The outlook for the British property market seems to deteriorate by the day. Yet more than two-fifths of buy-to-let (BTL) landlords are still bullish.
According to market research agency BDRC, 41% of 508 landlords surveyed between December 2007 and March 2008 expressed optimism about Britain’s private rental sector. An even higher proportion (54%) thought property still had the potential to offer better growth than other forms of investment; 44% said that while letting wasn’t currently their main source of income, they expected it to be in the future. Oh dear.
Even those landlords who are pessimistic have largely only become disillusioned because of the day-to-day facets of property ownership. About half had experienced a void (when the property doesn’t generate rent), which sounds low. More than half had had trouble with tenants, the key issue being property damage.
Landlords’ apparent lack of concern appears complacent. Rising interest rates have pushed rental profitability to its lowest level since the survey began. The average gross rent was £30,140 a year, and the average “portfolio size” £697,670; so even rental yields before deductions averaged just 4.3% – well below the cost of borrowing. So how can so many still be optimistic?
The main reason seems to be that the average BTL position is still affordable. But that’s only because the average loan is £282,950, making the average loan-to-value (LTV) 40.5%. This explains why 41% are still bullish. If they had larger loans, their worsening cash-flow position would by now be more clearly reflecting the deterioration in the financial argument. By being less leveraged, BTL investors think they can ride out the storm, saying they’re “in it for the long-term”.
Even if variable mortgage rates have now risen above 7%, our average BTL investor will still have outgoings of no more than £20,000 against a gross income of £30,140. It would be an unfortunate landlord indeed who suffered £10,000 of damage, maintenance and other costs in a year, so most must still be cash-flow positive. But this is a double-edged sword. If the average BTL investor was instead 100% leveraged, outgoings would be nearly £20,000 higher than gross income. Would so many be as complacent if that were the case?
Already, those who do have significant leverage can’t afford any voids at all now. A full 17% say they have already missed a mortgage payment. What was truly shocking was that this was up eight percentage points in the three months since December. That means that in the first quarter there was an annualised 32% rise in delinquent BTL borrowers. Earlier this month, Bradford & Bingley confirmed as much when they revealed that in the first four months of the year, the number of BTL loans that were at least 90 days in arrears had jumped by 52% to more than 3,000.
These more-leveraged BTL investors already realise how hostile the market has become. It’s only the under-leveraged, complacent ones who’ve been in the game longer who fancy they can ride it out. But if the more highly leveraged Johnny-come-latelys are forced to bail out, the market will be swept out from under their feet. It’s time for the ‘long-termers’ to get their calculators out and try to see it from the other guy’s perspective. With some investors so close to the wire already, repossessions are a distinct possibility.