“The rate of interest goes up, but are they bothered? “We just up the cost of rent to cover the interest rate rises, and in any case most of us are on fixed rate mortgages,” say organisations representing landlords. “Look at us,” they say, “are we bothered?”
Buy-to-let mortgage provider Paragon puts it this way: “The evidence continues to show that on the back of higher interest rates, landlords are able to simply increase rents paid by the growing number of people who live in rented accommodation. At the same time, landlords are responding to this strong demand for rented homes by purchasing new properties for their portfolios.”
And here is another stat to make you understand why the buy-to-let market is as safe as, well, houses, or at least house prices. According to the Council of Mortgage Lenders a mere 0.59 per cent of buy-to-let mortgages are three months or more in arrears, whereas for the market as a whole 0.89 per cent of mortgages are three or more months in a arrears. You see, buy-to-let investors are a responsible lot. They have seen it all before.
The Royal Institution of Chartered Surveyors added its penny’s worth to the debate yesterday, when it revealed some stats that supported the buy-to-let bull story. Or at least the stats support the story from one point of view.
To be frank there is something strange about the data and the explanation given.
Demand for buy-to-let properties is still rising. The percentage difference between surveyors reporting a rise in tenant demand and those reporting a fall in the 12 months to April is + 16, says RICS. Sounds impressive doesn’t it? Well, actually the index was at its lowest level for almost two years; it stood at + 30 in March, for example. But wait to hear the explanation for the fall in the index.
According to RICS: “Many recent homebuyers moved into their new properties during the first quarter and therefore no longer needed to rent.” So there you have it, sure there was a slight fall in the increase in demand from tenants, but this was simply because some former tenants had jumped onto the property ladder.
But then again, look a little deeper and the picture is not quite so rosy. RICS also asked surveyors whether gross yields – that’s rent to price of property – were up or down. In April the percentage difference between surveyors saying gross yield was rising and those saying it was falling was minus 19. Sure, rents might be rising, but house prices are increasing even faster.
But while the industry tries to reassure us, if we look elsewhere towards analysts who have less at stake in the market, we find a different opinion. Recently, the National Institute of Economics and Social Research (NIESR), said that buy-to-let is ‘probably the weakest link’ in the mortgage sector. Its director Martin Weale said: “Multiple buy-to-let holdings create potential for instability, so anyone with a large mortgage, especially for buy-to-let, is taking a big risk.”
According to the FSA, in February 2006, 8 per cent of properties sold at auction had been repossessed. But by last December, the repossession rate for auctioned properties had jumped to 25 per cent. But, even more alarmingly, of these repossessed properties, 80 per cent were from areas dominated by buy-to-let properties.
It seems to us that there is a fatal flaw in the argument that as the rate of interest moves up, rent goes up to cover this extra cost. Price is determined by supply and demand, so why should tenants suddenly be willing to pay out more in rent?
It doesn’t matter how short the supply of properties is. No one can sensibly pay more than they can afford. And if there is so much spare cash residing with tenants that they can simply cover the landlord’s extra costs and pay more rent every time the rate of interest goes up, it seems strange that these apparently flush individuals haven’t jumped onto the property ladder. They don’t buy properties because they can’t afford them, yet bizarrely we are asked to believe they can afford to pay their landlord more rent.
Furthermore, anecdotal evidence suggests more and more landlords are struggling to cover mortgage payments through rent. But the industry tells us they are still investing because they see property investment as a long-term game. And yet with house prices clearly overvalued – 15 to 20 per cent according to Lehman, much higher say others – it’s difficult to see their logic.
© Investment & Business News 2013