Owning a Home and the Buy-to-Let Market
Owning a home is one of the essential investments many people desire to achieve in their lives, and typically, most of the purchases are financed by debts. In the UK, households experience various effects when buying –to-let houses and Financial Times Stock Exchange (FTSE) 100 performance plays a significant role in determining the “buy-to-let market in the UK”. The paper intends to determine the effects of the performance of FTSE 100 on “Buy-to-let housing market in the UK”. The research method used it the critical literature review form the desk review.
The Role of FTSE 100 in the UK Economy
Besides the role of FTSE 100 in the UK economy, it mainly influences the price trends of the houses and has the bubble effect on the BTL housing market. The contributing factors to the change in the BTL housing market in the UK include mortgage affordability and availability, interest rates, rates of unemployment and income earnings which do not form price bubbles compared to the FTSE 100 Indexes performance together with the influence of individual company performance. The supply of housing in the UK is majorly determined by the changes in the performance of FTSE 100 which can also be used as a predicting signal to anticipate the future trends of the BTL housing market.
Key Words: Performance, FTSE 100 Indexes, BTL housing market, Bubbles, and Mortgages.
Background
FTSE 100 Index is the most extensively followed stock market index in the UK. FTSE 100 brand name was in doubt until the moment when the Financial Times joined in after its reluctance to support an alternative option to FT 30 Index(FTSE, 2016). In terms of performance, FTSE 100 could be termed a significant index from other major global indexes. Historically, the FTSE 100 has been less volatile as compared to other major indices. The specific perspective of the index makes it a case of special interest for investors as they have an important indicator available not only to carry on potential investments but also to safeguard them during the times of high volatility (Cao et al, 2010). One of the major reasons such nature of the index is that many of the companies listed in FTSE 100 are also listed in other major stock indexes of the world. Any possible decrease in the activity in economy can be offset by returns from other markets. The performance of the index has therefore generally remained stable over the years (Preuss & Brown, 2012). From investor’s perspective, FTSE 100 provides great investment opportunities for the investors. The constituent companies are large multinational organizations which have standing in many countries of the world. The impact on the index is therefore not only due to changes in the national economy but also due to the global economic changes.
The FTSE 100 index started in 1983 from 100 points. Since 1978 to 2018, the index has gone as high as 7778.64 points and as low as 427.50. Since 1999, the index has generally remained in the range of 4000 points touching the lowest and highest points multiple times. From investors perspective it provides stability in their investment decision in British corporate stocks (Satchell & Knight, 2011). Over the 5 years ended November of 2017, FTSE 100 earned a return of 25%. In comparison to global indexes, it stood on the 21st rank. The Nikkei 225 index with 141% returns stood at the top position while Straits Times Stock Index of Singapore remained at the last rank with a five year return of 12%. Although the performance of the market may have not been ideal, the index could term to be in the recovery mode after the global financial crises (McCann & Wheeler, 2011).
Problem Statement
The various recent changes in the legal and regulatory environment for Buy-to-let (BTL) landlords together with the shifts of tax relief on mortgage repayments with an increase on second-hand homes stamp duty pose new challenges on UK housing market imposing substantial impacts on investors. Housing prices continue to rise, for instance, in London alone, the houses have been increased in price by 80% compared to the previous seven years(Jardine, 2011). From investors point of view this may reflect a positive development however the regulatory changes has deprived them of some of the benefits from the rise in prices.
The investment in Buy to let could be analyzed from a difference angle. Due to increasing prices of houses, affordability is a major concern for different consumer classes. Due to affordability issues not everyone can purchase a home and this leads to an increase in the demand for rented propersties providing significant gains to the Buy to let investors (Fuster & Zafar, 2016). On the contrary to the UK objectives of the government policy stated, the private rented sector has experienced decrease since 2007 after the property boom cutting down the supply of the available UK housing for owner purchases. Rather than increasing the amount of housing in the UK, Buy-to-let investments have led to a loss in the net supply of houses available to first-time owners(Gillingham, 2009). Instead of building new homes, since 2007, the government housing policy has removed the substantial amount of British houses efficiently that the potential first-time buyers could buy(Bate, 2015). This contradicts the efforts of the government towards helping first-time buyers in the UK.
