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.