Don't hold you breath for the buy-to-let sell-off

Buy-to-let is a bubble about to burst. There’s no question about it - mortgage costs are rising, lenders are slashing their loan books and all those greedy landlords are about to get it in the neck.

This is the typical view of many outside the property world and quite a few with a good deal of insight into bricks and mortar  – but I’m not so sure.

The theory is that with house price falls starting to register, buy-to-letters will start selling up en masse, and one Britain’s most loved and hated get-rich quick bubble will go pop.

Too many landlords chased capital growth, is the bears’ theory. And when these misguided hopefuls can no longer justify subsidising tenants in a property falling in value, with mortgage costs going through the roof, they will jump ship.

Of course, buy-to-let’s cheerleaders dispute this in the strongest possible terms. Buy-to-let is in rude health, they claim, and landlords will see falling prices as a buying opportunity.

There is however, another side to the story. And that says both the bears and the bulls have their points, but the great buy-to-let sell off may not arrive. Buy-to-let is facing its first serious bout of tough times, but amateur landlords might be more resilient than people think. And there’s a big reason why – pensions.

A number of favourable factors are credited with helping buy-to-let take off since its conception more than a decade ago - low interest rates, lenders exploiting a new market and a decade-long house price boom. But one factor that is often overlooked is the public’s complete lack of faith in the financial services industry and the Government.

‘My property is my pension’ is an overused phrase and a philosophy that has distorted the UK’s housing market. However, people didn’t arrive at this conclusion without having already lost all retirement hope elsewhere.

Endowments, pension scheme collapses and poor investment management have created a culture where the public doesn’t trust the experts with its cash. This mistrust is so deep, that people don’t even have much faith in the bank anymore - witness the rush on Northern Rock, despite assurances deposits were safe.

Rightly or wrongly, many only trust themselves when it comes to investing, and the buy-to-let boom created the perfect vehicle for the paranoid investor. A property is a tangible asset – you can walk around it, improve it, decide who manages it and even decide who lives in it.

If you have made a substantial return on your investment over recent years - as many buy-to-let landlords have - common sense says prepare to sell now. The property market has peaked, favourable capital gains tax changes arrived in April and refinancing properties has become a lot more expensive, as the average loan tops 6% and arrangement fees run into thousands.
However, while those who bought recently, or opted for new build flats, may find continuing with their investment unsustainable, many others will not.

If you bought a flat that cost £120,000 five years ago and it is now worth £180,000 you won’t have problems with loan-to-value, your rent will comfortably cover the mortgage and a 10% drop in prices doesn’t sound too worrying.

What else will deliver ₤150 per month on top of the mortgage cost into your bank account. And where do you put your ₤60,000 capital gain, if you don’t trust the professionals?

Even those barely breaking even or losing money may take some time to jump ship. As a paranoid investor, where do you put your money instead? That ₤100 per month subsidising tenants would only go into a pension you mistrust instead. The British home-owning psyche says there will be a lot of people out who will continue to put money in, even as prices dip, on the basis that in 25 years time that property will be worth more.

At the moment smart money is piling into commodities and emerging markets, but the man on the street will take some convincing to swap bricks and mortar for wheat, gas or Korea.

The easy credit that fuelled the buy-to-let boom is gone, house prices have peaked and property sentiment has shifted. Without the flood of new entrants, the buy-to-let market is running out of steam fast as new blood is essential to any market. But don’t hold your breath waiting for the big sell-off – it may not arrive as fast as predicted.

- Simon Lambert, This is Money

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Comments

[smell The Coffee]

Simon,

RE: Article 20th May 08.

You opened with the Buy-to-Let Bubble is about to burst.

Sorry my friend but you are about 2 years behind the ball. In fact real Buy-to-let landlords haven't been buying for over 3 years! Only inexperienced, ill-informed amateurs have been 'mugged' into buying buy the likes of Inside Trick (RIP, or rest in Hell, I'm not sure). The figures simply don't stand up and haven't for some years.

There will be a huge number of rented property coming on to the market to sell in the next year or so, when the poor unfortunates with over priced property and underpriced rental incomes, feel the pinch and opt out of the market.

Most of the rest of the article is about right. Except buying in Korea, which has itself been going through a downturn.

[Katie Clarke]

If people can manage to keep their properties through this time then there is no reason why their investment can't have a long term return. I think people are just dissapointed because property isn't offering the high return that it did over the past 10 years. People that bought in the last property downturn in the early 90s, if they managed to hold onto their property, have made a good return on their investment over time.

[rob]

Is certainly possible the sell off will not, and cannot occur.

1) at high ltv and interest only mortgages it might be that its not possible to liquidate the asset currently. the seller may not have the ability to, and must hang on as long as possible, leading to longer slower declines

2) lack of buyers. also most investment properties not really the kind of thing people want to buy for themselves other than at times of mania/bubble where fear causes people to buy poor quality at any cost to prevent 'missing the boat'. buyers being extended credit at 2006-2007 levels unlikely in midterm future

maybe what is more likely to happen is that we, the taxpayers, will buy many of these places over the coming years, as the govt (lab or con) replenishes the social housing stock in an attempt to provide support for high prices.

hopefully while this means waste of taxpayers money it would at least continue downward momentum on rents

[Arc Property Solicitors LLP]

The problem is a lack of confidence brought about by events around the world. Having said that, we need to stop talking ourselves into a recession.

We looked at official government figures and whilst there is no getting away from the fact that the property market peaked in 2007 at 173,000 properties being bought in August, there were still 102,000 properties that were bought in February 2008.

Perhaps what we are really seeing is a saturated market where there are too many estate agencies? Time will tell.

[chris hayes]

The current property downturn leads to people holding off on house purchase. However houses are not just an investment they are somewhere to live. Hence if people dont buy they have to rent. Hence rental prices will rise over the next few years. Therefore for buy to let investors although the paper value of the asset may fall the rent will go up versus the mortgage cost (interest rates likely to drop in the short term)
Hold out and ignore the downturn in property prices and you will see a tidy profit followed by a gradual increase in prices later. Perfect for income now and an asset for a pension in the future.
The most important advise for all buy to letters is dont sell your property now or for at least 5 years

[Commercial Mortgage]

The poor global economy has damaged the property market, and with confidence at an all time low, lenders have stepped up criteria heavily to avoid the whole bradford and bingley situation. Problem is, buy to let does not seem to have boomed as I have heard.

I really do believe it will take the economy to recover before things start picking up for buy to let landlords.

[Daniel Foley]

Everything was initially sparked by the fall of Northern Rock, the decline in property prices meant that the sales of property fell which also decreased the demand for property. This loop was further fueled by banks tightening up on lending criteria which meant that mortgage approvals fell to an all time low. Companies saw an increase in the need for bridging loans, whilst companies saw a decline in mortgage inquiries. The mortgage and property market will gently stabilize before returning to its former glory.