£1 in every £14 lent is for BTL – the pendulum has gone too far

A couple of days ago I shared an article from the Telegraph entitled “160,000 rental properties disappear as landlords sell up” – with some commentary that has had a fair few thousand impressions on social media, including a couple of thousand views on my YouTube channel on my video on the subject (that’s a big deal for my little channel!).

It also led to Mark reaching out to me to contribute to the site, so it seems fitting to replicate that article and my efforts below, with some extra commentary for the P118 readers to really get into the data.

Original post:

There are bits you’d need to sanitise from the data in this article. Also, the Telegraph these days wear their bias like a badge of pride as they’ve never done before. Lots of sources (including the Bank of England) are keen to refute this sort of report.

However, what it always misses is the fact that the need for rental property in the UK has grown like it never has done before over 2022 and 2023, simply because of the migration figures. Supply is dropping – regardless of the political bent of whoever is measuring it, and anyone remotely connected with the market knows why.

1) The interest rate. Sorry, but that’s the number one reason, and the one that quite literally no-one controls. The 5-year gilt has been trading below the Base rate by between 1% and 2% since base went to 5.25% in August 2023.

2) The taxation disincentives – but Section 24 has now created a market where informed new business is simply done through limited companies.

3) The uncertainty around recovering possession. The time taken on the renters’ reform bill has hurt the market – markets don’t like uncertainty.

4) The hostile environment – a familiar phrase for the recent iterations of the Conservative party – started by George Osborne in 2015 and carried on with vim and vigour ever since. Large business good, small business bad was George (and Dave’s) mantra – and it is a really, really bad mantra for 90%+ of the population in general.

5) Inflation. The cost of refurbishment has skyrocketed, as has the cost of maintenance. Well above inflation, or rent inflation. Again – we aren’t in control of that (and 2022/23 proved that no-one really is).

6) The perverse incentives out there – double council tax on empty properties – what council wants to move those along to cut their revenue? 3% SDLT – makes genuine flipping of property much more than 3% harder. Disincentivizes buying property to let.

The pendulum, as always in these situations, has swung too far. But it’s OK, because Lloyds have bought 2000 build-to-rent units which will do precisely zero to take any pressure off the market where it is most needed…….

This WILL get worse before it gets better, and if Labour do get elected and ramp UP the hostility for ideological reasons, the reactions for tenants will be terrible. It looks as though localised/combined authority led rent controls will be permitted, and just WATCH what that will do to the available stock in those areas. Labour are so scared it won’t work that Sadiq wants to “start” with 6000, but it is the message that it sends to people.

In 2014, £1 in every £3 lent was for buy to let. Too much. In 2024, £1 in every £14 lent so far has been for buy to let. 7%, in a sector that houses 19% of the households in the UK. That gives you a rough picture of the quantum of the problem.

Original article:

https://www.telegraph.co.uk/money/property/buy-to-let/160000-rental-properties-disappear-landlords-sell-up/

It was the last sentence that created the most traction – for those who haven’t read or listened to any of my content before, let me explain. I’m a nerd. A proud one. A data geek. I am interested in the real world – what’s really happening – and trying to explain it. I’ve no time or interest in political points scoring and, frankly, I detest ideology. I’m always very happy to engage in robust debates about “why” – we can all see the massive, massive problems in the housing market at the moment, and my feeling is that this gets far worse before it gets better, and – although I’m an annoyingly optimistic person – I don’t see at the moment how it DOES get better or where the turnaround point is.

I doubt it is the general election on 4th July!

Anyway – back to the data points. I’m an avid consumer of source data. The ONS, the Bank of England, the base reports for all of the important macro stats – I read those BEFORE I consume any other media about them. Then, I get fascinated with the spin. For example, yesterday’s inflation number at 2.3%. If you weren’t obsessed with the numbers, like I am, and are in the 99.99% of ordinary people, that would have looked like great news. Inflation is sorted! Oh no, no no. It was actually a BAD print given that at points this year many were convinced it would be under 2%, and I maintained throughout that there was no chance of that and my prediction was 2.4%, closer than any others that I read including the Bank of England. And that prediction was made about a month ago.

Not slapping myself on the back there – or trying to – merely pointing out that because I put the work in, and have no issue with tweaking forecasts when something changes, or admitting when I am wrong (I was still wrong, let’s face it – I was just closer than the rest), that I have tended over the past few years to prove I know what I’m talking about in the forecasting space. I had to start doing it, seriously, because I couldn’t trust one single other economic forecaster, and I want to run my businesses properly. The Bank of England ADMIT how bad they are. The Office for the Bloody Ridiculous (Or Budgetary Responsibility, as they are actually called) have been pathetic. The IMF isn’t up to much and neither is the OECD. They are too slow, too stuffy, too model-driven, and frankly it often feels like they don’t put the work in. The models haven’t worked well since Covid, because the previous data didn’t include a pandemic, massive stimulus, etc. etc. – anyway, enough. Onto the meat.

