Buy to let outlook uncertain as house prices stall

Investing in buy to let used to seem like the ideal way to get rich quick. You found a house, mortgaged it to the hilt and then sat back and watched the value of the property rise, as rents took care of the mortgage interest payments. Once the value had risen, you re-mortgaged, extracted the profit and either made another purchase or spent the cash.

It was an attractive idea, and the number of new buy to let mortgages has more than doubled since 2002, with around 940,000 outstanding today, worth £108 billion. Then reality kicked in: rising interest rates, softening house prices and lack of tenants in areas of over-supply of rented properties.

A new report from the Royal Institution of Chartered Surveyors (RICS) has declared that buy to let property investment is now the preserve of the rich. It says the market is now so inaccessible to the average investor that only the wealthy can afford to be become landlords.

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Soaring interest rates, and the requirement from lenders to show that the rent on the property will exceed the mortgage repayments by at least 25%, have made the investment an unattractive, if not impossible, proposition for vast swathes of the population, it says.

"It takes more capital than ever to set up a buy to let investment," says David Stubbs, RICS senior economist.

"Would-be investors who have missed out on the impressive returns of previous years are now finding that the hurdles to property investment are higher than they imagined.

Harder to buy, harder to let?

The crackdown on easy credit, and five interest rates rises since August 2006, mean that would-be investors need to find a deposit of £65,600 for the average UK house, or 30% of its value, in order to get a foothold on the buy to let ladder. This compares dramatically with the £10,100 (only 8% of a property's value) required in the first three months of 2002 - a leap of more than 500% in just five years.

One group who are not daunted by rising interest rates and falling house prices are professional investors. Stubbs says that existing investors could actually be better off, as they may be able to use the equity in their current properties to fund their next investment. "This should ensure that demand from the buy-to-let sector does not dry up entirely," he says.

Professional landlords, with an already comfortable equity cushion, see the harsher interest rate conditions, which are making things difficult for first-time buyers and "amateur" buy to let investors, as a buying opportunity because they are causing prices to fall.

Those who are feeling the pinch are novice buy to let investors with just one or two properties, with many facing huge losses and repossessions.

Paul Walshe, head of lender services at repossessions litigation specialist Moore Blatch, says, "41% of investors own buy to let portfolios containing only one or two properties and, set against a background of a 64% increase in house prices over the last five years, many will have seen buy to let as a guaranteed investment."

Novice landlords struggling

But many of these investors have been suckered at a weekend seminar into investing in overpriced newbuild flats in areas of oversupply, such as Northern cities. They are now finding it hard to let their property, cannot fund the mortgage payments and have discovered that, if they want to sell, the value of the property has plummeted.

Mark Alexander, managing director of The Money Centre, estimates that the downturn could affect as many as 80% of landlords, who typically own just one property. "Lenders can cherry-pick who they lend to," he says.

Those who are managing to hang on may not have much to look forward to. Michael Saunders, chief Western European economist at Citigroup, says, "We suspect that the number of buy to let home purchases will fall outright in 2008, hence contributing to a sharp drop in overall housing turnover," and a price decline of between 1% and 2%. He added, "There is a sizeable risk that the outturn will be worse. Given weakness in housing, and financial market strains, risks lie on the side of more, rather than less, easing."

Peter Williams, executive director of the Intermediary Mortgage Lenders Association (IMLA), says landlords need to be realistic about house price growth over the coming year. He says, "The fact remains that house price inflation will, as always, be uneven across the country. So, though we can expect properties in good locations still to increase in value (both actual and real terms), there may be localised falls.

"In reality, only someone who has bought at the top of the market will be significantly impacted by this slow down."

Want to be a landlord? Find the best buy buy to let mortgages.

Annie Shaw
13 November 2007 © Moneyextra.com

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