It’s the 10th anniversary of buy-to-let mortgages this summer. Those who bought properties 10 years ago are likely to have seen stellar returns on their investment – the average house price has risen from just over £66,000 to nearly £180.000 now. But is now the right time to start your career as a budding property tycoon?
I’d say steer clear. I’ll explain why below – but first a bit of background.
Buy-to-let: a history
Buy-to-let loans were originally launched by the Association of Residential Letting Agents. The first loan was sold through estate agent Bradford & Bingley in July 1996.
Since then the market has rocketed. Buy-to-let lending now accounts for around 14% of the mortgage market, according to lender Paragon Mortgages.
And the fastest growth has come in the past few years, despite a sharp slowdown in house price inflation. The Council of Mortgage Lenders (CML) reports that at the end of 2005, there were 701,900 buy-to-let mortgages outstanding, up 33% on the previous year.
The surge has been driven partly by investors jumping on the bandwagon as house prices have soared. But the relaxation of lending criteria on buy-to-let mortgages has also played a large part in the boom, particularly in recent months.
Landlords once had to pay higher interest rates on their mortgages, but buy-to-let loans can now be had for similar rates to a standard residential mortgage.
Deposits required have fallen too. CML figures show that at the start of 2000, most buy-to-let lenders would only allow potential landlords to borrow up to 75% of a property’s value. By the end of last year, that had increased to 85% – and some lenders will now offer up to 90%.
Meanwhile, rental cover has been lowered. Borrowers at one point had to be able to command rents as high as 150% of mortgage interest payments. In other words, if your monthly mortgage interest payment was £500, you would need to be able to rent the property out for £750 a month.
This ‘cushion’ was meant to provide cover for all the other charges that are part and parcel of being a landlord – like ‘void’ periods (where the property is sitting empty), letting agency fees, and maintenance costs. Nowadays some lenders are willing to go as low as 100%.
Buy-to-let: too many landlords?
However, as more and more investors jump on the buy-to-let bandwagon, tenants have an increasing number of properties to choose from. That makes it difficult to raise rents.
And at the same time, the rush to buy investment property has kept the housing bubble from popping, as first-time buyers have been replaced by amateur landlords.
Statistics for the second quarter of 2006 from buy-to-let mortgage firm Landlord Mortgages show that annual rental yields on property in England currently average around 5.7% – a four-year low.
The company says that this is partly because “in this competitive climate, landlords are increasingly sacrificing increased rental income to retain reliable long-term tenants”.
And other statistics suggest the true picture could be far worse. ARLA suggests that annual rental yields (after mortgage interest payments and allowing for a 27-day void period) are as low as 0.7%. In other words, buy-to-let investors are losing money after taking inflation into account.
Landlords like this are effectively paying their tenants to live in their properties. If challenged, they will argue that they are in the market for long-term capital gains.
Buy-to-let: an overheated market
This just shows how overheated the market is. Property has traditionally been viewed primarily as an income-generating asset – the idea of subsidising a tenant to live in your property would never have occurred to a professional landlord.
But amateur investors are now treating houses like risky small-cap shares – who cares about the dividend yield as long as the price goes up? The problem is, of course, that homes tend to be a lot more expensive and a lot more difficult to sell than shares.
Even the purveyors of the “property porn” filling our TV screens aren’t exactly coming up with great reasons to invest in the buy-to-let sector.
Property pundits Kirsty Allsopp and Phil Spencer recently gave investors a run down of the top ten best places to invest for buy-to-let. Despite my scepticism, I watched the programme, wondering what out-of-the-way corner of the UK Kirsty’n’Phil had unearthed as the next property goldmine. What was the number one investment location? Oxford.
Yes, it’s a university town full of uncommonly wealthy students, but that’s hardly a revelation. If there are any bargains to be had in Oxford, they’ve long since been snapped up. And that’s the point.
If even property uber-bulls like the Location, Location, Location duo can’t find a better-value place to invest than Oxford, then what hope does an amateur landlord, chasing the crowd, have?
The last word is best left to Property Ladder’s Sarah Beeny. Earlier this year she warned: “Most of the people investing [in property] at the moment are hocking themselves up to the eyeballs, and struggling to just about pay the interest on a buy-to-let, which just seems nuts to me, absolutely nuts.”
Of course, no one who appears on Property Ladder ever seems to listen to Ms Beeny. In this case, that would be a huge mistake.
First published on MSN Money 17/07/06