’t work any more. I sincerely hope this will be continued by the new government. Because so many MPs are landlords there are a lot of vested interests in keeping the status quo (ie the present system) going for as long as possible.

    Maybe the penny is finally dropping when their adult children also can’t afford to move out to their own place. Rents are also very high and saving for a house deposit is very difficult unless youngsters carry on living rent-free (or at a low rent) with their parents.

    A house price crash (sorry correction) would really help youngsters to be able to afford their own place. As you point out all the “help” schemes have done is push prices up even further.

    • ” As you point out all the “help” schemes have done is push prices up even further.”

      And depressingly been hailed as a “success” ……..

      YES! saved the Bank yet again , RESULT !!!

      was heard from No 10…..

      Forbin

  4. I fear that the solution will be more of the same. As much as one can discern the researchers in or around the Bank of England reckoned QE achieved little yet Carney and co want to sneak it in under the all encompassing excuse of BrExit. Regardless of the Bank of England’s view I view this as repeating behaviour and expecting different results.

    A more cynical more leftist might say they want to transfer even more wealth to asset holders. They have no other plan.

    • Hi Bedfont

      Mark Carney has always given me the impression that he is not a QE fan. So it will be interesting to see if it is produced out of the hat at the August MPC meeting. As we have discussed on here many times he is prone to fashions and U-Turns.

      Also the Andy Haldane speech was released for a reason I think. To give us the expectation of a lot of easing next time around.

  5. Tax benefits of BTL, super low interest rates and gilt yields and loose credit as wella s HTB etc has fuelled a housing bubble and unaffordable prices across the country but especially in london.

    That ahs very obviously led to a reduction of FTB (new entrants) into the housing market for owner occupation.

    That directly ahs led to an increase in the PRD which fuelds more BTL etc justa s Sean has stated.

    ONLY a price correction will fix this. The correction can (and probably will) be triggered by a combination of:

    Base rate rise
    End to oepration Twist (unwinding the UK’s QE)
    Tighter lending rules
    Tax changes to BTL
    Restrictions on foreign ownership
    tax penalties for unoccupied housing (PRS or OO)
    Social Housing policy to build council homes
    Reduction in Housing benefit as as result of Social Housing policy
    Tightening of Immigration policy and related benefits entitlement

    I wish ALL of the above would happen so the UK can get back to some semblance of normality (As a potential FTB in my 30’s living in London I think I’m entitled to want this.)

    • I would willingly sacrifice 30-40% of the value of my house for your generation, Anand, and I have no children.

      • Means a lot that there are folks out the that do see the bigger picture. Ive put on hold having a family because I cant really see myself bringing up kids in a rented flat in London. Prices go up faster than my annual savings and have done for the last 20 years give or take the odd blip. Its tragic.

        And moving well out of London doesn’t work. I’m born and raised in NW London,. family and friends ALL here and my work is City of London centric (NOT A BANKER!)

        I love my city but its not letting me LIVE my city!

        Ah well, pray for a correction!

        • It will be quite spectacular as a key issue with BtLs is yield. In the past, this has of course been mainly price rises, which has driven down the necessity to make much income yield. Given that prices have apparently peaked, then what? As I said a few days ago, my late great-aunt’s house in Parson’s Green (“South Fulham”) yields about 3% on each of the two flats it is now in. If rates move just 2% and so, it has to produce 5% yield solely from income, then the logic of pricing on that yield is that the now £700K flat (about £20Kpa rent yielding at 3%) will suddenly become about £400K.

          That of course has been an underlying issue with BtL – there has been enough demand to maintain rents while the yield can shift values spectacularly, especially at low levels – a required 2% yield would double the value if only 1% were required later, an effect which would require 8% to 4% to have the same doubling (or halving( effect. However, the problem with housing markets is that they can produce a lot of extra supply very quickly, which could potentially shift the supply & demand rental market. I remember this happening after 08, when the TV presenter Konnie Huq was shown, having bought a couple of flats in one ofb the London big developments. When the rental market crashed, so the flat values went down and many in her block were sold off to a housing association. Shaun has noticed problems in a Battersea development and now, the massive (Chinese funded) flat-building development at Greenwich Peninsula has slowed very suddenly – compare that with this from 2008 http://www.bbc.co.uk/london/content/articles/2008/11/03/greenwich_social_homes_feature.shtml

