For many years buy-to-let investors have enjoyed juicy annual returns on the
back of low borrowing rates and a boom in UK property prices.
But over the past eight months the outlook for buy-to-let property has shifted
from very sunny to decidedly gloomy. First, the growing evidence that house
prices are falling means that one vital prop to the buy-to-let property
business - the prospect of capital gains to add to rental income - has now
been knocked away. Halifax, the UK's biggest mortgage lender, reported this
week that UK house prices had fallen by 2.5 per cent in March - the fifth
fall in seven months and the biggest monthly drop since Septenmber 1992.
Morgan Stanley, the investment bank, reckons that property prices could drop
by 20 per cent over the next two years.
Secondly, the impact of the global credit crunch has made lenders in the UK
much more wary of advancing money to buy-to-let borrowers unless they are
really good credit risks. They have withdrawn many buy-to-let deals and
jacked up the interest rates and the size of deposits required on the
remaining ones.
David Hollingworth, of L&C Mortgages, the mortgage broker, says: “Until
recently it was quite easy to borrow 90 per cent of the value of a
buy-to-let property. Now that figure has dropped to 85 per cent. A year ago
Nottingham Building Society offered buy-to-let borrowers a good three-year
fixed rate of 5.45 per cent with an £895 fee. Today the lowest three-year
fixed rate is 5.79 per cent with BM Solutions, but it carries a fee of 2 per
cent, which would add £2,000 to a £100,000 loan. Leeds Building Society
offers a three-year fix at 6.19 per cent with a £999 fee.”
James Norton, of Evolve Financial Planning, the independent financial adviser,
says: “We think that, in general, people have too much of their wealth tied
up in property. It's a case of too many eggs in one basket.
“On top of that, we think that now is a particularly bad time to invest
because rental yields are so low. In many areas they are about 4 per cent,
before management charges. In 1993-94, at the bottom of the last property
market crash, yields on buy-to-let properties stood at about 20 per cent,
which left plenty of margin for profit even after management charges and
loan interest, but that margin has now evaporated.”
However, some people in the property industry remain convinced that buy-to-let
still has some steam left in it. Malcolm Harrison, of the Association of
Residential Letting Agents (Arla), says: “Most buy-to-let landlords are not
overextended with their borrowing. Our latest quarterly survey shows that
the average mortgage taken out by landlords is for less than 75 per cent of
a property's value.”
He adds that most buy-to-let landlords are long-term investors, typically
purchasing a property in their forties and holding it for more than 20 years
as an investment for their retirement.
He says: “A high proportion are not too worried about making a net annual
profit. They tend to have a reasonable amount of equity in their properties
and many have a day job. They are not panicked by short-term ups and downs
because they reckon that they can still make a profit in the long term. Even
peope who bought at the peak of the property boom in 1990 and suffered a bad
few years in the early 1990s are now sitting on substantial profits on their
investments.”
Mr Harrison accepts that times are now growing tougher but he thinks that
there are still opportunities for property investors. “The key thing is that
investors need to do their homework,” he says. “They should check the real
rental value of a prospective property and whether this will be enough to
cover any loan comfortably. If the sums stack up, then investing in
buy-to-let property can still be viable.”
But other experts are less sanguine. Stephen Herring, of BDO Stoy Hayward, the
accountant, says: “There is already oversupply of city centre apartments for
rent outside London, and with prices for these properties falling, a number
of buy-to-letters have already had their fingers burnt.”
He adds that there are two very different factors pushing investors to sell
their buy-to-let properties right now. One, which is hitting short-term
investors, is the fear that they will not be able to make a quick buck
because property prices are falling.
The other is the change in capital gains tax (CGT), which took effect on April
6 and is tempting some long-term investors to sell their properties and pay
tax on the profits at the new CGT rate of 18 per cent, rather than the 24
per cent to 40 per cent that higher-rate taxpayers faced until this year.
Mr Herring says: “If even a modest percentage of these people decide to sell,
there could be a glut of buy-to-let properties on the market, which would
trigger further price falls. There could also be a bit of a queue at the
exit because property is an illiquid investment and can take some time to
sell.”
Mr Hollingworth adds: “There is no doubt that credit conditions are now
tougher and the immediate outlook for property prices is gloomier.
Experienced investors who are in buy-to-let for the long term should be able
to weather the storm and the more adventurous may even look to add to their
portfolios by picking up some properties at lower prices.
