Buy-to-let booms as house sales dry up
Home sellers unable to shift their properties have turned to renting out their homes in order to weather the current climate.
The latest market survey from the Royal Institution of Chartered Surveyors (RICS) reveals that the number of properties coming onto the rental market has shot up at its fastest pace since its records began.
RICS says the increase is down to homeowners preferring to let out their property rather than attempt to sell, as they grow ever more frustrated at the slow housing market. The survey comes a day after the latest Rightmove figures, which show house prices continuing to fall as sellers outnumber buyers.
Despite the rental market historically being dominated by flats, RICS reports that demand for family homes is currently stronger. This reflects the large numbers of families who, unable to secure mortgage credit, are forced to rent instead.
When the credit crunch hit last year, experts grimly warned that many buy-to-let landlords might flee the market to avoid being stung by falling house prices. But the RICS survey indicates the opposite is true, as high demand from tenants has pushed rents upwards.
James Scott-Lee, a spokesman for RICS, explains that becoming a landlord is now an increasingly profitable option with rising rents and yields offering good returns.
He adds: “The lettings market is booming with many vendors opting to rent their property while sales in the housing market continue to dry up. Many are willing to hold and await the return of capital appreciation.”
On a darker note, it is unclear how long the buy-to-let boom will continue. Scott-Lee notes that the increase in the supply of rental property could negatively impact rent prices down the line, especially as cheaper mortgage credit means many renters may find themselves finally able to get on the ladder and buy their own place.
And recent research from Skandia warns that landlords could cash in £18 billion of equity over the next few years, effectively shrinking the market by around two-thirds. The savings firm expects investors to sell up as house price falls reduce £120 billion worth of housing stock to £44 billion.
In addition, estate agent Cluttons says the rents in London are beginning to dip, as the supply of rental property on the market overtakes demand.
It says that rents have fallen by up to 5% in South Kensington, Chelsea and Knightsbridge. Cluttons recommends that, as tenants are becoming more demanding, landlords should consider making improvements to their property in order to stay ahead of the game.
Amelia Greene, partner for lettings at Cluttons' South Kensington office, says: "To prosper in the current conditions, landlords must have realistic expectations regarding rental income and steer clear of void periods at all costs.
"A number of 'accidental landlords' who have come to the market reluctantly after failing to sell their property, are refusing to budge at all on the asking rent, instead settling for void periods which professional landlords know are seriously detrimental to yields."
The start of the new university academic year is also good news for landlords, as the vast majority of students rent during their years studying.
New research from the Property Investor Show found that rental yields are, on average, higher in university towns than elsewhere.
Nottingham is the best student town to buy rental property, with low property prices and higher rents, followed by Durham, Manchester, Hull and Bangor.
In contrast, the survey names Warwick and Crewe as the worst two university towns when it comes to rental yields.
Nick Clark, managing director of the Property Investor Show, says the buy-to-let landlords shouldn’t be deterred by the weak housing market.
“Investors may think that they are buying into a weak market, but as this research shows rental yields are on the increase and buy-to-let investors have a great opportunity to capitalise on the increasing demand for student accommodation, whilst taking advantage of lower house prices,” he adds.
Falling house prices also represent an opportunity for landlords, but Clark reminds those interested that property is a long-term investment and shouldn’t be considered if you are just after a quick buck.
In addition, investors shouldn’t be seduced by the promise of rental yields, as in the majority of cases this money will be used to pay a mortgage and for the upkeep of the property.
Hargreaves Lansdown, an independent financial adviser, is also concerned that too many landlords view their property investments as an alternative to a pension.
Research from Bradford & Bingley in May found that 46% of landlords rely on their buy-to-let incomes to provide a pension. However, alternative figures from the Council of Mortgage Lenders suggest that too many enter the market blindly with the result that 10,000 buy-to-let mortgages are currently more than three months in arrears.
Despite property prices set to rise over the long-term, Hargreaves Lansdown urges caution and warns many landlords may be forced to sell up early if they are no longer able to afford their mortgage repayments.
Laith Khalaf, pensions analyst at the firm, says the real test of affordability will come in 2009/10 when those who borrowed large sums at relatively cheap rates in 2007 come off their two- and three-year fixed deals.
“Borrowing to invest can be a hazardous strategy, just as much with property as with any other form of investment, because you magnify losses as well as gains,” he explains. “This was as true 10 years ago as it is today, and will be in 10 years time when everyone has forgotten the current credit crisis.
“For the overwhelming majority of the population, buy-to-let should not be seen as an alternative to making regular savings into a pension.”
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.
“Arrears” tend to be associated with debt. If you fall behind and miss payments on any outstanding debt, the amount you failed to pay is an arrear – the amount accrued from the date on which the first missed payment was due.