  6. Great blog as always, Shaun.
    After reading your blog, I took the trouble to read Andy Haldane’s speech. Either he has real problems understanding the UK’s real income estimates himself, or he is guilty of dumbing things down to a quite unacceptable level in his speeches. On p.6 one reads: “If we take net overseas income out of GDP, to give a measure of net national disposable income per head, it has recovered even more slowly than GDP per head. It is currently at levels little different than its pre-crisis peak (Chart 3).” If one checks the chart, what he is referencing is real net national disposable income (RNNDI) per head, and its level is not “little different from its pre-crisis peak” of 2007 in 2015. It is clearly inferior to it. RNNDI is the broadest measure of real income as defined by the ESA 2010 manual. I gave up trying to get ONS to tell me how it calculates it, although in terms of the sequencing used to get there described in “Measuring National Well-being” by Jawed Khan and James Calver, it would seem that RNNDI as calculated by ONS does not conform to RNNDI as it is supposed to be calculated according to ESA standards. (Post-Brexit perhaps this won’t matter.) In any case, it involves way more adjustments than Andy Haldane mentions, including removing consumption of fixed capital from GDP (that’s why it’s net, not gross) and the trading gain or loss from the changes in the terms of trade. If you just take net overseas income out of GDP one of course gets GNP, not GDP. Is the chief economist of the Bank of England really not aware of this?
    It would be interesting to analyze just why real income per capita for people in the UK, after pretty solid growth, was still well below peak in 2015. However, it would seem to me that should be the task for some economist in one of PM May’s ministries, not the chief economist of an inflation targeting central bank.

    • Hi Andrew and thank you

      You have made a good spot there as the level is ~98 compared to 100 in 2007. If this is worth a mention.

      “Indeed, GDP per head today is only around 1% above its pre-crisis peak”

      Then something of the order of 2% lower is not “scarcely been any recovery” is it?

      I have to say when I look at the wider measures such as NNI and its derivatives I see so many assumptions used that I loose what little faith I started with!

      • I’m quite annoyed (but not surprised) that no politician or mainstream commentator ever mentions GDP per head. Surprised the Leave campaign didn’t, very strong argument that our perceived strong economic growth is ALL fueled by simply growing the population (largely via Immigration).

        Fools errand! it will all end in tears if we cant start generating REAL GDP gains per capita.

        And I don’t really see that happening until the countries competitiveness is boosted (requires lower Jobs tax and lower cost of living, specifically houses).

        Instead of Corp tax cuts to 15% we should be targeting a reduction in taxes on jobs, namely Employers national insurance AND Employees national insurance. no more Personal Allowance changes please, its a sly attempt to pretend to help the poor!

  7. Hi Shaun, good analysis as ever. This is one of my major complaints, and I think chimes very much with one of your other themes. Namely our banks are almost useless at lending unless it is for property purchase, speculation or development. If you invent a widget or want to expand an eisting business or even have simple cash flow issues, then they are simply not interested nine times out of ten. Quite right you have termed it “Funding for (Mortgage) Lending. Whilst our baks are probably in a better state than

    At least the noises coming from the new occupant in No10 appear to suggest changes afoot. Unceremoniously sacking Osbourne was I suppose some sort of contrition from the Government. Maybe we will see a policy attempt at rebalancing the economy beyond parroting trite phrases such as “Northern Powerhouse”. Too many failures. Similarly, I would be disappointed if Mark “Fred Carno” Carney wasn’t dragged in by the srcuff of the neck and given a Thatcheresque carpetting. These people have had it way too easy from Cameron.

    • It is 14 months since I was fired by Barclays for having the temerity to suggest they should consider the big difference in lending costs between skills training and mortgages, plus querying how long the Digital Eagles would last when a housing bust threw red ink over their accounts. I was assured by a young grad (bless him , he was too young to know!) that it wouldn’t happen as Barclays was much better regulated. I was thus amused to read on Haldane’s Wiki that in a 2012 speech, he “drew on behavioral economics to argue that complex financial systems cannot be controlled with complex regulations.”