Research Questions
The Research has the following questions
Has the performance of the FTSE 100 Affected the development of the Buy to let housing market in the UK since 2007?
What are the positive effects of the performance of FTSE 100 on the development of the Buy to let housing market in the UK since 2007?
What are the negative impacts that the performance of FTSE 100 has on the Buy to let housing market in the UK since 2007?
Looking at the reasons why BTL investors do what they do, with an understanding of risk appetite, portfolio analysis, alternative investment strategies
Study Objectives
The research intends to accomplish the various objectives
Ø To investigate the effects the performance of FTSE 100 on the development of the Buy to Let Housing Market in the UK since 2007.
Ø To analyze how FTSE 100 index has contributed negatively or positively towards the Buy to Let Housing market in the UK Since 2007.
The Significance of the Study
Various researchers have been conducted to evaluate the impact of the firm performance with the findings being positive or negative, but the confusion still is persistent. The researcher wants to highlight the effects the performance of FTSE 100 has on the development of the Buy to Let Housing Market in the UK since 2007. The results of the study will be useful to investors as well as various companies who desire to explore and invest in FTSE 100 index or Housing sector in the UK(Filippidou, Nieboer, & Visscher, 2016). The results can be helpful to also to the government to prioritize in their budgeting or regulate taxing rates to boost a Housing Sector in the UK.
Ethical Considerations
Throughout the research process, the researcher has remained mindful of the four key areas of potential risk that are commonly associated with social science research:
1. Avoiding harm to all involved in or potentially affected by the study
2. Ensuring the anonymity of all participants/respondents
3. Gaining informed consent from all participants/respondents
4. Avoiding deception
Accordingly, every effort has been made, with close guidance from the academic research supervisor, to eliminate, or as a minimum ameliorate, these potential risks throughout the processes of research design, data generation, data analysis, and dissemination. All data has been stored securely, locked or encrypted, throughout the research and will be destroyed upon completion.
The chapter of literature review would focus on the main topics associated with the subject of the research and would analyze the various propositions of the scholars in the subject area.
The Background of FTSE 100
Elroy Dimson and Paul Marsh back in 1983 when were approached to give an opinion on how to come up with a real-time index for London's Stock Exchange market resulted in the creation of FTSE 100. The intention was to introduce trading options and features for the investors to manage and hedge the UK equity exposure more effectively(Rafaely & Bennell, 2006). The required rarity of time was to give real-time index and to be a representative of around 100 stocks compared to a narrowed index dating back to 1935(Zumbach, 2004). The previous stock market had flawed calculation methods which the investors could beat the index by just holding it and the need for a new index were inevitable.
The actuarial profession which has been making a significant contribution to development and design of stock market indexes in the United Kingdom (UK) in 1984 introduced a new index in Stock Exchange called “The Financial Times-Stock Exchange 100 Share Index (FTSE 100)” with the involvement of the Financial Times. The FTSE 100 is a real-time index which is continuously updated with the objective of facilitating the “features and options of trading in the UK market” (Dimson, 1984). FTSE 100 was incepted as a home-grown talent its index bearing household names such as MFI Furniture, grocer Tesco, Boots the pharmacy(Fernandes & Mergulhão, 2016). The demands of the UK consumers were met by these built businesses. FTSE 100 also had firms with national names such as British Petroleum and British Aerospace among others(Komarov, 2011). FTSE 100 was the first option for consideration for anyone intending to invest or searching the benefits from burgeoning economy of UK stock market.