Where does this mortgage data come from? The data isn’t perfect here, but the FCA and UK Finance are pretty good. Data is poor in the rental sector in general, although it has been improving as housing becomes more and more of a political football.

First the moans. It is slow to be published. Q4 2023’s data was published on 12th March. That means our next slice – Q1 – will be published in the middle of June or so. It’s free to air and it is here, for those who want to take a leaf out of my book and read it for themselves: https://www.fca.org.uk/data/mortgage-lending-statistics

So what did last quarter’s data say – and what has the trend been? Loan balances 1.1% lower than 12 months earlier (£1.657 trillion, for the record, against about £8.3 trillion of UK residential property – that latter figure varies a touch from source to source, but is roughly right).

Here’s the key piece of commentary:

“The share of gross mortgage advances for buy-to-let purposes (covering house purchase, remortgage and further advance) decreased by 0.5pp from the previous quarter to 7.0%, the lowest since 2010 Q3, and 4.9pp lower than a year earlier”

Take a moment to absorb. Remember 2010 Q3? Not out of the doldrums yet by any means. Flat as anything. Punch drunk from the financial crisis. Very low base rate, but gilt yields nowhere near as low as they got in the end of the “free money” cycle. Not yet at the point where we were talking about the double dip recession – which we narrowly avoided. VERY difficult to borrow money, as I am sure many can attest to. And many of today’s landlording challenges simply didn’t even exist yet.

That’s the equivalent to the last quarter of 2023. The maths – well simply, 1/7% = 14.28 ergo £1 in every £14.28 lent was lent for ANY BTL purpose. The robustness of this data – c. 340 regulated mortgage lenders and administrators (so, people who say they are “regulated by the Financial Conduct Authority”) are required to submit a quarterly return. Pretty good, I think you’d agree. Wouldn’t include private lending (of course), SSAS lending for example (generally), some bridging lending.

The comparable point – my point about 2014 – that £1 in every £3 lent was too high – and it was. However. The data (as often happens over years and decades) was reported and stored in a less robust and transparent way. Back in those days things were split into purchases, and then segmented to “FTBs”, “Other” and “Buy to let” – rather than accurately lumping together purchase monies, further advances and remortgages for BTL, as happens today. I would think the FCA HAS the data because it makes these comparisons, but unfortunately we can’t access it so we can only speak from the purchase data segmented.

I think it would be fair to assume there are more remortgages “per capita” in investment properties than for owner occupiers – especially in a year like 2014. Many were using 2-year mortgages to release capital from the markets that had got very hot indeed, like London. However, I’m left speculating (and explaining where the £1 in every £3 came from).

The data we CAN see saw, on purchases, at this peak, 21.7% of all purchase monies spent on a buy to let – so, actually, a little less than £1 in every £5 lent out. Still – that 21.7% was a few points ahead of the size of the private rented sector at the time. This is symptomatic of a sector growing to take more of the pie, of course. For the £1 in every £3 to be correct, around half of the remortgages at the time (57% to be precise) would have needed to be for buy-to-let. Possible – if the size of the sector was around 17-18% at the time, it would “only” need it to be three times as likely that a remortgage was for a BTL than for a residential property.

There’s the precision for the pedants out there, which definitely includes me. Here’s one more sentence which I found interesting, and also underreported, from the most recent report:

“Of the 58.7% of advances for house purchases by owner occupiers, lending to first-time buyers increased by 1.2pp from the previous quarter to 27.1% of gross advances, the highest since reporting began in 2007, and was 3.0pp higher than a year earlier.”

So – by proportion – first-time buyers had the best result, by percentage, that they’ve ever had on record. You’d think that was something to celebrate – but the world is now confused. Is it? Are they just the most motivated so the most likely to swallow the higher interest rates? (versus investors who can’t buy if they can’t make deals stack up). The reality is – without enough housing, there are too few for FTBs, second steppers, people who want and need to rent – too few for everyone, in every sector, social most definitely included.

Will Q1 2024 look better? A bit. The nadir here was in H2 2023 for sure. Why? Gilt yields at nearly 5% for the 5-year in July 2023. We are “only” at around 4.15% as I write this, bouncing upwards again thanks to a hotter than expected inflation print (which was such good news it triggered an election – apparently – even though Sunak knows inflation is going back upwards after this print).

Stay tuned and I’ll be keeping you posted with more! If you enjoy, please leave a comment. If you don’t enjoy, please leave two comments! Thanks

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