Two and-a-Half Decades of Buy-to-Let Investment

Surprisingly, buy-to-let investment has a definite birthday. It was given life at the RAC Club on the 24th September 1996.

It was the brainchild of the The Association of Residential Letting Agents who, along with lenders including Paragon Bank and NatWest, created the BTL (Buy-To-Let) mortgage product that was debuted on that day.

This was the first financial product especially designed to support the private rent sector (PRS).

As someone whose livelihood is entwined with the buy-to-let market, I thought it would be interesting to take a look at the origins of the ‘new’ private rental sector and what’s changed since it began.

In the beginning…

Prior to BTL mortgages, the PRS was largely the exclusive preserve of ‘professional’ landlords, as rental properties were often bought for cash, and successive post-war governments had promoted social housing ahead of the private sector.

In the post-war years, there was a large stock of council owned and let housing created, and it was this which was favoured by governments who paid less attention to private house construction, leaving such things to the market.

That canon was about to change. New legislation would open the floodgates on ownership of rental stock by ‘normal’ people – right to buy. Originally proposed by Labour in the 1950s, it was the Conservatives who would make it happen.

Introduced in the Housing Act 1980, the right to buy introduced the ‘greatest single transfer of capital from the state to the people’ according to Michael Heseltine at the time.

Suddenly over 6,000,000 people had the opportunity to buy their council house at a very substantial discount compared to the market value. Such an opportunity represented almost instant equity gain, and was understandably popular.

By 1987, over 1,000,000 council houses had been added to the privately owned market, although subsequent governments would attempt to slow the process as housing demands continued to rise.

By 1996, and the introduction of the BTL mortgage, the housing market was already feeling the pressure of reduced council house stocks and there were now over a million properties on the market potentially available for purchase.

With a shortage of available housing even then, the PRS offered an affordable solution to those unable or unwilling to buy their own home. By the year 2000, the market exploded.

The Housing Acts of 1980  and 1988 introduced two other concepts which fuelled this property boom, mortgage interest tax-relief (1980) and assured shorthold tenancy (AST).

Mortgage holders were able to reclaim tax against their mortgage interest thanks to the Mortgage Interest Relief at Source (MIRaS), and landlords had the assurance of being able to limit tenancies through the provisions of AST.

With the pumps primed, lending to purchase rental properties went from £3.9 million in 2000 to $45.7 billion by 2007, as the number of BTL mortgages rose from 48,400 to 346,000.

The financial crash of 2008 pulled the rug out from under the market, and although it bounced back once stability was restored, it would never regain the heady heights achieved before the crash.

It’s easy to forget that the early 1990s were a difficult period financially, whereas the later years of the decade were marked by falling interest rates and a boom, partly based on deregulation and market confidence. Cool Britannia indeed.

Lowering interest rates continued to make property investment an attractive alternative and the lack of serious regulation or restrictions did nothing to dampen the surge of new landlords entering the market.

What’s changed since then?

Starting with George Osbourne’s period at No.11, governments have moved to dampen the buy-to-let investment market, not always successfully, and the gradual removal of financial incentives has continued since then.

Part of the reasoning was that it was felt too many homes were being snapped up by landlords, leaving too few for owner-occupiers. This is a simplistic view of the problems in the property market, although it did reduce housing churn.

To digress briefly, the broader issue with supply lies with restrictive planning practices and the entirely mistaken idea that the UK is already ‘full’. In fact only something like 2.2% of the total land mass is built on.

Regardless, landlords were to see changes to capital gains tax allowance, increases in land taxes for additional properties and the removal of mortgage interest tax relief. Although still profitable in the face of low interest rates, the landscape had changed.

However, by the second decade of the 21st century, the private rented sector represented a substantial part of the overall housing market, and clearly wasn’t going anywhere.

As social housing stocks diminished and house building failed to meet demand, this made it increasingly important to those who needed a home but found alternatives lacking.

Advice from the property pros

Given that this is something of a retrospective, maybe advice isn’t the right term. The genesis and evolution of the BTL market is similar to many other such phenomena – an initial rush, followed over time by increasing maturity and regulation.

The wild west days of the early 2000s are gone, never to return. While the UK has struggled with housing supply for decades, the intervention of a global pandemic has made the current situation extremely difficult.

In such a market, the availability of high-quality, affordable rented accommodation is vital to the property market and the place of the private rented sector is likely to be secure for many years to come.

Accordingly, even during a period of financial difficulty, buy-to-let investments continue to represent good investments to those interested in dipping a toe in the market.

In summary…

It is fair to describe the buy-to-let investment market as maturing. As we see new regulation affecting landlords throughout the UK, something that may not always be welcome, it’s worth remembering that such changes are, and were, inevitable.

Legislative changes are sometimes necessary, sometimes ideological, but they are a part of all of our lives, and markets have proven adept at accommodating them. ‘Landlords fleeing the market’ is a press trope, rather than real news.

With decades of experience in the buy-to-let market, we have seen changes big and small, but we’ve also seen the market survive and continue to deliver for both landlords and tenants. We don’t expect that to change any time soon.

If you’re interested in how buy-to-let property might fit into your investment planning, drop us an email or pick up the phone. We’d be delighted to discuss the market with you and offer advice and suggestions, along with more practical help if needed.

Buy to let has been a wild ride at times, and while those days are now in the past, the market and the principles underlying it remain sound for anyone looking for the right opportunity.

Written by Ross MacDonald, Director of Sales & Cofounder of Portolio

Get in touch on 07388 361 564 or email to [email protected]