Times have changed since the launch of FTSE 100 in 1984, with only 28 of the original 100 companies of FTSE 100 remaining. Also, some of the natures of their business have evolved, and the index of some of the companies changed drastically but still offered decent performance, implying that FTSE has risen by 614%, without including returns and dividends, if involved, the impact will be more significant (Mase, 2007). FTSE 100 has evolved to have a reflection of the revolution of the global economy indicating the issues the investors have to consider when investing(Daya, Mazouz, & Freeman, 2012). The fortunes of the global economy are represented by the UK centric index that has evolved from the FTSE 100 through mergers, demotions, new listings, failures, and promotions(Danbolt, Hirst, & Jones, 2017). For instance, G4S, security firm was promoted back to FTSE 100 together with the real estate investment Segro.
Affordability of housing in the UK is a big issue, which provides opportunity to the investor of the UK housing as a significant fraction of the UK population is crammed into artificially and deliberately limited space with ever increasing gaps and house prices restricting people from becoming homeowners. The demand and supply gaps may have negative impact on the consumers segment, from the investor’s perspective this is the high time to expect better returns. A lot of wealth lies within the housing sectors in the UK, and at the same time, vested interests keep things this way by the current private landlords and homeowners according to Hilber (2015). The proposed policies and reforms “tend to tackle the symptoms other than the real causes of the UK housing crisis”. Hilber (2015) further highlights that in 2014, the house prices in the UK “per square meter were second highest in the world after Monaco with high prices specifically in South East and London” (Tabatabaei Sameni, Gaterell, Montazami, & Ahmed, 2015). The rate of homeownership has been declining since 2007 with an extension of Buy-to-let rights “likely to worsen the housing affordability Crisis in the UK”.
Another significant impact on the investors was caused by the scheme of the government called ‘Help-to-Buy' intended to stimulate demand for housing and increase the number of homeowners resulted in an increase of housing prices between the year 2013 and 2014 quarter two. The step had the impact of slashing the prices of the home down and causing a reduction in the returns to the home investors. On the contrary, the result were found to be completely opposite of what was expected. The government announcement led to house prices rising by 25.8% and the residential building boom that was expected failed to emerge(the Chu, 2015). In the UK housing sector, subsidies have an adverse effect towards homeownership due to the impact of price, even though increased demand. It doesn't offset the price controls as compared to grants with the positive outcome where the markets are flexible demand results to increased supply expanding the number of homeownership rates but only of the higher income earning individuals. The investors were therefore saved by the possible loss in returns due to the government intervention.
The un-ending trouble in the UK housing market perspective with the long-lasting sources of evidence is not changing anytime soon. The causing persistent inflexible market mandates the research of the effects of performance of FTSE 100 on the Buy-to-let UK housing market. The FTSE 100 performance can affect the incredibly unresponsive supply housing market in the UK and its either negative or positive shocks of pushing the house prices up or down(Haddaway, 2013). For instance, planning and regulation of building new houses are tightest in London and South East where the stimulation of demand instead causes the prices of homes to rise thus having no positive impacts on construction and or homeownership.
The private investors use Buy-to-let (BTL) mortgages to purchase residential properties with the intention of renting out to tenants as accommodation houses. The investor desire to earn rental returns and gain capital increment due to the rise in house prices over time(Sprigings, 2008). On the contrary, the raised availability of BTL mortgages as a source of finance stimulates the demand for housing increasing the outstanding BTL debt(Chamberlin, 2009). According to Michael Ball, an estimate of only 54% of BTL landlords utilize mortgages finance sources to purchase their properties (2012). High house prices in the UK have been the signal failure of the Government objectives of enhancing housing affordability, conditions, and economic policy.
On the other hand, the FTSE 100 performance is associated with the performance of various commodities BTL Housing market included due to its significant weighting of oil and mining companies. The return of the FTSE 100 over the last five year has remained 25%. For the last ten years, the returns have been Mostly, the buying outcome gets affected by the index of the local currency not determined by the individual earnings of the member companies but by the continued appreciation of the US dollar against the British pound(Areal, 2008). For the investors buying the FTSE using dominated US dollar have the fate of their investments being determined by the problematic and unexpected changes of the prices of the commodities in the market where Housing units are in the list.
