The frozen property market is fostering a boom in the Buy-To-Let market, but this is a game with lots of unwilling players who will be happy to leave the field.
The Royal Institution of Chartered Surveyors confirmed last week what I predicted last autumn - a surge in the buy-to-let market caused by the freeze-up of the residential property market.
People who need to move but can’t sell are taking their properties off the market and letting them instead. Surveyors report a big rise in the number of new letting instructions, and also rising rents.
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Buy to let rents are rising again
In fact buy to let mortgage lender Paragon says rents now average £12,048 a year, up 14% over the past 12 months, with the average age of tenants also rising. Back in 2002, 10% of households rented their homes; now it’s 12% and rising.
This rise though is mainly due to the fact that first-time buyers now find it all but impossible to get a mortgage unless they have a high income and a 20%-plus deposit.
Paragon says that rental yields now average 6.3%, but my own analysis suggests that this is still at least 1% too low to make property a slam-dunk investment proposition. While professional BTL investors - whose timescale is usually a decade – will be happy to stay put and collect higher rents, more recent buyers facing capital losses in off-plan flat purchases are still likely to sell or have their repossessed properties sold for them.
Repossessions will drive prices down
While such forced sales - and a small number of people selling BTL properties because they now only pay 18% instead of 40% capital gains tax – probably won’t amount to more than a tiny fraction of the BTL market, the fact is that prices are set at the margin.
It’s the marginal transaction that sets the pace in both rising and falling markets. Today, it’s the guy who just has to sell who is setting prices (along with the repo auction sales), and that’s going to continue for a while – at least until the mortgage market returns to something like normality, which looks like autumn at the earliest.
The situation is going to be confused by the new trend of Let-To-Rent (LTR), which means there are thousands of willing sellers out there who own properties they are renting out but will be happy to sell as soon as they can get a decent price for them. The longer the crunch continues, the bigger this property backlog will become and the bigger the drag it will exert on any upwards move in prices generally.
Six paths to Let-to-Rent success
If you’re planning to join the LTR class, make sure you get the business of letting out your home right. Here’s a checklist of the key points.
-Make sure you inform and get the approval of your lender for the change of tenure.
-Set rents to account for void periods and minor repairs. Most lenders would require a rental level of at least 125% of your monthly mortgage payments.
-Ensure that you have a tax plan and know the tax rules surrounding letting a property. Paragon has a comprehensive tax guide here.
-Make sure that you have a household insurance policy that covers you and your property in your new role as landlord. You may need to obtain a specialist let policy.
-Ensure that if you take a deposit it is insured and protected by one of the tenancy deposit schemes.
-Familiarise yourself with the rules surrounding the classification and licensing of houses of multiple occupation.
-Understand the requirement for an Energy Performance Certificate to marketing your property to let after 1 October 2008.
For landlord information visit the National Landlords Association at www.landlords.org.uk and for a list of professional lettings agents visit www.arla.co.uk.
