Tuesday, 27 May 2008

The fast track to ruin

You have to admire the optimism of the Royal Institution of Chartered Surveyors (RICS) spokesperson - James Scott-Lee. The organisation has just completed its residential lettings survey and this what James thought of the results:

"The sales market’s loss is the lettings market’s gain. Some would-be sellers are retreating from selling and letting or re-letting their properties as they wait for mortgage lenders to offer buyers more favourable lending criteria. While transaction numbers in the sales market are weak, many are taking advantage of rising rents and yields in the private lettings sector.

With rental expectations high, landlords will continue to enjoy this increasingly lucrative market. Fears that a change in capital gains tax would bring a new wave of sellers have to date not been realised."

What exactly accounts for this effusive optimism? The RICS survey showed three things:

• New instructions to let properties rebounded firmly, having fallen during the previous three month period:
• Gross yields increased at the fastest pace in the survey’s history:
• Landlord sales fell from 4.6% to 4.2%, the lowest since January 2007.

Let us strip out the hype, and reconnect with reality. Landlord sales are declining because demand for housing is drying up. Rather than keep homes empty in anticipation of a future sale, landlords are pulling property from estate agent windows, and putting them up for rent. In other words, rental supply is increasing.

Rental yields are rising sharply. Why? Simple arithmetic. The rental yield is a ratio of two numbers; rent divided by the property price. Yields are rising because property prices are falling, not because rents are going up significantly. This is hardly a sign of financial success.

Going forward, landlords are going to be squeezed on at least three fronts. Credit conditions are not going to improve. Options to refinance have disappeared. Many landlords obtained residential loans, which often have temporary teaser rates. When rates reset, many landlords will be in deep trouble.

A slowdown in economic activity will neatly complement the credit crunch. Higher unemployment and lower earnings growth will contain rental growth. This will put a cap on cash flows, and will push many landlords over the edge.

Finally, house prices will continue to fall. Many marginal landlords will find themselves holding assets worth less than their liabilities. In other words, many would be property moguls will become bankrupt.

So rather than being an increasingly lucrative market, buy-to-let is becoming an increasingly dangerous market. It is just about the fastest route to financial ruin you can find today. So enough of the hype and optimism. The buy-to-let market is imploding.


Vodka drinker said...

Hype, hype and more hype. It is a sickness.

aSteve said...

I'd not be surprised to see that rental prices asked have also risen... what's not so clear is that these prices will ultimately be paid.

simon said...

We really are in a brave new world,

This isn't buy to let, this is let to rent.

We have never had a situation like this before.

Even more people are becoming landlords, whilst at the same time being tennants themselves.

how it will pan out I don't know

Josh said...

Aren't seller increasing their asking prices right now? I read that somewhere.

Anonymous said...

buy to let = buy to lose

RenterGirl said...

Alice: I know nothing about economics, but I have felt instinctively that what you say here is what is happening. The other factor is a new idea called Local Housing Allowance, which caps housing benefit levels in a a given area, based on rent officers submitted average rents (claimants must now pay the difference). Throw in low income, insecure employment (which means that many on short contracts and 'flexible working' will almost inevitably claim benefits at some point) and you have another reason that rents cannot rise. Another factor? Letting agents inform the media/statisticians about the rents they are requesting. I'd like to earn £50k pa, but it doesn't mean I am...

aSteve said...

Rental asking prices are very relevant.

With the assistance of property-bee


it is relatively straightforward to find how long properties have been on the market. While browsing an area that interests me last week I found an OK-ish 4-bed detached semi-rural place that had been reduced from £1250/month to £800/month. Relative to other properties, it didn't seem wildly over-priced at £1250... so, maybe, what we're seeing is that rentals that aren't bargain basement sitting empty.

Mike Dimmick said...

Let to rent is surely a crazy idea? The balance of the rent you receive for the house you own, less the mortgage payment, less income tax (adjusted for mortgage interest dammit) has to be greater than the rent you're paying, or you're out of pocket.

This obviously assumes you're staying on the right side of HM Revenue & Customs and have gained permission to let from your mortgage provider.

I can understand people doing it if they absolutely have to move to a different area, or want to downsize, but I don't see this making much of a change in the price of rentals.

Sell to rent? Have to find a buyer first! As an FTB myself I'm staying well out of it - prices have to crash 50% to drop to sustainable levels.