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How Buy-to-Let Landlords Flood London Property Market

Published on May 24, 2016 by Landa George in News, Property Investment

Buy-to-Let investors dominated the Prime London property market between January and March. They accounted for 36 per cent of all transactions in this period. The flurry of activity from this buyer group came as no surprise. With the additional 3% stamp duty surcharge for buy-to-let investors and second homebuyers coming into effect from the first of April, buy-to-let investors brought forward purchases to prevent the additional tax liabilities.

As much as 60 percent of all property purchases in Prime London in the first quarter of this year were made by buy-to-let landlords and second homebuyers, underscoring the impact of the additional taxes on the property market in the first quarter of this year.

Despite the increased demands, Inner London, for only the fourth time since 2012, did not record the highest growth in houses prices in the 1st quarter, losing out to the Outer Metropolitan region for the top spot.

However, despite coming in second place, prices still reached an all time high, rising some 52 per cent from pre-crises levels (compared to 9 per cent in the whole of UK).

Mortgage Lending Rose To About £26bn

Data from Council of Mortgage Lenders indicate that Mortgage lending rose steeply to about £26bn, up by 43 per cent, from £18bn recorded in February. Reports suggest that buy-to-let investors accounted for about 25 per cent of the total mortgage lending in the UK for the month of March.

Robert Gardner, Nationwide’s Chief Economist, asserts that while buy-to-let buyer lending may have increased in March, a significant portion of March activity was driven by cash buyers. He says that:

“Cash purchasers have become a more significant part of the market since the financial crisis, accounting for around c35% of all transactions since 2008 (compared with around 25% in 2006/7). Cash investors would have also been better placed to buy properties in the relatively short period of time between the stamp duty announcement at the November Autumn Statement and the implementation on 1 April.”

In London, buy-to-let purchases are up by 26 per cent on the previous quarter. This represents an upturn in the recent trend of lower investor confidence that has been in decline since it peaked in the 4th quarter of 2014.

Second homebuyers accounted for about 23 per cent of the total of all first quarter purchases in London, an increase from barely 14 per cent in the 4th quarter of 2015.

Together, second homebuyers and buy-to-let investors accounted for almost 60 per cent of purchases in prime London.

In Prime Central London, second homebuyers accounted for 41 per cent of all purchases slightly edging out buy-to-let investors purchases which accounted for 35 per cent of all sales.

Furthermore, cash purchases in Outer Prime London rose to 40 per cent, a 6 per cent increase from the 4th quarter of 2015. In Prime Central London, cash purchase accounted for almost half of all purchases.

London Slipped Out of The Top 10 Cities to Invest

 

Despite this flurry of activity in London, 2016 marked the first year in which London slipped out of the top 10 cities to invest, according to a report published by PwC and Urban Land Institute. The report, Emerging Trend 2015, states that “central London pricing has become toppish and therefore less attractive going forward.”

However, investment in London is driven by several factors such as the need to preserve wealth and not just by ROI. Hence, London property market is expected to still draw in more investment than a city like Birmingham that climbed 14 spots to emerge as the sixth best city to invest in 2016.

CEO of Marsh & Parsons, David Brown, opines that:

“Investors will always be the stalwarts of the prime London property market – it’s the golden goose of capital returns, and people are still clamouring for a slice of the action.”

However, the easing off of annual growth rate in April to 4.9 per cent from 5.7 per cent it achieved in March is expected to signal a change to a more orderly pace in the whole of UK. The next quarter is expected to see lower growth rate than the previous quarter.

David Brown said that purchase activities in the property market in the first quarter were not typical. He cited the extra stamp duty surcharge as the reason why buy-to-let buyers and second home purchasers flooded the market. He opines that:

“Now that the ruckus has passed, we’ll see much more orderly transactions over the summer months, as the market rebalances towards first time buyers and other owner-occupiers.”

Robert Gardner of Nationwide holds the view that prices will most likely keep increasing. He adds:

“it’s possible that the recent pattern of strong employment growth, rising real earnings, low borrowing costs and constrained supply will tilt the demand/supply balance in favour of sellers and exert upward pressure on price growth once again in the quarters ahead.”

Demand outweighs supply

Last year, demand for properties in London increased by 9 per cent. This increase brought the average number of registered buyers interested in a property in London to 14.

Supply and demand levels in London are uneven across the city. In outer prime London, demand has risen by about 19% from last year, while in prime central London, demand reduced by 4 per cent. On the other hand supply in central prime central London is up by 11 per cent, while supply is down by 12 per cent annually in outer prime London.

This discrepancy is reflected in the level of completion for property across the city. Ares such as Balham have about 21 registered buyers showing interest while in most places in London it is about 16.

Generally the feeling across the UK property market is that demand outweighs supply.

The Royal Institute of Chartered Surveyors published data which showed that the amount of property listed on estate agents’ book is at an all-time low. This is partly due to the flurry of activities that was recorded in March.

RICS average stocks of properties on books

Naturally, this increased demand has caused significant increase in house prices in Outer Prime London. Prices increased by 7.2 per cent in the last year, 3.4 per center of that coming in the last three months alone.

In the coming months however, price increase are expected to slow down. This will be partly due to political and economic uncertainties surrounding a possible Brexit and investors showing more interest in regional city like Birmingham.

The introduction of 3% stamp duty surcharge on buy-to-let investors and second homebuyers, as well as higher tax on profit and tougher borrowing standards are measures aimed at tilting the property market in favour of owner-occupier buyers. While buying activity is expected to decrease from the former group, it’s yet to be seen if this vacuum will be filled by the later especially as prices in the London market is still expected to be on the increase.

In the meantime, it’s expected that landlords will increase rent to offset the additional tax liabilities.

To browse great buy-to-let opportunities in London visit The House Shop.

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About the author
Landa GeorgeLanda George and her husband invest in property part-time and specialise in creative strategies that can assist people in negative equity or who need to release the cash from their homes quickly.

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