Commercial insurance article archive
UK property market: Buy-to-let loses its shine
Buy-to-let was the darling of the property market, a shimmering beacon for those who wanted to make the most of their wealth - and make a killing at the same time.
Mixing an egalitarian attitude of helping one's worse-off brothers find a place to rent with a gleeful excitement at continually rising property prices and rents, buy-to-let investors may have been amateurs, but the market was working for them.
It was all a bit too easy, really.
Back in August, nine out of ten buy-to-let investors told the Association of Residential Landlords that they would not sell even if prices fell and over half expected to make some more buy-to-let purchases.
However, increasing numbers of buy-to-let homes are being repossessed by the banks as owners struggle to keep up with rising mortgage costs – providing a clear indication of the health of the sector.
A lack of confidence following the credit crunch and soaring interest rates have been blamed for the difficulties currently being felt.
Consultancy Capital Economics calculated that landlords who borrowed more than half the value of their property and have a rental yield of five per cent are unlikely to be making a profit at the current rate levels.
Unfortunately, research from the Association of Residential Letting Agents found that 67 per cent of all landlords were making rental returns of five per cent or less in August.
This suggests that large numbers of buy-to-let investors are finding that the monthly rental income from their properties has dropped below the average cost of paying off their buy-to-let mortgage.
However, rental incomes have rarely been the main source of funds for buy-to-let purchasers, as for the last few years they have been able to rely on the impressive growth of property prices to keep them sitting upon a pretty packet.
But recent research suggests a price decline may have already kicked in due to the high interest rates and the blows to buyer confidence following the credit crunch and the run on Northern Rock.
Nationwide has estimated that UK house prices rose by less than one percent in August, while Halifax's report went one further by suggesting that in September prices fell by 0.6 per cent.
This has sparked some landlords into life, with the Royal Institution of Chartered Surveyors (Rics) reporting a rise in the number of buy-to-let investors selling off their property from four per cent to six per cent in April.
While this remains below previous dips in confidence, such as in June 2004, it suggests that greater numbers are concerned that their lifeline of capital growth is beginning to taper off.
As mortgage companies up their premiums further to realign with the base rate rises over the past few months, there could be even greater pressure on investor finances. While fewer people willing to enter the housing market at all could speed up a potential house price fall.
However, it remains to be seen whether the pictures of fretful lines outside Northern and gloomy predictions of a downturn in the wider property market have shaken investors' soaring confidence in the sector which has been so good to them thus far.
12 Oct 2008