Buy-to-let lending hit its highest level for almost two years between July and September as landlords looked to cash in on buyers shut out of the housing market by a mortgage famine and high deposits.
The Council of Mortgage Lenders' latest figures showed buy-to-let lending rising for the second successive quarter to hit £2.8 billion after bottoming out at £2.1 billion between January and March.
But lending is still low compared with its pre-credit crunch peak of £12.4 billion in 2007 and the CML expects further growth next year as the rental shortage lingers in a "dysfunctional" property market. London has been particularly hard-hit by the rental shortage, with recent figures showing average rents up 6.8% to £972 a month since the start of the year.
CML director general Michael Coogan said: "We would expect buy-to-let demand to pick up further if current rising rental trends continue and house prices remain broadly stable."
He warned: "The bigger question is whether there will be sufficient supply side capacity to meet that demand, as the number of buy-to-let lenders dwindled in the credit crunch after 2007 and is yet to be fully restored."
Buy-to-let loans were up 8% to 26,700 in the third quarter, with lending by value rising 12%. Total lending volumes were up 14% on a year earlier, the CML added. Nigel Terrington, chief executive of buy-to-let lender Paragon, said the figures were "encouraging" and reflected higher confidence amongst landlords and lenders in the market.
"Although we are still a long way from normal market conditions and lending is low by historical standards, the market is heading in the right direction and is growing again," he said.
Further figures revealing a stagnant mortgage market in September underlined the soaring demand for scarce rental properties. There were 50,000 loans for house purchase, unchanged on August, although the value of loans fell by £200 million.
Loans to first-time buyers were up 4% to 18,600 over the month but this was still 6% lower than a year earlier. Credit conditions remain tight and first-time buyers were asked to put up average deposits of 24%, higher than the 23% asked for by lenders in August.
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There was better news on repossessions, which fell for the fourth quarter in a row to 8,900 between July and September and are set to undershoot CML forecasts of 39,000 this year.
Low interest rates and a more sympathetic stance from lenders have helped but the CML warned the trend could be reversed following the Government's 40% cut in mortgage interest support for households in need.
IHS Global Insight economist Howard Archer warned that many homeowners were still at risk: "Any rise in interest rates would be liable to send a significant number of financially stretched people over the edge."