“However, would-be investors who were attracted by the prospect of short-term
capital gains will be put off by the cooling in property prices. If they
hold off for the time being, this will be no bad thing.”
Buy-to-let factfile
- Seven out of ten buy-to-let investors borrow between 71 per cent and 90 per
cent of a property's purchase price.
- A quarter of landlords own only one property, 70 per cent own fewer than
five and 2 per cent own more than 50.
- Buy-to-let investors expect, on average, to own their properties for 16
years, but a quarter of landlords expect to own them for more than 20 years.
- The average rental yield on UK properties is now 4.6 per cent. Capital
appreciation has averaged 8.2 per cent over the past 20 years, though
Halifax reports that prices have risen by only 1.1 per cent in the past 12
months. In March property prices fell by 2.5 per cent.
- Only 7 per cent of landlords are currently buying more properties (down from
11 per cent in the previous quarter), while the proportion selling has risen
from 16 per cent to 19 per cent.
Houses and flats are primarily places for people to live. Property values rise and fall, (albeit on an overall upward slant).
The risk of losing in the short term, must be weighed against the possible long term income and property value increase.
Don't risk what you can't afford to lose !
Steve, Cramlington, U.K.
What is killing naive and over borrowed "investors" is the service charge racket, run by freeholders/superior landlords' agents which wipe out rental yields. With no capital growth and more than 50% borrowed, disaster looms.
How could those idiot banks lend 95% of a property's cost?
Peter Lewin, Northwood, UK
Frankly, it's about time the buy-to-let market took a knock. There are simply too many amateurs encouraged by too many TV programmes who are only in the market to make a quick buck, and it is these people who are taking properties off the market for first time buyers.
Sophie, Liverpool,
The best advice is that once the shoe shine boy starts buying into something it time to sell....i think they time has come and past and now watch out
andy anderson, rousse, bulgaria
Michael Corby makes an important point, "thepeak of each boom is higher than the last".
Buy to let has changed the UK's housing market. Rental is now a huge segment. Good, not that long ago the letting market did not exist, with security of tenure for tenants and artificial, controlled rents.
Peter Lewin, Northwood, UK
What I dont understand about the doom and gloom of the BTL and first time buyer market is this, if the 1stTBuyer cannot get a mortgage because of the credit crunch and your typical little Johnny wants his own pad instead of living with mum & dad.. he needs somewhere to rent. Equally If the BTL fraternity cannot sell their property at the moment to the likes of little Johnny and all the other demands for the lower end of the housing market are maintained ie divorce/separation immigtration it seems to me that the only way is for rents to rise sky high, until such time as becomes cheaper to buy again. Or is that too simple?
John, London, UK
So 25% of BTL owners have only one property to let.
Surely that makes them rank amateurs (and could much more be said about those with fewer than five properties)?
Doesn't this mean that only about 25% of the BTL market can be considered serious, long term professional investors?
If so, what does that tell you about the ability of the sector to weather any downturn, particularly a long and severe one?
Father Ignatius Brown, London, UK
There is a difference between property speculation and investment.
We have property in our portfolio going back decades. Rent is akin to a dividend. The thing with property is to take a lifetime view, or several lifetimes. I remember buying one against advice thinking that it might treble in 20 years. I was wrong: we sold it for eight-fold!
The simple fact is that the peak of each boom is higher than the last, and the trough of each recession is higher than the the previous peak but one.
The main advantage is that one is in control as long as one can hold for the long term. Entrusting money to stock-market has to be part of a portfolio but there are risks there . Cash is risky as inflation erodes the value.
Quite simply the property market is undergoing a periodic correction. Good property will be a good investment at any time, like good shares.
Michael Corby, London, ENGLAND
The BTL Market became flooded with easy credit, how many in the U.K. 1-2 million? I worked for a local Council last year most of the staff were amateur landlords, and so were the taxi-drivers, barbers etc-it couldnt go on forever, if the Pound goes to 1 Euro, the "economic immigrants" will go elsewhere, then there will be some empty properties!
steve, west midlands, uk
Anyone who bought a BTL flat in the last 2-3 years is in trouble. Low (if any rents) and depreciating capital asset = net monthly loss. This will result ina glut of discounted property being sold to cut losses. This in turn will be seen as evidence of a "property crash" ad this "bubble" passes through - followed by "new property boom" as average prices recover. We have always invested in family homes (ie: 2 or 3 bed houses) and rental income is strong and we have a waiting list of tenants. Prices for such homes are fairly stable here in the South West and I expect a 2 to 3% downturn this year - mainly caused by so manyy people using the term "property price crash". It's a difficult market to be in right now and I wouldn't suggest anyone new joining right now it but, long term it has been OK so far and will continue to be. Last thought - we didn't seem to learn from the 60s - people simply don't want to live in flats and we have far too many being built.
