We are looking at the market in turbulent times. Although the word ‘unprecedented’ has been over-used, there are few others that adequately describe what has been happening in the world, the mortgage market or the economy.
This article will likely be a snapshot in time amid what are likely to be long-term changes to our way of life. The plus points are that the housing market is currently looking robust, and the buy-to-let market particularly so.
In a number of interactive webinars we have held, people always asked about potential parallels with the credit crunch. The fundamental difference is that 2007 was a liquidity crisis caused by financial institutions whereas this time those institutions are as much of a victim as everyone else.
The positive factor is that, having been through the credit crisis, the Bank of England already had measures it could utilise this time, such as the Funding for Lending Scheme. As a result, the Bank reacted very quickly to put these liquidity support mechanisms in place for the banking sector; not for non-banks, because they are funded by the wholesale markets, but definitely for banks and building societies. The Bank also had an existing quantitative easing mechanism to pump money effectively into the economy, which it ramped up significantly and quickly.
Pent-up demand
After the initial lockdown period we have seen demand increase significantly. While some lenders, such as Landbay, continued to lend throughout lockdown, a huge amount of pent-up demand was created until valuers could carry out physical valuations again.
The announcement of a stamp duty holiday further turbo-boosted demand and, at the time of writing, we have just had one of our best weeks this year. The stamp duty measure has provided many investors with the confidence to use this window to purchase property and many are leveraging their existing portfolios to do so.
The stamp duty cut is likely to have played another role because property values are creeping up a bit. This will provide some reassurance that the housing market is supported. Certainly, what we are hearing about now is not a lack of demand from potential buyers but actually that not enough people are putting their property on the market.
Demand for good-quality rental property is likely to stay strong for the foreseeable future and into the medium term. We have not yet seen the end of the furlough scheme, which will undoubtedly lead to a rise in the number of unemployed. This, together with perhaps a rising divorce rate, the requirement for bigger deposits and a greater challenge for first-time buyers, will mean that the demand for rental property will continue to grow.
Professional landlords
We may see a change in the profile of landlords, however. Although this government has bigger things on its mind than the issue of professional versus amateur landlords, it is more likely to be the professional landlords who continue to buy at this point.
At this time of financial uncertainty there may be few landlords with one to three properties who decide that now is the time to expand and buy another. This may also change the BTL lending landscape because, generally, larger lenders tend to focus more on smaller landlords, with specialist lenders concentrating on portfolio, multiple-property landlords. The current market may accelerate that shift towards more specialist lenders for BTL.
The stamp duty cut may also provide the opportunity some landlords have been waiting for, to incorporate their properties into limited companies. As long as the property is worth more than £125,000, they will make savings on the applicable stamp duty.
There has also been talk about capital gains tax going up in the future. Although this is only speculation, the government is going to have to increase taxes. So, arguably, if it makes financial and tax sense for a landlord to transfer their properties into a limited company, it is probably wise to do so before the end of March 2021.
What can we expect for the next six months? The fourth quarter is likely to be very busy, some of that being a catchup still and some because of the stamp duty changes. So we could still end up with £37bn of BTL lending this year.
Q1 next year is also likely to be busy because of the continuation of the stamp duty holiday, but expect Q2 and Q3 to be well below what everyone may have anticipated if the stamp duty holiday does indeed end on 31 March.
Paul Brett is managing director intermediaries at Landbay
