EU plans to clamp down on buy-to-let mortgage lending could limit the future growth of the UK’s buy-to-let sector.
The warning has come from the property analyst firm Hometrack in a special paper.
It says that the change is due to come into force this year ‘despite widespread opposition from the industry’.
Under the draft directive on Credit Agreements Relating to Residential Property (CARRP), Britain would be forced to fall into line with the continental practice whereby lenders assess buy-to-let in the same way as mortgage applications by owner occupiers on their prime residence.
In other words, the main lending criteria would be the borrower’s earnings.
In the UK, critics say that lenders should continue to assess a landlord purchaser’s credit worthiness by looking at rental income, rather than what the borrower earns.
But Hometrack says that CARRP is not the only risk factor to further growth in the buy-to-let market: it says that affordability is a major problem for tenants, meaning that rents will grow by just 2-3% this year. Hometrack says that outside London, rents are broadly unchanged from three or four years ago.
The paper, by Hometrack’s director of research Richard Donnell, does however say that tenant demand is continuing to grow and that there is still a strong appetite for investing – although landlords still primarily look for capital growth.
It also says that there are two distinct rental markets in the UK: one in London and another for the rest of the UK.
It also says the rental market is highly segmented by price, with 25% of all private tenants on housing benefit. Rental growth in this part of the market will be limited by caps the Government is putting in place on welfare benefits.
In the mid market, it says rents are relatively stable, but the upper end of the market, largely driven by corporate demand, is subject to volatility.
Yields for landlords also vary enormously: in central London, where a two-bed property costs £819,000 and a weekly rent of £600 can be charged, a gross yield of just 3.8% can be expected. In Liverpool and Birmingham, a two-bed property costs under £115,000 and while weekly rents are put at £121 and £132 respectively, yields are a lot higher at 6.2% in Liverpool and 6.1% in Birmingham.