Will the Help to Buy scheme affect the buy to let market?

Will the Help to Buy scheme affect the buy to let market?

Buy to let housing investors have had a wonderful time of things in recent years - but their celebrations were somewhat punctured last year when the Help to Buy scheme was launched. The question is, to what extent has this government project actually altered matters and what effect can people expect to see as a result in future?

An important point to establish from the beginning is that Help to Buy cannot be used for buy to let investments - the scheme is only available for remortgagers, movers and first-time buyers. The initiative has been especially popular among those trying to take their first step on to the housing ladder.

In a nutshell, it allows people to get a mortgage on a house up to the value of £600,000 with just a five per cent deposit. The first phase (launched in spring 2013) focused on new-builds, while the second phase expanded this to older properties too.

Why is it feared?

The reason why Help to Buy was greeted with apprehension by the buy to let community was essentially two-fold. Firstly, by allowing more people to afford to buy their own home, the thinking was that there would be fewer people in the private rental sector and with this drop in demand a fall in rental prices could follow. Secondly, the increase in homebuyers would create more demand in the property sales market, which would fuel higher asking prices.

In a sense, these fears are completely logical because people in the UK - much more than many other countries - generally have great enthusiasm for owning their own home, so by putting a house purchase within reach, Help to Buy marries opportunity with motivation and surely would inspire thousands of individuals to take advantage?

With regards to the actual impact of this take-up, there is undeniably a link between demand and price - and yet, both in 2013 and 2014, many experts have maintained that the effect on landlords will not be so momentous.

Have these concerns become reality?

This is difficult to say, as there are so many factors to take into account. What is true is that rental growth was not as strong in 2013 as it was in 2012 in general; however, certain popular areas (most notably London) continued to see rent levels skyrocket and gross yields for buy to let investors did not drop off as the year wore on. Also, house prices continued to rise in 2013, but there are question marks as to whether this is mainly as a result of Help to Buy's influence.

Commentators have highlighted how the Help to Buy scheme is actually not quite as attractive as it first seems, so potential applicants may have seen just how much they could expect to pay and been scared off. While renters could get on to the property ladder quicker, they will possibly pay hundreds of pounds more each month for the pleasure. Faced with this scenario - as well as the prospect of lawyers’ fees, stamp duty and other costs - there will have been plenty who decided that it was unaffordable or simply a poor option.

Thousands of people used Help to Buy to fund their home purchase in 2013 but in a population of millions this is actually not that many - it has been predicted that it will facilitate just two per cent of transactions in the three years following its launch. While this will certainly have been a factor in rising house prices, the general shortage of housing is probably equally important. Ultimately, the doom-mongers were wrong (the average profit for BTL investors in 2013 was £12,000) but it is certainly something of which investors should be aware.

Looking to the future of BTL

On the one hand, landlords and investors must be aware that certain types of property will ultimately become more sought-after and expensive as a result of Help to Buy, but on the other hand they should not worry too much, as there are other niches that will remain relatively untouched. So while areas popular with young professionals will no doubt become more expensive to buy in as they are a logical fit for the Help to Buy scheme, properties for students or those on benefits may not since they are unlikely to be able to take advantage.

Research is a crucial part of any BTL investment and the impact of Help to Buy should be one more factor that is considered. The scheme will not be in place forever, so it may be that prices are currently being pushed up artificially and the bubble will burst in the mid-term.

The current field of renters, described recently by the FT as Generation Rent, are definitely a favourable variable for landlords. What could impact purchase prices and rents more are the prospect of major housebuilding programmes or removal of tax relief on BTL investments. Again, these are factors to monitor. The BTL game is very much still in full flow, but investors must take into account circumstances at the time before signing up another asset for the portfolio.