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.
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
|
LENDER |
TYPE OF DEAL |
RATE |
FEE |
MAX LTV |
|
Two-year tracker |
2.84% |
2.5% |
60% |
|
|
Two-year tracker |
2.99% |
2.5% |
60% |
|
|
Two-year tracker |
3.05% |
3.5% (mortgage comes with £500 cashback) |
60% |
|
|
Two-year tracker |
3.29% |
£1,299 |
60% |
|
|
Two-year tracker |
3.29% |
1% |
60% |
|
|
Two-year tracker |
3.39% |
£1,249 |
65% |
|
|
Two-year tracker |
3.49% |
3.5% |
65% |
|
|
Two-year discount |
3.75% |
£799 |
70% |
|
|
Term tracker |
3.88% |
£1,895 |
75% |
|
|
Two-year tracker |
3.89% |
£1,999 |
75% |
|
|
Two-year tracker |
3.89% |
£1,999 |
75% |
Fab fixed rates
|
LENDER |
TYPE OF DEAL |
RATE |
FEE |
MAX LTV |
|
Two-year fix |
3.25% |
3.5% (mortgage comes with £500 cashback) |
60% |
|
|
Two-year fix |
3.39% |
2.5% |
60% |
|
|
Two-year fix |
3.59% |
£1,999 |
60% |
|
|
Two-year fix |
3.65% |
£2,249 |
65% |
|
|
Two-year fix |
3.79% |
2.5% |
60% |
|
|
Two-year fix |
3.89% |
3.5% |
65% |
|
|
Two-year fix |
3.99% |
£1,999 |
75% |
|
|
Two-year fix |
4.19% |
£1,299 |
75% |
|
|
Two-year fix |
4.25% |
1% (plus £299) |
75% |
|
|
Three-year fix |
4.49% |
£1,299 |
75% |
|
|
Two-year fix |
5.69% |
£999 |
80% |
|
|
Three-year fix |
5.88% |
2.5% |
80% |
|
|
Five-year fix |
6.49% |
3.5% |
80% |
More: Landlords set to suffer more regulation | Why UK house prices will fall
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At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call freephone 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.com), 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.
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Comments
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OldHenry - yes, the Rent Acts certainly "sorted out" the rental sector - they destroyed it! It's been shown time and again that all rent control does is discourage landlords from investing in the market or maintaining their properties: the good landlords leave and only the bad ones remain. Socialist policies to "protect" tenants by controlling rents always end up harming them, by removing the supply of properties and forcing people who can't really afford it to buy a house. Exegenesis - rents are not excessive: it's still generally much cheaper to rent than to buy, once you factor in maintenance costs and the fact that the tenant has zero exposure to interest rate variations, unlike vulnerable buyers. Rents are already effectively linked to wages, by the workings of the marketplace: in general, rents rise with income, and if rents start to increase due to increased demand, as now, this balances out by BTL mortgages availability improving and more landlords entering the market, again as is now happening. Because so few people can afford to buy, we are seeing more builders and developers choosing to let their properties rather than sell, plus there are more largescale commercial providers of rental properties entering the market, and of course there's the sensible small investor too, putting money into rental property because it offers a much better income (average 6% gross) than is obtainable from savings schemes or annuities (about 3%). Sure, this means more people are being forced to rent rather than buy, but this is no bad thing: British people are far too obsessed with home ownership, ignoring the many disadvantages such as exposure to interest rates, periodic booms and crashes, inflexibility if you need to change jobs, and the heavy expense of maintenance. Renting in contrast is easy: so long as you pay the rent and the bills and behave yourself, there are no other risks or responsibilities, and you can lead your life generally as you please.
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Not surprising people can't pay considering the excessive rents, we need regulation so that rents are relative to incomes in areas
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Luniversal said 'As a customer of the Co-op Bank, with its much trumpeted ethical posture, I am surprised that it is so keen to foster a landlord's market in private rented property. I hope not too many of its loans are going to Asian slumlords who pack their kinsmen into inner city sardine tins and pre-empt their illegally earned wages for an inflated rent. ' As a customer of the Co-op Bank apparently due to its ethical stance, I'm surprised that you so easily fall into casual racism in your post. I don't doubt that there are slumlords of Asian ethnicity, but I'd be suprised if they held 100% of that market and fail to see why you need to pick them out as undeserving of credit or that 'their kinsmen' are all illegally earning wages. Disapponting.
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27 January 2012