Second life

Bricks and mortar are as safe as houses - so the saying goes - but recent months have shown even the safest of bets can have sticky moments as house prices stagnate and buyers disappear.

But how bad is 'bad'? Pundits differ widely in their forecasting; some say prices could tumble by as much as 30%, others a more modest 9% and some are not expecting a massive fall of any kind - more a market realignment.

And while the main housing market is going through a sea change, the second home sector is going through similar uncertainty. A recent report from Capital Economics has suggested up to 25% of those with more than one home may choose to sell up in response to the falling value of property. It forecasts that 60,000 homes may go on the market in England alone as a result.

The figure may be supported by a recent capital gains tax change, which has reduced the potential liability for some owners from 40% to a flat rate of 18%, making it more attractive to off-load a falling investment. But the flip side is that in a falling house market, rental income tends to rise making ownership of another property more attractive. Combine this with the increasing number of people choosing to stay in the UK for their holidays and second home ownership may give people a valuable stream of income when times are hard.

Acumus Insurance Solutions managing director John Bibby says: "About half of the UK's two million second homeowners are not wealthy holidaymakers or tycoons, but professional or amateur landlords; often providing for student offspring or putting money away as an alternative pension.

"The fundamentals underpinning the buy-to-let sector are sound. New build shortfalls, population growth, greater demand for single occupancy homes and the arrival of more workers from abroad will limit house price decline."

However, he says, these landlords do need advice. "Non-professional landlords are often initially unaware of the special need to protect their property. Policies need to cover loss of rent - essential in case the property ever becomes uninhabitable."

Landlord liabilities

He continues: "There are also any liabilities that may accrue to the landlord, accidental damage and the provision of alternative accommodation. Legal expense cover, particularly for covering the costs of any contractual dispute or bad debt recovery, is also important."

Acumus says bargain-hunting landlords will be able to snap up deals due to more sensible asking prices and a lack of competition. For the insurance market this could be good news in the face of fears that new business opportunities could dry up. However, Mr Bibby foresees a possible hardening of the market as insurers adopt more selective rating criteria in a bid to rate profitably.

"The small ray of sunshine," he says, "is that rental income is expected to go up with increased demand. For landlords there is a concern to find a good quality tenant balanced with the need to get any sort of tenant; but the trend shows more people are renting, which may help our clients tough it out."

Acumus keeps its product ranges quite separate - with policies for residential use and others for rental property - because, Mr Bibby says "they are genuinely different risks".

There is a general belief that if you have a relationship with a client you should be able to keep the business across lines, but Mr Bibby believes the product needs are too different.

Laurent Schonbach, head of holiday home insurance at Hiscox, feels differently. For 25 years Hiscox only insured holiday homes if the owner insured their main home with the company. This changed around five years ago when Hiscox began to offer a stand-alone product and Mr Schonbach admits Hiscox has yet to go through a full market cycle in this arena.

However, he remains bullish about the sector, confident that a solid core of business will remain, regardless of the appetite to buy or sell. He disagrees with the predictions of Capital Economics simply because he believes there are different reasons for buying a holiday home, which are fairly market resistant.

"I don't think a massive amount of homes will be sold simply because people owning second homes are buying them as a toy or as a lifestyle choice. However, we are forecasting a drop in new acquisitions, which will filter through into new business on the insurance side," he warns.

Much of that can be blamed on difficulties in finding mortgages to finance the holiday home. In contrast, the majority of those who already have a second property are "likely to just sit on it", he says.

There is a crossover between the pure holiday home market and those who buy as an investment, says Mr Schonbach, particularly at the lower end of the market. But the holiday home market is a specialist area in terms of insurance, with relatively few players, including brokers, with facilities at Lloyd's.

Ian Ferries, household underwriting manager at Holmans, adds: "The UK holiday home market is already very competitive and generally profitable and I do not see insurers dropping out of the market; however this may have an effect on the rates.

"I don't think brokers will be concerned about the products they have to offer their clients as there will be plenty to select from."

Overseas insurance

Few overseas property owners insure these properties in the UK market. To date, 95% of Brits who own homes overseas have insured them in the local market with attractive low premiums. And those lower rates make breaking into those sectors difficult. Mr Schonbach is realistic. "We know we can't compete against Axa in France or, say, Mapfre in Spain. We have to work on service and claims and convince insureds it is worthwhile spending that little bit extra."

Even in the UK the market is relatively small and Mr Schonbach claims the top four players write between £25m and £30m of premiums a year. But he sees opportunities for brokers to expand their service to clients by offering second home cover alongside main home insurance.

