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Buy-to-let and the impact on UK house prices

Buy-to-let and the impact on UK house prices Ricky Taylor National Housing & Planning Advice Unit What is BTL? Buy-to-Let (BTL) is characterised by private investors who purchase residential property using mortgages in order to rent out accommodation to tenants

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Buy-to-let and the impact on UK house prices

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  1. Buy-to-let and the impact on UK house prices Ricky Taylor National Housing & Planning Advice Unit

  2. What is BTL? • Buy-to-Let (BTL) is characterised by private investors who purchase residential property using mortgages in order to rent out accommodation to tenants • Since the introduction of the BTL mortgage product in 1996 Q3 BTL mortgages have grown to over 991,600 by 2007 Q3, with a value of over £116 billion.

  3. BTL gross mortgage advances

  4. The simple house price model • The average mortgage interest rate • Real household disposable income per capita • The repossession rate • Value of mortgage advances (including BTL) • Stock of dwellings • Number of households • Housing user cost of capital (a measure of the cost of home ownership less the capital gain)

  5. Actual mix adjusted house prices and the estimated house price if there had been no BTL mortgage lending (1994Q2 to 2007Q2)

  6. Impact of BTL on house prices • Since 1996Q3 house prices increased in real terms by 150 per cent • Even without the estimated effect of BTL, they would still have been expected to increase by more than 130 per cent. • Rising incomes, low and stable interest rates, household growth and limited supply are the main drivers of house prices.

  7. Impact of BTL on house prices • Gap at its widest point in recent years. • In 2007 Q2, the actual mix adjusted house price was then £183,000 and the counterfactual price was estimated to be £169,000. • Implies that BTL lending had increased prices by around £13,000 (or 7 per cent) over and above what they would otherwise have been. • This equates to £90 per month in mortgage repayments.

  8. PRS and BTL

  9. Long-term trends in the PRS: BTL in context BTL mortgage product Housing Act 1988

  10. Benefits arising from BTL • Kept rents down in PRS • There is some evidence to suggest that BTL has promoted increased supply by effectively forward funding housing development.

  11. Regional impact? • There is tentative evidence to suggest that the inflationary impact of BTL investment could impact on some UK regions more than others.

  12. Proportion of BTL mortgages approved, by region (2004 to 2006) [1] NHPAU analysis of Land Registry data

  13. Characteristics of BTL properties • BTL investment is concentrated towards the lower end of the housing market, particularly on the purchase of flats and terraced houses, which are also popular with first-time buyers.

  14. BTL properties by type

  15. Characteristics of BTL investors • Typical BTL investor would appear to be affluent and middle-aged. • In 2006 the average gross annual income of a single BTL mortgage applicant was around £50,000 • Average age was 42 years.

  16. Motivations for investing • Falling stock markets and companies closing final salary pension schemes have been the two main drivers for people to invest in residential property (Rhodes and Bevan, 2003). • Property is also a more tangible investment than stocks and shares (Ball, 2004).

  17. BTL and the wider housing market • Model concurs with view of others (e.g. Barker, 2007) • Downturn in BTL lending could cause house price inflation to moderate, especially if existing landlords started selling properties • However, 90% want to keep properties or extend portfolio in 2008.

  18. Conclusions • BTL has made a small contribution to house price inflation but rising incomes, low and stable interest rates, household growth and limited supply are much more important factors. • BTL financing has increased overall demand for housing. Not surprising particularly in a market where supply is constrained.

  19. Conclusions • But BTL has helped to increase the size of the private rented sector and has kept rents low. • Downturn in BTL lending could potentially create a downward pressure on house price inflation.

  20. Any questions……. Contacting NHPAU: National Housing & Planning Advice Unit, CB04, Ground Floor of the Clerical Block, Segensworth Road, Titchfield, Fareham PO15 5RR Tel 023 9295 8152 enquiries@nhpau.gsi.gov.uk www.communities.gov.uk/nhpau

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