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22/02/07 -
Buy-to-Let Market Struggling? |
The newspaper headlines made grim reading. "Property
collapse feared as landlords sell up," declared an April 2004 article which described the buy-to-let market as "now
running into trouble". Fast forward to February 2005 and the warning was that "the craze for buying houses and flats
to let has finally started to pall", while in October of that year "many mortgage brokers and lenders are convinced
that the buy-to-let boom is over".
There has been no shortage of commentators predicting doom, gloom and a lot worse for amateur landlords who have
turned to bricks and mortar as an alternative to investing in a pension. The market has defied the Cassandras, and
many investors who took the plunge have had the last laugh. With three interest rate rises in six months, and
another on the cards, life is getting harder for buy-to-letters, with some talking about selling up because their
mortgage payments are now higher than their income from rent. Could this be the year that the wheels finally come
off the buy-to-let bandwagon?
According to the Council of Mortgage Lenders, the investor landlord sector enjoyed a pretty spectacular 2006,
performing even more strongly than the wider housing market. More than 330,000 buy-to-let mortgages worth £38.4bn
were taken out in 2006, representing a ninth of all new lending during the year, and the total value of loans
outstanding is now nudging £100bn.
But could we now be seeing a change in sentiment? On Monday, property website Rightmove said a smaller than expected
monthly rise in asking prices following January's surprise interest rate increase had triggered the sharpest drop in
the annual rate of house price growth for 18 months. Last week, when buy-to-let specialist Bradford & Bingley
announced its results to the City, some banking analysts were less than upbeat about the prospects for the sector.
While the market is underpinned by growing employment, driven largely by foreign workers flocking to Britain, Alex
Potter at stockbroker Collins Stewart warned: "Once immigration slows (post new EU accession) and the effect of now
higher interest rates feeds through, we believe the appetite for buy-to-let could slow materially."
On some measures at least, the market appears fairly healthy. The CML data revealed that the proportion of
buy-to-let mortgages three months or more in arrears (a pretty good test of whether investors are keeping their
heads above water) is continuing to fall - from 0.64% at the end of the first half of 2006 to 0.59% at the end of
the second half. This is lower than the 0.89% figure for the wider mortgage market. The mortgage lenders' body
declared that, with evidence from other sources of strong tenant demand, rising rents and falling void periods,
"buy-to-let looks set to remain popular and successful".
Falling yields
Rents are indeed going up but are failing to keep pace with property prices. As a result, rental yields - the annual
income you get from renting out the house or flat expressed as a percentage of the property's price - are falling.
Landlord Mortgages, a specialist buy-to-let loans broker, said yields hit a five-year low in 2006. For England they
had fallen from 7.1% in 2002 to 5.74% last year, while for London they were down to 5.8%. The firm added that while
falling rental yields in themselves "are not great news for investors", the decline resulted from the healthy
capital appreciation investors have enjoyed over that period. Others quote even lower yields: Birmingham Midshires
says the figure for central London is 4.7%.
With growing numbers of lenders competing for the affections of investor landlords and the maths looking tighter and
tighter, many banks and building societies have relaxed their lending rules on these mortgages, allowing amateur
landlords to borrow more money. UCB Home Loans, part of Nationwide building society, has reduced the rental cover it
requires from 125% of the mortgage repayment to 110% with effect from this week, while Alliance & Leicester said
rental cover of "just 100%" was now required on some of its deals.
'Toppy'
As with the wider housing market, a lot hinges on what happens to interest rates. Alex Potter said that if the Bank
of England does continue to raise interest rates, "it will at least blow the froth off the buy-to-let market". In
cash flow terms, buy-to-let landlords are "just about washing their face", he added. Many may take the view that
they can live with that, as long as they have got the promise of long-term capital appreciation - but it may not
take much for the picture to change dramatically. "In cyclical terms, the housing market is looking pretty toppy at
the moment," said Mr Potter. Nevertheless, he believes that 2007 is likely to be "another good year for buy-to-let".
While he certainly doesn't envisage a crash in the sector in the next few years, "I can see growth really tailing
off quite a lot".
The outlook is muddied by new rules coming into force in April that will force landlords to hand over tenants'
deposits to a third party organisation, while a new licensing regime for rented property, where larger shared houses
now need to meet minimum standards on facilities such as toilets and basins, has added to landlords' headaches.
One thing no one knows is how the new army of buy-to-let investors will behave if or when the property market takes
a nosedive. Will they offload their properties en masse, and prompt a market collapse, or will they hold their nerve
when the going gets tough? The doomsters have, so far, been proved wrong, and it is a brave commentator who will
predict the demise of this new class of property owners. |
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