The biggest growth in the market has been at the bottom end as more people with an income between £25,000 to £40,000 have looked at opportunities to buy a holiday home, often topping up their main home mortgage to buy. These people, says Mr Schonbach, may have snapped a holiday home in Bulgaria but may now find it difficult to afford the mortgage back home. Some may start to rent these second properties out in a bid to continue ownership. As a result they may also need to change the policies they have to cover renting the houses out, again providing opportunities for the brokers.

Those opportunities have already been spotted by some. Direct Line, for example, has been running a TV campaign to attract the buy-to-let market. Gavin Peacock, business development manager at Towergate's household division, also believes that some people will continue to buy overseas - simply because they had already paid a deposit.

"Bearing in mind a lot of people are buying in Spain and Bulgaria and may have paid a deposit 12 months ago, they are going ahead with the deal," he says, however adding that they may struggle to find a mortgage in this country.

One solution to keep the overseas market developing is obtaining a mortgage in the local market, which is being promoted by estate agents eager to see sales continue. The downside for UK insurers is that encouraging more local involvement may also encourage buyers to find their insurance overseas too.

Mr Peacock says the strong Euro is also playing its part by encouraging buyers to look further afield "where you can still buy a house for £50,000". For overseas owners, he says, they need to check out things like helplines - routinely offered by UK insurers but not by overseas firms. "People have to be careful when buying insurance from overseas firms because the levels of cover are not the same.

"For example, public liability in Spain is as low as £100,000 while it can be even lower in Bulgaria. People renting out the property can then sue in the UK and leave the insured out of pocket."

For UK second homes, Mr Peacock believes the available insurance is pretty comprehensive and there are still opportunities for insurers in the market. "The second home market is still fairly specialist but is becoming less so," he says. "The main players want to get into that market."

He claims insureds will not yet find second home cover on aggregator websites but many main insurers are offering policies. "Policies are similar to standard primary home insurance but insureds will also need loss of rental income and cover when the property is unoccupied.

"It is a fairly stable market. People have always had holiday homes and always will do. A lot of holiday homes are for weekends or for getaways. If people need to, they will rent them out but the market will remain," he adds.

The British Insurance Brokers' Association runs a variety of schemes for second homes. Technical services manager Steve Foulsham says the association works with a variety of insurers offering slightly different products. He believes while it may be difficult to achieve mortgages at the moment, those already owning second properties are experiencing high demands to rent, which in turn requires its own insurance.

On the holiday home front, Biba includes static caravans, which often provide an alternative for those not wanting the expense of a house. Again it operates a scheme - with K Drewe Insurance Brokers - and Mr Foulsham reports a very healthy market.

"I think there is a different mindset in terms of holiday homes because my perception of buy-to-let is that it's an investment; when people buy holiday homes they are not thinking about money, it's about lifestyle."

He adds that there does not seem to have been much impact as yet from the credit crunch either but warns one fall-out could be increased fraudulent activity during the difficult economic climate.

Switching insurers

Mr Foulsham also agrees more people may rent out their second properties, adding to the call that the market is improving for landlords. However, he cautions that a standard household policy will not be sufficient for rental purposes and brokers will need to advise owners to check cover and possibly switch providers. There is plenty of choice around, he says: "When we were setting up our scheme, we were looking at five or six providers keen to work with us.

"The market is still very sound but I have not seen much movement on rates. We are still in a limbo in insurance but I personally feel we will start to see some movement in the marketplace by the end of the year."

Biba also operates a scheme for mid and high-net-worth business with Sterling Insurance, where associate director Sara Greenwood believes they are already seeing some signs of a change.

"It is on a softly, softly basis," she says "and we are hoping price increases will continue." She adds the market has changed little in recent times and even these increases are very dependent on the individual being rated.

So far there have been few signs of "any effective new entrants", which is helping to stabilise the market and even turn it around. Some insureds have faced as much as a 10% hike but "if you have a good quality risk you have held for some time, then you are not going to increase rates as much," she says.

While the mid-market is more commoditised, the HNW sector is individually underwritten and insureds tend to have second properties as part of a wider portfolio. Some of them will have second properties purely as holiday homes, particularly overseas plots, while others will view them as investments.

In terms of claims, the market suffered slightly last year from the floods across the UK but Ms Greenwood sees little sign of the credit crunch taking any toll - she just has fingers crossed that it will be a catastrophe free year and that "we can make some money".