      All this policy is doing is minimising the interest element in any loan repayment, placing nearly all of it in the capital element, thus making the likelihood and severity of a crash much greater (as there is nowhere to go with rates). At the same time, this locks in the amount sucked out of consumption demand, since the capital repayment amount cannot change – consumption being the bulk of GDP, down goes consumption and there is nothing the BoE can do. Haldane and Carney have been allowed to do this for political expediency – but now the room for manoeuvre (like the cash) has run out.

      That failure to incentivise skills and production in favour of a housing bubble has come home to roost – ha, ha at this: http://www.express.co.uk/news/politics/629401/UK-economy-Germany-world-Western-Europe-Angela-Merkel-George-Osborne Of course, it was much quoted by Brexiters last month.

  8. Isn’t the issue more that supply seems unable to respond to the price signal of the housing market?

    I was surprised reading Haldane’s ‘recovery’ piece that he made no attempt to link observations to monetary policy given the controversial nature of QE.

  9. Interesting quote from Haldane in the Guardian today: “In a reference to the prison movie The Shawshank Redemption Haldane said: “I would rather run the risk of taking a sledgehammer to crack a nut than taking a miniature rock hammer to tunnel my way out of prison – like another Andy, the one in the Shawshank Redemption. And yes I know Andy did eventually escape. But it did take him 20 years. The MPC does not have that same ‘luxury’.”

    So, it’s a case of Peter Gabriel https://www.youtube.com/watch?v=g93mz_eZ5N4 or perhaps to be more accurate, Jean Michel Jarre’s recent collaboration with Vince Clarke https://www.youtube.com/watch?v=NxV0OWna09U – soon to be followed by https://www.youtube.com/watch?v=hhcveYXKZTY

    What was that Einstein said: “Insanity: doing the same thing over and over again and expecting different results”?

    • Hi David

      On the musical front I put that song out on Twitter earlier. i followed up later with “dedicated follower of fashion” which Andrew Baldwin originally proposed for Carney.

      The other interesting thing is that the bulk of that speech was made on the 30th of June yet it is not on the Bank of England website for then. A stealth speech?

  10. Has any research been done on the inheritenance of residential property once the owners have died? Assuming the property is willed to the children,if any, do they usually move in and sell their existing dwelling or give it to their kids or do they tend to sell and use the money elsewhere?
    I know It does sound a bit obscure, but with all the baby boomers, over the next two decades about to fall off their perch (me included) this may add quit a dynamic to the equation of future housing ownership. Where will this wealth end up?

    • Hello, Foxy. The attached file:

      https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/6355/1775062.pdf

      on p.17, has a paragraph on housing wealth and inheritance, with references to several papers on the subject. Unfortunately, the papers don’t seem to be freely available on the web, and the most recent dates from 1994 in the John Major era. It seems all the studies agree that there are big regional variations in passing on homes and that better income homeowners are more likely to pass on their homes. I hope that Shaun or someone else knows of more recent studies on the subject. You would think there would be some.

    • This is one of the arguments with students moaning about loans. When my paternal grandparents died in 79/80, I received 25% – £2250! It would been the equivalent of 4 terms of a full grants as it was at the time. The house is valued on Zoopla now at £180K – so I would have received £45K, which would more than covered the whole period at university plus fees. My maternal grandparents rented, so there wasn’t much there anyway. Many students would find monety coming from both sides of the family and of course, if close rellies have no children, there will be money there too.

      However, I suspect that many of the current generation of recipients have quite substantial debts, not least those, who were constantly remortgaging in the Noughties. Similarly, if there is a lump of money and it merely moves into another house, it does not affect consumption.

      • Huge quantities of inheritance tax are another reason for British governments to love high house prices. Obviously it depends where in the country you are but once the tax man has been paid there isn’t a huge amount left over for siblings to share. Then of course you have to wonder where the money goes, chances are it gets ploughed back into property deposits for the next generation. I really wonder when people we’ll realise that unless you own multiple houses property wealth is an illusion?

  11. Hi Shaun, high rents and house prices transfer wealth from poor to rich. I have long called for lower house costs. Am in Auckland which also suffers from high house costs. This is harsh on the less wealthy.

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