Paul Kearns, Ilfracombe, Devon
All markets correct.
Looking at the real rise in house prices over the past 5 years, we should be overdue for a 30-40% drop to get back to value fundamentals. Expect that drop. Internationally the UK , Irish and Spanish property markets are very over-headed. First time buyers should rent and wait 2 years, then buy at big discounts to today's price. Buy low, sell high!
Ron Jones, Nice, France
I provide a good service for those people who are happy and glad to rent. I invest in properties for the long term and therefore do up and maintain my properties carefully knowing that I will not see a return on my investment for a good 5 - 10 years, if not more. However, those of us who remember the bubble of the late '80s and crash in the early '90s will have seen properties rise in value twice if not three times since then. Those who invested in city centre flats in Mancs, B'ham, Leeds and L'pool were probably new investors who relied on other people's advice rather than do their own due diligence. Anyone who did their homework could see that the great number of rental properties available would inevitably depress the market. In the longer term it is inevitable the house prices will rise. In this country we consistently under build for the demand and with the pressure of one person households continuing to rise, I anticipate that housing is a good investment.
Sarah McCloughry, Oxford, UK
Dave, Are you suggesting that anyone who works internationally or is required by their employers to work abroad temporarily, should be forced to sell up their home?
Michael, Edinburgh,
The tragedy of buy to lets is that they have taken a lot of homes out of circulation for working families who want to buy a home to live in. but landlords want obscene inflated rents that nobody will pay for. This has a secondary effect of creating tens of thousands of empty homes that are lying empty becasue of the selfishness of the buy to let market. Buy to lets have created havoc on British society and should be made illegal.
dave, Brent, UK
I live in Wandsworth, SW London, and have lost count of the number of For Sale/To Let combo signs that have gone up this last 2 weeks. To me, this suggests the London rental / BTL market is not as robust as vested interests would have us believe.
Will Hicks, London, UK
Chris Potts. I'm afraid that your desperation shows in this excessively rosie presentation. I'm in business and the one thing I do NOT do is encourage others to compete with me by giving away information about my profitability etc - if I have a good business model I keep it to myself. BTL is based almost entirely on the principles of a pyramid scheme - current investors rely on future buyers being stupid enough to pay over-inflated prices, hence the desperate need to talk up the market. The pyramid has now collapsed and many BTLrs will find themselves quickly in negative equity and from there the bankruptcy court.
Clint, Brighton, UK
I does ARLA do its sampling? Who are these people in their 40s? If they bought pre-2002 and have extensive portfolios they may fit that profile…
of the 2m BTL properties/ 1m BTL mortgages, half were bought after mid-2005 i.e. since then house prices have been so high that BTL relied on flipping/leveraging/capital increase
Rent gowth has been weak (there is a huge stock of BTL supply), it does not match the rise in interest they are about to have.
With falls leveraging works to wipe out capital massively. Add in low or negative yields (if true costs i.e. equity and time cost, taxes and fees).
London? Most BTL I know are getting out. Year on year rises are still occuring in London, but they are stagnating or falling. If you bought in September you would lost money.
not sure which LIBOR rates Chris POTTS has been monitoring! Luckiest guy alive lol....goodluck with the 7.5%. no voids? No City unemployment? mmm
Most BTL bought after 2005, and are subsiding tenants.
Raj, London,
Anecdotal evidence,as an established operator of 10 London buy to lets spread throughout price ranges and locations,that capital gains in 07 were around 15% with solid rental performance with no voids.The strong rental performance persists this year with rental increases around 5%.Recent valuations and informed opinion in this sector indicate robust valuations for sought after properties in good locations with a prognosis of capital gains in 08 in the region of 7.5%.The interest climate for banks' best customers is softening with 2 x 25 basis point drops recently and 2 more forecast this year.This represents a sanguine ongoing situation in the capital where there are stronger than ever supply and demand factors in favour of landlords.
Chris Potts, Hong Kong, SAR
The party was effectively over last year but many people were so greedy they were looking back at 2006 and not forward into 2008.Many BTLs may find that they have been running on empty.The town at most risk is Gerrards Cross where house prices are the highest.
stephen hulton, eure, france