Is the buy-to-let bubble bursting?

With record rental demand, high rents and low void periods, 2011 was a dream for landlords. But is the tide beginning to turn for buy to let?

All good things must come to an end, and landlords may find 2012 a little trickier than last year.

According to the Association of Residential Letting Agents, which produces some pretty thorough stats on the health of the buy-to-let sector, there was a drop in demand for rental accommodation at the end of last year.

It says that the number of letting agents reporting more tenants on their books than available properties dropped massively from 74% in quarter three of 2011 to 55% in quarter four.

In addition 40% of agents noted an increase in tenants struggling to pay their rent, a worrying trend that can have a devastating impact on landlords who still need to cover their buy-to-let mortgages.

The London rental market, which so often charges ahead of the rest of the UK, seems to be leading the slump, with agents in the capital signing up the lowest number of tenancies anywhere in the UK - an average of 26 in quarter four, down from 31 in the previous three months.

Why the dip?

The drop in figures could simply be a seasonal downturn, with many potential renters waiting until the New Year to flat and house hunt. Or it could be a sign of the wider economic malaise beginning to pinch.

The private rented sector has done well out of the economic gloom in recent years, with the credit crunch forcing many potential first-time buyers to rent for longer. But renters are just as affected by job losses and economic uncertainty as buyers, and if they can’t afford to move out of the family home, that’s where they will have to stay for a while longer.

But, before we get too gloomy, it’s important to look at all the figures out from ARLA last week, and to view them in context.

Still buoyant

Firstly, the majority of letting agents (55%) are still saying that demand is outstripping supply in their area. While this figure may have fallen significantly, it still indicates a pretty healthy sector.

We must be very careful not to extrapolate trends from figures until we have seen, well, evidence of an actual trend.

As it happens ARLA’s quarter four figures had a lot to live up to, since the quarter three data represented a peak in tenant demand, with a record 74% of agents reporting demand outstripping supply.

[SPOTLIGHT]In other words, a drop from the peak could be the start of a trend, or it could be nothing significant at all.

And while the number of tenancy agreements in London fell, the overall UK figure was stable, at an average of 34 new tenancies signed per letting agent.

Rather than a bursting bubble, the buy-to-let sector is in pretty good nick. The ARLA figures serve to remind us that no sector of the property market (or any market) is immune to wider economic pressures, but they don’t warn of impending doom for landlords. Far from it.

In fact, one of the clearest gauges of confidence is the behaviour of lenders towards a particular sector of the mortgage market. And they are currently clamouring for a piece of the buy-to-let pie.

Lender confidence

Remember that lenders are risk averse following the credit crunch, so if they are putting their weight behind buy-to-let, it’s fair to say they don’t see it as especially high risk. And in the last few months they have been doing exactly that.

New lenders have recently entered the market (including mortgage giant Santander), stoking up the competition, and lending criteria has finally begun to relax for landlords.

In the last few days we have seen Yorkshire Building Society roll out its buy-to-let offering across the country, after a successful trial in London and the South East, under its broker-facing Accord Mortgages brand. It has also relaxed criteria, including reducing its minimum applicant age from 30 to 25, as well as lowering the minimum income for an applicant from £35,000 to £20,000.

The Co-operative Bank’s broker arm, Platform, has just announced it has increased its maximum loan size on buy-to-let to £500,000. The lender also committed to increasing its lending in the buy-to-let market in 2012 by a third to £600 million.

Add these recent moves to the fact that lenders have increasingly begun to offer buy-to-let mortgages at a more generous 80% of the property’s value, and you see a picture of a lending community that has clear confidence in the buy-to-let sector (and an obvious desire for its higher profit margins!).

So while the recent figures from ARLA sound a note of caution about demand in the private rented sector, they should also be taken in context. For the most part, the fundamentals underpinning the buy-to-let sector look healthy. Lenders and landlords are right to be positive about the future, as long as they are prudent too.

Below are some of my favourite buy-to-let mortgages of the moment:

Top variable deals

Fab fixed rates

More: Landlords set to suffer more regulation | Why UK house prices will fall

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