Buy-to-let market will be supported by tenant demand, writes Fitch Ratings

Despite increasing house prices that have now seen double digit record highs, it is still thought by many experts that the buy-to let market will still see growth, due to the demand from tenants, at least during the next 24 months.

During the past few years there has not been enough new building to cope with the demand from home seekers. Hence a shortfall, which has kept potential buyers hunting for whatever is available. This has understandably kept investors interested in increasing their portfolios.

The low interest rates still available have also prompted good business. Despite the 3% stamp duty tax which will have an effect and the imminent European referendum, it is the impending changes to underwriting standards that may hold the key to buy-to-let’s prospects in the future.

International ratings agency, Fitch, state that demand for private rental property should continue to flourish despite any impact on landlord from tax treatment. But, it sees the Prudential Regulation Authority’s intention to implement underwriting guidelines, as a game changer in the long-term.

Last week’s proposals  mooted by the Bank of England, includes affordability tests that would make lenders implement an interest rate stress of 5.5% minimum on buy-to-let arrangements. In the consultation paper, Underwriting standards for buy-to-let mortgage contracts, they would also have to investigate landlords’ letting costs and tax liabilities. This would only apply to landlords with four or more properties in their portfolios.

The regulator reviewed the intentions of the top 31 lenders; these firms plan to increase their gross lending by an average of 20% annually over the next two years. Portfolio landlords are likely to be 6%-8% of all buy-to-let investors. However the investigation also expects affordability testing across the wider buy-to-let market in general. After responses to the consultation paper, which are requested by 29 June, portfolio landlords will be contacted.

Fitch also suggests that these proposals would not place limits on areas such as loan to the value of property, amount owed compared to income balance, or even ratios to do with interest rates. If these came into practice then rises in rent may not offset the cost of implementing these rules by a landlord. The agency also felt that Brexit may have an effect on the fundamental implications of limited immigration and thus rental.

However, Fitch are generally optimistic about the coming two years, especially in the light of the government’s support of homeownership and housing supply. They expect house prices to rise by 4% to5% this year.

It seems that the landlord is still in the driving seat. Rents will rise to keep pace with the increased costs of renting; tax changes could keep potential properties off the rental market, therefore increasing the demand.