FTSE 100 index performance has an inverse association on the value of investments where its failures and success has little to do with the evaluation of the real value of member companies but more dependent on the performance of the US dollar, oil and copper. Also, "one of the primary drivers of the" current demand and supply of housing market in the UK is the household income in the market locality contributing towards the discussion of the ratio of house price and average earning that limits the periodic inflationary bubbles(Fulcher, 2013). In the scenario of UK housing sector, such as assumption does not represent the behavior of the market instead the short-term housing capital returns determine the housing prices.
The FTSE100 was designed by a team of representatives from the Institute of Actuaries, “London International Financial Futures Exchange (LIFFE),” the Financial Times and the two professors called Paul Marsh and Dimson from the London Business School of Finance. Mark Makepeace the first CEO of FTSE 100 was among the group, but now FTSE 100 is wholly owned by the London Stock Exchange(Xiang & Zhu, 2014). The role of Paul and Dimson was to establish how well to track the market by creating back history for the new index and to advise on how and when it should be rebalanced(Al-Hnaity, Abbod, & Alar’Raj, 2015). FTSE 100 enormously allowed many people to successfully monitor the movement of the market in real time, enhance their risk management by carefully selecting their positions(Frijns & Tse, 2015). Besides, FTSE 100 encouraged the development and increase of index funds which are the cheaper alternative method of investing in the stock market exchange.
Currently, “FTSE 100 Index is the most extensively followed stock” market index in the UK. FTSE 100 brand name was in doubt until the moment when the Financial Times joined in after its reluctance to support an alternative option to FT 30 Index(FTSE, 2016). Initially, the Stock Exchange deliberated the new Index to be called SE 100 as a working name until the minute Financial Times accepted to support before the launch fixing the prefix FT to create the FTSE 100 name(Bloomberg, 2017). By the time London Stock Exchange acquired FTSE100 in the year 2011, the FTSE Group under the leadership of Pearson Group (the owner of Financial Times), was valued at £ 1 billion.
The Importance of FTSE 100 in UK Economy and Stock Exchange Market
Initially, FTSE 100 was designed for policy settings and measuring the performances of investments, it evolved to be complementary to Financial Times Actuaries (the FTA) and more so competitive to FTA. Despite being integral to FTA, FTSE 100 is of importance to actuaries due to the following reasons. First, the traditional interest in immunization and matching naturally extended to equity portfolio from fixed interest portfolio as a result of the introduction of FTSE into the “stock index futures and options on the UK market” (Dimson, 1984). Secondly, FTSE contributed towards the elimination of 1984 Budget of Tax relief for insurances leading to the development of new products and searched for innovative sources of incomes(Anwaar, 2016). The FTSE 100 guaranteed contracts were making the management of index-based investments much easier.
Thirdly, the stockbrokers with the advent of the dual capacity in the UK were expected to advise on the fluctuations in equity prices and to control of exposure of the market makers(Tabner, 2012). Fourthly, Both FTA and FTSE 100 Index lie on the joint responsibility of the actuarial profession for their management. The members of FTSE 100 used the FTSE index to analyze the statistical association in the equity market. Finally, the actuaries expressed their opinion about the suitability and application of the FTSE index compared to those that were designed previously.
The “Role of the Buy-to-let (BLT) Sector in the UK Housing Market”
The private rental sector is rising after decades of stagnation due to change of housing preference by the young generations opting to remain flexible in the urban areas and avoid being tied down by the vast amount of house debt(Baptista et al., 2016). The pressure on the rented accommodation also increases due to working migrants and students who plan to move after a short period of stay, and they prefer rented houses than buying because they are cheaper and flexible(Paccoud, 2017). The future housing market of UK will be more diverse deviating from the vision of owning a home for everyone(Clapham, Mackie, Orford, Thomas, & Buckley, 2014). Regardless the source of motivations and pressures, the demand for renting household will continue to increase even in the future.
