Housing Studies Association 2015 Dr Alison Wallace BUY-TO-LET MORTGAGE ARREARS: Understanding the factors that influence landlords’ mortgage debt

Outline of study Funded by Lloyds Banking Group Grew out of policy discussions with Shelter and others about reform of the private rented sector Based on mixed methods: English Housing Survey- Private Landlords Survey 2010 (c.1000 landlords in England) Lenders BTL loan book data (c.330K loans, September 2013) Interviews- 25 landlords across UK, 2 landlord advocates, 8 lenders (c. 60% BTL market)

BTL Mortgage Arrears Fig. 1: Rate of arrears BTL and residential (%) Sources: CML Table AP8 Fig.2: Rate of possessions BTL and residential (%) Fig.3: Buy-to-let possessions % of all possessions BTL loans commercial Moved through arrears process more swiftly BUT unsure if propensity of individual BTL loans to fall over is lower than residential

Landlords Finances Diverse spectrum of landlords, largely ‘cottage industry’, various submarkets, (Rugg and Rhodes) Landlords more affluent than wider population, BUT significant % financially constrained (Lorde et al.; BDRC) Crook et al. show finances influenced by market and business risks Scanlon and Whitehead- Landlords do not always provide a rational response to market signals Bevan and Rhodes- work even prior to the boom showed a pool of landlords not breaking even Other potential risks evident: policy risks and personal risks

Regional rents IPHRP) Annual change existing rents English region 2006 to2013 (Source: IPHRP) darker line=region; broken line= England

EHS –Private Landlord Survey % small problems 6% serious problems with mortgage costs Selective licensing associated with problem mortgage costs, but fell away in statistical analysis Tenant receiving housing benefit associated with tenant rent arrears but not with landlord’s loss of income, direct payments HB to tenants or HB shortfalls/ top ups Problems with housing benefit administration was associated with problematic mortgage costs NB: Survey data collected 2009/10

EHS-PLS factors increase likelihood of problematic mortgage costs

Lender BTL loan book data 09/2013 3% loans 1 month or more in arrears. 1.4% 3 months or more in arrears (Higher than industry average at time 1.16%) Higher mortgage arrears (1+ month in arrears): Northern Ireland 6%, NW property types, 5% flats/apartments landlords, 8% landlords with multiple loans year of advance - 1/3 loans advanced in 2007 in arrears Data indicates remortgaging or sales difficult to achieve negative or low LTV – Half of loans >75% LTV – 1/5-1/4 loans in Scotland, NW. NI unable remortgage regular loans 11% estimated negative equity (NI 26%, NW 25%, Scotland 22%)

Lender loan book data (2013) Factors increase likelihood of 1 month arrears

Landlord and Lender Interviews BTL conceived as a business but not always operated as such. For some no due diligence or business acumen Sitting behind formal arrears figures are pool of struggling landlords not in arrears Many landlords trapped by negative or low equity (weak housing markets) Adverse events in personal or other business lives spilled over into BTL arrears (all housing markets) Lenders complicit in underwriting poor investments Mixed evidence on policy risks- HB and licensing challenging in context difficult markets, but in some areas cannot avoid HB

Discussion Policy concern as c ,000 tenants’ landlords in arrears, more struggling financially and constrained in ability to fulfil obligations and signalling exits from market when able Formal rent recovery risky and unaffordable to some landlords so could undermine confidence in longer lets Wider welfare changes undermine tenants in market more than lender policies Argue that lending criteria a poor fit for qualities required for stable market investment, business not hobby Institutional investment seen as solution to stable rental markets but lenders could also have a role in securing more stable BTL market Implications for regulation in BTL mortgage market.

Summary PRS critically important as access to social housing and homeownership constrained The factors that influence landlord mortgage arrears can contribute to weaknesses in the sector Landlords letting activity threatened by interaction of poor business practice, market change, incursion of personal difficulties into letting activities, and policy shifts. Policy concern as ambition for professional safe secure stable PRS Lenders could consider how their lending criteria could contribute to these goals Greater regulation required but lender/landlord resistance strong

Thanks for listening Dr Alison Wallace