Twice in six months the Bank of England has issued strongly worded warnings about the ballooning buy-to-let market. Last month, its Financial Stability Committee said the activity of landlords had “the potential to amplify the housing and credit cycles” – in other words, push prices up faster when the market is buoyant and drive them down more steeply when it falters.
This is strong stuff. It follows an earlier warning, on the eve of George Osborne’s post-election Budget, about lending activity to the sector. It is striking how loans to landlords have risen by 40% since the 2008 market crash, whereas mortgages to owner-occupiers have increased by just 2%. There are now 1.7m outstanding buy-to-let mortgages, about a quarter in the capital.
It is against this backdrop that the chancellor has sought to slow the growth of buy-to-let by reducing tax relief for landlords. The timing is interesting, given predictions that new pension freedoms for over-55s could further fuel the sector. Savills forecast that about £1.2bn every year could be freed up from defined-contribution pensions and find its way into the housing market.
While there is no doubt that buy-to-let has supported many new-build housing schemes, around two-thirds of its growth has come from the secondary market. Both the mayor of London and successive governments have explored how the rental market could contribute more to net new supply, rather than convert existing stock, with a strong purpose-built-for-rent offer emerging, supported by a new planning covenant and public land disposals in London. This is essential for a city seeking to double housing supply.
Now, perhaps, the continued criticism of the Bank of England, coupled with the Budget implications, could lead to an even more creative approach to harnessing the money that continues to flow into the buy-to-let sector. Recent analysis shows that three-quarters of landlords are investors rather than “accidental” landlords. So why not invest through a vehicle – such as a residential REIT, or a similar fund?
There’s a compelling case to support it. It would offer flexibility, liquidity, and diversify risk away from the price of a specific home. It would also address the personal debt concerns raised by the Bank of England. In the long term, these vehicles could support the increased supply of homes, in contrast to the current fears that landlord activity may be inflating prices.
Finally, it would help to deal with concerns about management standards in the sector, with the professional management advocated by the London Rental Standard.
Of course, such vehicles are not easy to get off the ground. Since REITs were introduced to the UK, almost all have been commercial-led rather than residential-led and, while pension funds are investing more in build-for-rent, there are relatively few retail investment opportunities. Perhaps there are insurmountable cultural barriers, but REITs’ potential seems particularly relevant for individuals looking to exercise pension freedoms.
There is also an irony, given the Budget measures, as REITs benefit from significant tax relief. These tax advantages were boosted recently with the introduction of stamp duty relief, extended this year to investment into shared ownership.
This potentially enables an even more exciting development: a massive expansion in part-buy, part-rent, helping Londoners fulfil their aspiration to own, despite living in a high-value city.
City Hall continues to do a huge amount to support supply-side measures, freeing up public land, offering cheap debt to developers through the London Housing Bank, and designating 20 housing zones – with more to come – around transport nodes and town centres to accelerate house building, with planning focus and investment into essential infrastructure.
But we need more innovation, in both the public and the private sector, to get house building up to the rate required, through the support of developers, institutions and perhaps through residential REITs.
Richard Blakeway is deputy mayor of London for housing, land and property
