Commercial insurance article archive

Will buy-to-let growth continue in 2007?

Doom-mongers repeatedly predicted the breakdown of the buy-to-let market as it continued to out-perform the rest of property market throughout 2006, but despite being described by one analyst as enjoying a "staggering success" worries remain over the future growth of buy-to-let.

An indication of the scale of the boom in the sector was provided by figures released earlier this year the by the Council of Mortgage Lenders showing that 2006 saw a 48 per cent increase in the number of buy-to-let mortgages being taken out and a 57 per cent rise in the money involved.
 
This equated to buy-to-let investors taking up an impressive 11 per cent share of new mortgage lending.
 
However, in February, property website Rightmove noted a smaller than expected house price rise for January due to the surprise interest rate hike, cutting the potential long-term returns for buy-to-let investors, and with inflation hitting three per cent in December last year, confidence in the market dropped by 27 per cent in five months, according to figures from Standard Life.

Additionally, some commentators took swings at buy-to-let due to their belief that it had been a major influence in forcing up house prices, making conditions tougher for first-time buyers especially, although this assertion was disputed by the Association of Residential Lettings Agents.

Despite these negative developments at the start of the year, some experts have attempted to quell the fears of investors.

Ed Stansfield of housing market research consultancy Capital Economics issued a rallying call telling investors to have faith in the market and view buy-to-let as a long-term investment, saying: "Buy-to-let is here to stay and it is not going to act as a major source of instability or a sort of weak link in the housing market, which I think has been suggested quite frequently in the past."

And investors seem to have been following a similar train of thought recently as mortgage lending continued to grow in January despite the slowdown in house prices, showing that buyers remained confident enough in the housing market to take on more debt.

Any fears of a full-scale house price crash after disappointing January rises were allayed by the buoying effect of continuing high demand for property. In research carried out by the Town and Country Planning Association it was revealed that the UK is struggling with a deficit of 450,000 homes, a figure which is growing by 120,000 every year.

Apart from ensuring that landlords don't lose on their initial investment by keeping house prices high, this deficit may also provides a key boost to the buy-to-let market in the future since demand outstripping supply is creating large numbers of willing tenants who cannot afford to enter the buying market themselves.

This situation looks unlikely to change in 2007, according to Mortgage Trust. The company believes that renting is becoming more acceptable among young people and when coupled with migration into the UK will bolster rental demand.

"With immigration and changing social attitudes all set to continue to contribute to high levels of rental demand… it is no wonder that investors are expected to increase their buy-to-let activity," Mortgage Trust's spokesperson Nicola Severn said.

In fact, such has been the influence of high demand for property that enterprising landlords have taken advantage by increasing rents.  According to mortgage lender Paragon Mortgages, from December to January the average rent increased by an annual rate of 17.2 per cent.

So with continued investment, high demand and increasing profits, why are some experts still harbouring concerns over the future growth of the buy-to-let market?

Firstly, there is the unknown impact of regulations coming into force in April which will force landlords to use a third-party to handle tenant deposits, while new rules governing the quality of multiple occupancy housing may discourage some prospective landlords as they may face rising costs to bring homes up to scratch.

But secondly, just like the rest of the housing market, buy-to-let will swing one way or the other depending on what the Bank of England's decides to do with interest rates.

Speaking to the Guardian, Alex Potter of stockbroker Collins Stewart warned that interest rate hikes could "at least blow the froth off the buy-to-let market" since, in terms of their cash-flow, buy-to-let landlords are "just about washing their face".
 
This is a natural position for investors to be in after making a significant outlay or taking on large debts and is usually out-weighed by the potential for high gains over ten or fifteen years, however, were interest rates to rise, it may squeeze finances tighter, especially for the growing numbers of amateur investors who may be unprepared.

He also cautioned investors against relying too much on housing demand staying high in the long-term as "once immigration slows and the effect of now higher interest rates feeds through, we believe the appetite for buy-to-let could slow materially".

But although Mr Potter said he believes that such factors could cause growth to tail off, he added that 2007 looks to be lining up to be "another good year for buy-to-let" nevertheless.

21 Mar 2007