The market of Buy-to-let has been put in the spotlight due to the rise of the number of households rented privately increasing from 9% to 18% between the year 2000 and 20014 respectively. The increase in the privately rented houses consequently caused a decline in the renting units in the local authorities due to the fast rising of prices of the homes in the UK by 32% surpassing the anticipated wage growth of 14% nominal earnings on the same period(Paccoud, 2017). The BTL comes into play by facilitating the purchase of residential houses with the desire to let the home to tenants in the private sector(I-Chun Tsai, 2014). In 2006 and 2016, the number of BTL mortgages evolved peaked in the year 2007 before the year 2009 of the financial crisis. The Buy-to-let sector reacted sharply to the financial crisis dropping from 12% to 8% but gained immensely during the recovery years 2010 to 2016.
Justification
By the year 2014, “the UK housing market comprised of 28.1 million residential properties” most of them are associated with the availability of mortgages or lending, wealth and income. “According to the Office for National Statistics in the UK”, the housing market is susceptible to the overall status of the economy(2015). Increasing number of house properties and prices of the houses doesn't necessarily represent an increase in the wealth levels but distribute the damaging drag on the economic performance in the UK.
The UK housing sector suffers from extremely restricted supply base with sluggish reactions towards changing the demand for houses making it far from being a perfect market. The housing market is driven by high price expectation of returns, low levels of credit availability, the business cycles making it operate on light levels of demand and cyclical nature(Poon & Garratt, 2012). The irresponsive supply of UK housing commonly reflects the sudden changes in price rather than the surplus supply(Agnello, Castro, Hammoudeh, & Sousa, 2017). The implication of FTSE 100 performance on UK BTL housing market is significant to understand the effects both in rates and the levels of the volatility of amount of houses in the United Kingdom.
There is a huge gap of knowledge of the effects and the extent to which FTSE 100 and the proposed government policies on the availability of BTL housing in the UK. Buy-to-let mortgage financing has grown with the striking trends in the housing market contributed by the FTSE 100 performance. According to the research paper commissioned by the Department of Communities and Local Government carried out “by the National Housing and Planning Advice Unit (NHPAU)” discovered that "there are good reasons to assume the effect of the rapid growth of BTL investment to increase house prices"(Ball, 2012). It was estimated that with an addition of £13,485 on the prices of houses in the UK was a consequence of BTL lending increase in prices by £13,485 over and above the reasonable costs reducing the amount spent on stamp duty by £1,750 according to Powell (2015). The rise in house prices in the UK contributed significantly the substantial difference between the growth of costs and the fall of market rent levels resulting to a situation trying to reconcile between the price increase due to demand for house and falling of rent levels.
Demand Drivers of Buy-to-let Housing in the UK
Private rental in the UK continues to increase due to the combination of various factors that drive the housing market including the roles of investors. Other than the legislative change that promotes private rentals, the performance of FTSE 100 acts financial regulators leading to new product lending from the banks and even the building sectors which in return drive the overall growth of the demand of housing in the UK market(Agnello & Schuknecht, 2011). The house prices in the UK market depend significantly on inflation and bank credit together with the aspect of the mortgage market, in this case, BTL mortgages all of which FTSE 100 plays a critical role(Tsatsaronis & Zhu, 2004). The FTSE 100 mostly affects the short-term rates on which house prices are sensitive. Also, feedback to bank credits is affected by the FTSE 100 which the mortgage and lending practices are widely based.
