Return of the undead

Another quarter, another big milestone for buy to let. The latest figures from the Council of Mortgage Lenders (CML) reveal some startling facts about the growth of loans to landlords.

The boom in buy to let is usually associated with the mid-2000s: the number of BTL mortgages rose from 120,000 in 2000 to more than a million in 2007. Then lending slumped after the credit crunch and the collapse of Lehman Brothers. By 2010 Fergus and Judith Wilson, the ex-teachers who went on to buy 700 homes, were pronouncing that the sector was ‘absolutely dead and will never return’.

Two years on and the corpse is back to life with a vengeance. BTL lending for house purchase is running 30 per cent ahead of levels seen a year ago (although down 9 per cent on the fourth quarter). As the CML points out, new lending to landlords is still around a third of 2007 levels, but that disguises the underlying trend.

For starters, there’s the way that BTL has increased its share of the mortgage market. In 2007 BTL accounted for one in ten of all outstanding mortgages (10.2 per cent). Loans to landlords now comprise one in eight (12.5 per cent) of all outstanding mortgages. Judged by the total value of those mortgages the share is slightly higher still (12.8 per cent).

Three sets of figures illustrate how things have changed. I’ve taken snapshots of the market now, in the third quarter of 2007 and then back to the second quarter of 2003. The point is to show how things changed in the four and a half years before and after the start of the credit crunch.

Total number of outstanding mortgages:

Q2 2003: 11,422,000

Q3 2007: 11,900,000  (+4.2%)

Q1 2012: 11,257,000 (-5.4%)

Total number of BTL mortgages

H1 2003: 332,500

Q3 2007: 978,900 (+194.4%)

Q1 2012: 1,405,200 (+43.5%)

Total non-BTL mortgages

H1 2003: 11,089,500

Q3 2007: 10,921,100 (-1.5%)

Q1 2012: 9,851,800 (-9.8%)

Sources: CML statistics on BTL lending, Bank of England statistics on total mortgage lending.

The figures for the total market show modest growth up to the crunch in 2007 and then slightly faster decline after it. Within that, buy to let almost trebled between 2003 and 2007 and has increased by almost half between 2007 and now. In contrast, the rest of the mortgage market was already declining in the boom years and has fallen by another 10 per cent after it. Since the credit crunch, there are more than 400,000 extra buy-to-let mortgages but more than a million fewer non-BTL loans.

It’s little wonder then that levels of home ownership began to shrink in the mid noughties and are still falling. However, if you project the same trends forward over the next four and a half years, the results become even more startling.

If buy to let continues to grow and non-BTL lending continues to shrink at the same rate as they have since the third quarter of 2007, this will be the result in the third quarter of 2016:

Mortgage market in Q3 2016?

Total number of BTL mortgages: 2,016,462 (+43.5%)

Total non-BTL mortgages: 8,886,324 (-9.8%)

Total number of outstanding mortgages: 10,902,648 (-3.1%)

To put that in perspective, buy to let will account for getting on for one in five (18.5 per cent) of all mortgages. And the total number of non-BTL mortgages will have fallen to its lowest level since 1988: the year that the phenomenal growth of the private rented sector began with deregulation and the creation of the assured shorthold tenancy.

There are obviously a lot of ifs and buts in there and any number of reasons why this may not happen. There may be a recovery in the conventional mortgage market. Lender sentiment may turn against buy to let, perhaps because of concern about over-investment. Alternative ways of financing private rented homes may develop, such as institutional investment. The government may finally decide to regulate buy to let.

However, it could also be an under-estimate. What if buy to let continues to grow at the rate seen over the last 12 months (30 per cent in a year)? Household incomes are currently falling and it could be several years before they start rising again, which hardly sounds like the conditions for a revival of conventional mortgage lending. New controls on owner-occupier mortgage lending such as the end of interest-only mortgages could tilt the playing field even further towards BTL loans (which are all interest-only). Property firm Savills is predicting that private renting will grow from 17 per cent of households in 2010 to 20 per cent by 2013 and 27 per cent by 2020.

None of this is meant to make the case for or against buy to let, or for or against greater regulation of the sector (for more on both those see my blog here) or to look at the possible political implications of a continuing fall in home ownership (on that, see an interesting ConservativeHome blog here). The point is that nobody predicted the exponential growth of buy to let in the 2000s, the Wilsons pronounced it dead only two years ago, and this is what could happen if the corpse continues to thrive.

---