Rents falling: has the buy-to-let bubble burst?

Average rents have fallen for the last three months on the bounce. So is the buy-to-let party over for landlords?

Tenants can breathe a sigh of relief, as average UK rents fell for the third successive month in January, according to LSL Property Services.

They dropped by 0.3% to £732 last month, their lowest level since July 2012. So should landlords start to worry that the tide is beginning to turn in the buoyant buy-to-let sector?

Don’t panic

While the headline figures on average rents may show a drop, the sector is still in rude health overall.

Indeed, the three falls in rental income in November, December and January represent three of only four monthly drops in the last five years. In other words rents have risen or remained the same in 56 out of the past 60 months – a staggering statistic, and one that means landlords are hardly going to be panicking over a few tiny falls.

The recent falls have been put down the usual seasonal lull around the Christmas period, when people are less likely to want to move home. In fact LSL Property Services, which produced the report, says that the pace of the falls has already slowed and reckons the rental sector is now coiled for a spring bounce.

It’s also worth noting that despite the recent dips, rents are still 2.8% higher this January than they were last year. In other words the overall trend is still upwards, and it’s tenants, not landlords, who are really feeling the pinch.

£50 a month rent rise!

In some areas the rent rises have been far more dramatic than the UK average. Rents in London saw the fastest growth over the last year, rising by 5.2% - an enormous increase of £54 a month. The South East saw the next biggest annual rise, with rents 3.5% higher than last January.

At the other end of the scale, the sharpest annual falls were in Yorkshire & the Humber and the West Midlands – where rents are 0.6% and 0.3% below levels seen a year ago.

More good news for landlords is the fact that annual returns on rental property – taking into account both rental income and capital appreciation – are also up slightly, to 5.7% in January. This represents an average return of £9,369 with rental income of £7,840 and a capital gain of £1,529.

Lending boost

More evidence that the buy-to-let sector is still buoyant came from the Council of Mortgage Lenders last week. It noted that lending to landlords increased by a whopping 19% in 2012 compared to the previous year, reaching its highest level in four years. The sector now accounts for a substantial 11.5% of the whole mortgage market.

It is also interesting, and reassuring, to see that arrears levels on buy-to-let loans are almost half that of the residential market. Just 1.14% of buy-to-let loans ended the year in arrears of more than three months, compared with 2.03% of owner-occupier loans.

Lending is up because landlords are feeling confident about the market, and are keen to expand their portfolios. According to a survey released this month by Paragon Mortgages, 15% of landlords are planning to buy more investment properties this year, with a massive 76% positive about the prospects for the private rented sector in 2013.

An overwhelming 83% admitted that the reason for their optimism was continued high rental demand, which they don’t see waning. Low void periods of just three weeks a year have also contributed to landlords’ bullish sentiments.

And low mortgage rates are making life that much easier for landlords.

Cheap deals

Buy-to-let mortgages have been getting steadily cheaper for the last few years. According to Moneyfacts, the average buy-to-let fixed rate is 4.64%, compared to 5.03% a year ago and 5.72% three years ago.

The average rate across the ten lowest buy-to-let fixed rates is now just 3.10% compared to 3.53% a year ago.

There are also nearly double the number of products now compared to 2009 – 488 compared to 243.

In other words things are looking up for landlords who want access to cheaper mortgage finance – either to switch their current mortgages or expand their portfolios.

In the last month alone we have seen buy-to-let rate cuts from Platform, BM Solutions, Barclays Woolwich and Accord Mortgages.

Plus, Clydesdale Bank has extended its range, Aldermore Mortgages has announced it will offer all of its buy-to-let mortgages on a let-to-buy basis, for borrowers who want to let their existing property and buy another home.

And finally, a new lender, Investec Specialist Bank, has been launched for high-earning professional landlords, which will offer mortgages on up to six properties up to a value of £5 million.

It’s been a busy month, and there is definitely still a buzz around the buy-to-let sector. Below are some of my current favourite mortgages for landlords:

15 fab buy-to-let deals

Use Lovemoney's innovative new mortgage tool now to find the best mortgage for you online

At Lovemoney, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free Lovemoney broker. Call 0800 804 8045 or email mortgages@lovemoney.com for more help.

This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at Lovemoney), before acting on anything contained in this article.

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.

Your home or property may be repossessed if you do not keep up repayments on your mortgage.

More on mortgages:

Is buying a home cheaper than renting?

The lessons I've learned since becoming a buy-to-let landlord

How to evict bad tenants

Landlords - this little mistake could cost you your home!