Another factor that drives the housing market in the UK is Mass Media that stimulus illustrates how easy it is through owning properties (Buy-to-let) can one make money (Ball, 2006). Most of the UK televisions transmit for many hours' programs that are focused on advocating the purchase of residential properties and renovations to make money(Pryce & Sprigings, 2009). Also, most of the print media communicate adverts and promotional messages of buying-to-let properties. For instance,
The mum of two, Jo Seward has bought a buy-to-let property to invest money for her children's future, Jo lives in Worsley but has bought a one bedroom apartment in Wolverhampton that is yet to build and she has never been to Wolverhampton. She relied on research conducted by Armchair Property Company who negotiated for her to pay £101k for the property listed at £116k, but already worthy £122k.(Sprigings, 2008, p. 78)
The third driver factor is the massive value of lending which according to the Council of Mortgage Lenders (CML) the BTL was at £45.3 billion in 2007 rising from £6.9 in 2001. Michael Ball (2006) illustrates further that BTL stimulates the growth of Private Rental Sector (PRS) but has no impact on the house sales market on overall. Michael Ball summarised his opposing position when he commented that:
Regardless of the Buy-to-let happens or not, the springs (2008) report illustrates that the price of homes in the UK will continue to grow and BTL has been the beneficially of the rapid price rise on behalf of First Time Buyers (FTBs). Even the lower priced homes are beyond the access to young first-time buyers indicating that half of them would seek assistance from parents to buy-to-let properties. According to the Gal and Pinter (2017) reports that only 30% of all new supply of houses in London goes to the owner-occupiers while the rest are taken by BTL purchasers.
Study Description
The chapter of methodology would discuss and analyze in detail the research methodologies adopted to arrive at the conclusion. The analysis is carried out to determine and evaluate the effects that the performance of FTSE 100 has on the development of the Buy to Let Housing Market in the UK since 2007. The research used the available national statistics of the performance of FTSE 100 indexes to evaluate the extent to which it affects the Buy-to-let Housing market in the UK and to recommend the reverse of the impacts(Oliver, 2012). The research is a descriptive review and not a meta-analysis but rely on an explicit strategy of selecting pertinent studies of high quality for the review process. It is a descriptive research for it relies on the interpretations of paper evidence and experiences and not to employ statistical techniques to compare the studies.
Sample Size
The research used the secondary data to empirically investigate the effects of the performance of FTSE 100 has on the development of the Buy to Let Housing Market in the UK since 2007. The panel data was collected from 2007 to 2017 to ascertain the association between the performance of FTSE 100 and the housing market in the UK. Since literature search has no restrictions, hundreds of articles might be available for review. The research utilized both primary and secondary screening to narrow down specific papers according to inclusion and exclusion criteria. For efficient searches, the first screening was primarily to identify broad range of papers with the potential of being used because of covering the topic of interest, readable language, and publication of repute. The second screening was for quality that narrowed down the search to identify the best available sources for the research.
The screening for quality ensures the gathering of sound evidence of accuracy. The research utilized both practical and methodological screening steps to enhance expert review, efficiency, and relevance of the selected materials(Okoli & Schabram, 2010). In total, six latest papers were analyzed and considered in the research.
Inclusion and Exclusion Criteria
During a productive screening, only publications in English were included, education journals, articles of Financial Times-Stock Exchange 100 (FTSE 100), and Buy-to-let articles in the United Kingdom. All studies that took place in the UK in the housing sector and FTSE 100 trading were also included in the review.
All non-English papers were excluded, and any publications below the year 2007 were also banned. The studies that were not in topic range and without data were also excluded.
Data Collection Methods
The researcher has used the secondary data from annual reports of the selected firms within the FTSE 100 index list. The researcher intends to carry out a literature review by comparing and contrasting various views of different journals among other publications.
Conceptual and Theoretical Framework
The research is based on the literature review and then employs some philosophical approaches to arrive at some conclusions for the problem under the study.
The Review of Mortgage Market and how it affects BTL housing Market in the UK
According to the published final data pack of Policy Statement 12 (PS12/2016) the supplement to the Mortgage Market Review (MMR) by the Financial Service Authority, An estimate shows that there were 26.3 million households in the UK, out of these, 66 % are homeowners, comprising of 32% outright homeowners while 34% have first-charge mortgages.
