Silver lining for buy-to-let owners
4wallsandaceiling.com Newsletter
Source The Telegraph
The property market might be slowing, but landlords are finding that they've never had it so good as loans become easier to get, reports Paul Farrow
The slowdown in the residential property market is providing a fillip to the buy-to-let market. With many would-be buyers holding fire, the rental market is booming.
Rental growth reached record levels in the second quarter of the year — and is expected to have shown a rise in figures for the third quarter due to be published by the Royal Institution of Chartered Surveyors next month.
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Demand from tenants had already been risen, and now the RICS reckons that the credit crunch shenanigans and the continued evidence of a slowdown in the property market will boost the buy-to-let market further.
Simon Rubinsohn, the RICS's chief economist says: " More buyers are sitting on their hands. First-time buyers are more likely to sit tight and take a six-month rental contract to see how the market unfolds. That should give the buy-to-let market a further boost." Rubinsohn also reckons that buy-to-let investors could be in for a double whammy: as well as reduced supply, "lenders are focusing more on risk and it will get harder to get a buy-to-let mortgage, which could dent supply at the very time demand is on the increase," he adds.
Nigel Terrington, chief executive at Paragon, a buy-to-let lender, says that recent events in the financial markets and any possible knock-on effect on confidence in the housing market can only serve to increase demand for rented accommodation and create further upward pressure on rents, which are 1 per cent higher in September than in August. "A collapse in house prices looks highly unlikely, but it's worth remembering that the period of the crash of the early 1990s coincided with the strongest growth ever in the private rented sector, as people who weren't buying turned to the sector for housing," he says.
So it comes as little surprise that landlords are continuing to invest – according to the latest survey by the Association of Residential Letting Agents, demand now "outstrips supply in all areas of the rental market", while a record number of buy-to-let loans were taken in the first half of this year.
Rental yields (rent expressed as a percentage of a property's value) are also ticking up, albeit slowly, as prices begin to ease. Rental yields hit a five-year low last year, with the average yield in England falling to 5.74 per cent. In some areas, yields had fallen to as low as 2 per cent– a far cry from 1998 when yields stood at 10 per cent. Regions with the highest yields are the north-west (6.5 per cent,) the West Midlands (6.4 per cent), Yorkshire (6.4 per cent) and the East Midlands (6.4 per cent). Greater London has the lowest at 5.5 per cent.
However, even the most enthusiastic fans of buy-to-let admit that property values are starting to fall in some regions: average investment property values have dropped from £181,533 in July to £178,566, according to Paragon. And some landlords are offloading properties, while new-build investment properties are particularly hard to shift.
Meanwhile, more heavily leveraged landlords are feeling the pinch from higher interest rates. Not surprisingly, in interest rate sensitive areas of London and the south-east, landlords' sales rose above the survey's average. "It is very regional and certainly buyers who snapped up apartments may struggle to offload properties. Areas such as London seem healthy but in the north, where there have been waterfront developments, there is an over-supply," says Rubinsohn. "And if house prices do fall – we don't think they will – it will support those investors already in the market."
Indeed, Mark Garner, 42, from Kent, is happy with his lot. He has more than 40 properties in his portfolio. He borrowed heavily in 2001 when interest rates fell to snap up more than 20 properties, but he has not bought for a while – and has no plans to do so yet. "Rents are going up nicely by around 15 per cent, but this is not the time to sell or buy," he says. "Prices are falling by around 15 per cent for those having to sell, but I reckon that the real window of opportunity will be in around a year's time. That's when I will be looking to buy again."
Steve Chippendale, a buy-to-let investor in the north-west, says he has seen significantly more competition among tenants. "In recent months landlords have been able to push rents up gently when negotiating a new tenancy. Following the recent rises in borrowing costs, owner-occupiers are more reluctant to purchase."
Earlier this year, this paper revealed that it had never been easier to get a buy-to-let loan. Lenders had been relaxing their lending criteria on buy-to-let mortgages in recent weeks – so much so that in some circumstances you can get a loan with no minimum rental cover and no need for proof of rental or earned income. Others no longer require a hefty deposit of between 25 per cent and 30 per cent: 10 per cent will often suffice. Traditionally, buy-to-let mortgage lenders required monthly rental incomes to total at least 130 per cent of mortgage payments. So if your payments were £800 a month, you needed to collect at least £1,040 rent. Now rental cover can be as low as 115 per cent or even 100 per cent.
So far, the status quo has remained. Rates have increased slightly but buy-to-let investors have never had it so good. It has been cheaper to take out a buy-to-let mortgage than a regular residential home loan in recent months: a reversal on the traditional state of affairs whereby buy-to-let loans were substantially more expensive than your run-of-the-mill mortgage.
Some lenders have increased rates, but others have not and very few have changed their criteria. "I would expect criteria to tighten on buy-to-let," says Melanie Bien, a director at Savills Private Finance. "Landlords would be wise to choose mortgages now."
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