House price crash feared as buy-to-let landlords sell
House price crash feared as buy-to-let landlords sell
High mortgage rates are leaving investors with shortfalls in rents, reports Andrew Moody
Sunday September 23, 2007
The Observer
Buy-to-let landlords could trigger a house price crash as increasing numbers sell their properties because of higher interest rates and fears of price falls.
According to property website landlord.co.uk, many are panic-selling, fearing a bleak winter for the housing market. This supports findings in a survey by the Royal Institution of Chartered Surveyors (RICS), which recorded landlord sales at their highest for two years in the second quarter of this year - having risen 44 per cent since the beginning of the year.
<SCRIPT language=javascript type=text/javascript> <!-- /* set the domain in anticipation of the ad*/ if(setDomainForAds) { setDomainForAds(); }; //--> </SCRIPT>
Tim Warrington of landlord.co.uk, which has 14,000 registered landlord users, warns of the buy-to-let market nose-diving. 'They have decided that market conditions are looking bleak. Too many landlords selling in the UK could send the property market into freefall.'
Jeremy Leaf, spokesman for the RICS, agrees that the market uncertainty is affecting landlords: 'It is inevitable that it is going to make them nervous. It is the smaller landlords - the ones with two or three properties - who are more vulnerable, since they may not be able or willing to take a longer view,' he says.
According to the Council of Mortgage Lenders, the number of properties in repossession rose 19 per cent from the first to the second quarter of this year to 751.
There is also evidence that landlords have been trying to increase rents to cover their higher mortgage payments, even where local market conditions are unable to withstand increases. Many tenants have simply walked away, leaving landlords with voids.
'This is something our members have been advising landlords not to do,' says Ian Potter, operations manager for the Association of Residential Letting Agents. 'In some areas where rents have been low, it might be possible to increase them, but rental markets will always find their own level. Landlords can go for an extra £50 a month, lose a tenant, have a two-month void and think they have achieved a victory. They could have lost hundreds of pounds in the process.'
The problem for many landlords is that with the huge rises in capital values, rental yields are very low - 4 per cent and lower is now typical in London and the south east, although established terraced residential areas in the north still command yields of about 6 per cent.
Although some buy-to-let lenders offer mortgages at 90 per cent loan-to-value (more typically 85 per cent), often the proposition does not stack up. For example, a three-bedroom, semi-detached house in Scunthorpe valued at £125,000 would usually attract a rent of £500 a month. If someone takes out an 85 per cent loan at 5.5 per cent, currently a good buy-to-let rate, repayments on an interest-only mortgage would be £486. Taking into account agents' fees at 10 per cent, plus VAT, buildings insurance and other costs, the landlord would be making a loss.
Nigel Jolly, 49, an internet entrepreneur from Didsbury, Manchester, has considered selling his investment property, a four-bedroom town house, nearby. He bought it for £120,000 in 1997 and it is now worth £340,000. He has a 7.6 per cent, interest-only mortgage for £165,000 - only 53 per cent of the property's value - yet his monthly mortgage payments of £1,050 exceed his rental income of £815. 'The uncertainty in the property market makes you feel like it would be a good time to get out. I have little room for manoeuvre, however. I am tied into what is now a very expensive mortgage,' he says.
Kelvin Davidson, property economist at Capital Economics, says landlords with a loan-to-value of more than 50 per cent are likely to be operating at a loss. His calculations are based on gross rental yields of 5 per cent and interest rates of 6.5 per cent. Buying and selling costs are also factored in and it is assumed that the property is held for 15 years.
According to research by mortgage advisers John Charcol, 55 per cent of landlords own one to three properties, but 'professionals' with more than 10 properties own 90 per cent of the buy-to-let stock. 'The problem would come if these professional landlords started selling their portfolios and I don't see any sign of that,' says Charcol's Ray Boulger.
However, some investors are already coming a cropper, with auction houses reporting former buy-to-let repossessions. Charles Smailes, senior partner at auctioneers Feather Smailes and Scales in Harrogate, expects a wave of them late this year. 'When buy-to-let mortgages first came out in the mid-Nineties, it all went along merrily for seven or eight years, but then a lot more people rushed into the market, borrowing up to 90 per cent,' he says. 'People just didn't have the financial back-up to cope with voids.'
But many still see buy-to-let as a good investment. Mark Chaston, of Trowse, near Norwich, is paying £150 more on his mortgage than he gets in rent for his two-bedroom flat in the city, but has no plans to sell: 'It is in a very good location and should increase in value over time.'
I'm taking the long view
David Haq, 37, of Ealing, west London, has more than 60 properties in London and on the south coast, with a total value of £12m. He has no plans to sell. 'I think the people who will have difficulties in the current market are those with one or two properties with little or no equity to fall back on,' he says. 'Other people selling are those in their fifties and sixties who have made huge gains over the past 15 or 20 years.' He says that with the capital value of his properties rising at 8 per cent annually, making him a notional £960,000 a year, he wants to expand his portfolio. 'I intend to hold for the longer term. I tend to buy small blocks of flats, which I often find in Estates Gazette. I negotiate a discount and I already have a large amount of equity from the start
Link
Reply With Quote
![Sanj[UK]'s Avatar](images/avatars/noavatar.gif "Sanj[UK]'s Avatar"){kind=avatar}
Originally Posted by Sanj[UK]
Social Networking Bookmarks