Thursday, 6 March 2008

Buy-to-let distorts housing construction

Between 2001 and 2006, the UK added almost a million dwellings to the housing stock. At the same time, it has become increasingly difficult for first time buyers to enter the market, while lending standards for buy-to-let speculators have become increasingly lax. With that kind of perverse lending criteria, strange things are bound to happen.

The growth of buy-to-let has been a major driver behind housing construction. To see why, first take a look at how the stock of rental properties have changed in the last ten years.

(Click on the chart for a larger version)

As the chart suggests, long term trends in private rentals have tended to be rather static. Back in 1981, there were around 2.4 million privately rented homes. Ten years later, the number had fallen to 2.1 million. The number remained broadly stable, until 2001, when the number suddenly begin to increase. In 2006, the number was almost three million. Clearly, a lot more people are offering houses for rent these days, but where did all these new rental properties come from?

This second chart provides some of the answer. It focuses on the aggregate changes in the housing stock from 2001 to 2006. The four categories of houses are represented; a) owner-occupied, b) local authority rentals, c) housing associations, and d) private rentals.

(Click on the chart for a larger version)

Changes in owner occupation and local authority sales almost cancel each other out. Local authorities have sold almost a 982 thousand homes, while owner-occupation has increased by 839 thousand. Since a local authority sale has to be first rented out to the buyer, the vast majority of council house sales have initially transferred over into the owner-occupied category.

The remaining two categories - housing association and private rentals - more or less add up to the total change in dwellings. At least half the increase in new dwellings is due to private rentals, i.e. buy-to-let.

Obviously, house sales are churning between these four categories. Many new constructions were sold to owner occupiers, while many buy-to-let investors bought old houses. Nevertheless, the growth of buy-to-let investors has been one of the key drivers behind demand. Behind the investors, we find the banks, who offered lots of easy money to buy-to-let investors, which in turn, provided the financing for this building boom.

What are these new homes and where can they be found? These are the thousands of undersized apartments that now blight every major city centre in the UK. They are poorly constructed, overpriced and offer negative cash flow for any investor stupid enough to buy one.

Was this the kind of building boom the country needed? Of course not, but the housing market is a morass of perverse incentives. A low risk first time buyer wishing to buy a single home can no get a mortgage, while an investor leveraging themselves to the hilt can get any number of mortgages. Therefore, tt should surprise no one that this country ended up with a huge stock of overvalued appartments bought by an army of naive investors.

1 comment:

Anonymous said...

interesting post