Buy-to-let is back and it's meaner than ever

Opportunity knocks for landlords. And it's first-time buyers that will suffer.

I’ve got bad news for anybody who dreamed of getting onto the property ladder in their lifetime. You’ve got competition, and it’s bigger and badder than you are.

It is called buy-to-let, and it’s back with a vengeance.

They buy, you let

Buy-to-let recently enjoyed its 15th birthday, but first-time buyers weren’t celebrating. They have spent much of that time slugging it out against seasoned landlords and equity-rich amateurs, and coming off worse.

This match is rigged in favour of the private residential investor. They don’t have to worry about raising the 25% or 40% deposit that lenders demand for their best loans, they can simply dip into the equity in their existing property (or portfolio of properties).

Nor do they have to worry about servicing the mortgage, because their tenant will do it on their behalf.

And now they’re back – in force. The number of new buy-to-let mortgages shot up by 25% between April and June, according to the National Landlords Association.

And there isn’t much first-time buyers can do about it.

Bye, bye, property ladder

Buy-to-let took a thumping in the financial crisis. Lenders fled the arena. Investors lost their nerve. Naive spectators like me expressed the hope that house prices might slide to levels where young people could afford them again.

It didn’t happen. House prices dipped, but not enough to make them affordable for newbie buyers. Worse, nervy lenders started demanding that buyers produce vast deposits.

To buy a modestly-priced £150,000 first-time buyer property, you would have to slap down at least £37,500. Few young people can afford that, unless they have a sweet line of credit from the Bank of Mum and Dad. No wonder the average first-time buyer is now 37 years old, going on 43, according to the National Housing Federation.

Even all-time low mortgage rates haven’t helped.

Amateur hour

This isn’t a problem for the buy-to-let investor. Many are now remortgaging their existing deals and using the funds to top up their portfolios. With base rates likely to stay low until 2014, they’d be mad not to.

Who can blame them? This is a great time to be a buy-to-let investor. Everything is moving in their favour. Finance is cheap and readily available (to them). House prices are weak yet rock bottom base rates should spare us a housing crash. Yields are soaring, thanks to record demand from tenants.

Given the lousy returns on cash and the ongoing stock market horrorshow, you can see why more and more people are backing buy-to-let.

10 for me, none for you

First-time buyers our fighting with both hands tied behind their backs. Cheap finance doesn’t help if you can’t get it. Falling house prices are a big worry without a plump cushion of equity. Rock bottom base rates have kept prices unaffordable. Record tenant demand is pushing up rental costs, reducing the amount you can save towards a deposit.

Many of these tenants would rather be owner-occupiers, but the banks won’t give them the money. So they end up renting flats from the very people who barged them off the property ladder in the first place, and the landlord uses the profits to buy more “stock”.

It is a vicious circle.

Risk-off

Buy-to-let isn’t pure evil. The UK does need a healthy rental market, because there are plenty of people who don’t want to buy now, and maybe never will.

It isn’t without risk either. If house prices do fall, investors will see the value of their assets tumble. The glory days of double-digit annual capital gains are now over. Base rates could rise, hitting those with variable-rate mortgages.

But really, these are minor concerns. As long as landlords can find tenants for their properties, they should still be able to service their loans, whatever the global crisis throws at us next.

Buy to rot

Buy-to-let isn’t even the root cause of the plight affecting first-time buyers. That is due to a national shortage of property, and the ugly after effects of the credit boom.

But it is aggravating the problem. It allows some people to accumulate ever more properties, while others may never afford the roof over their heads.

There has been a lot of talk about unequal Britain in recent months. Buy-to-let is helping to make things that little bit worse.

The buy-to-let landlord has beaten allcomers, and now rules the ring. Pumped up by cheap credit, an incredible 78% of amateur landlords are actively looking to add to their portfolios, according to Property Frontiers.

The buy-to-let landlord is back with a vengeance. It’s the property market rematch of the century, but there is only going to be one winner. And it won’t be the poor, pummelled first-time buyer.

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