By mbaxter 18 Nov 2008 [6 Comments | 508 views]
Related articles
And then it hit the buy-to-let market.
There are those who are surprised. For so long we were told that falling house prices would boost the buy-to-let sector. The argument went like this: since more and more would-be first-time buyers couldn’t afford to buy their home, they would have to rent instead.
In September 2007, Nigel Terrington, chief executive of buy-to-let mortgage specialist Paragon, said, “There is broad agreement that buy-to-let is a beneficiary of a softer housing market, as would-be homebuyers defer house purchase and find themselves competing with migrants, students and first jobbers, among others, for a finite supply of rented homes.”
In June 2008, Mr Terrington said: “Commentators forecasting a downturn in the buy-to-let market have overlooked the fundamental dynamic of the UK housing market – people need somewhere to live and, for many, house purchase is simply not an option.”
Then more recently than that, in July of this year, when the last survey from the Royal Institution of Chartered Surveyors (RICS) was published, RICS said: “Becoming a landlord is now an increasingly profitable option with rising rents and yields offering good returns.”
It is all a little odd, because the last 24 hours have seen the release of three sets of data, each painting a somewhat different picture. It’s that cliff edge again. It appears the buy-to-let market has found it. No doubt it will drag the wider housing market down with it.
First piece of data to bring such damning news to the sector came from the Empty Homes Agency. It reckons there are now more than 762,000 empty homes in England, with no less than 650,000 of this number owned by landlords. It says there are another 77,000 empty homes in Scotland and 50,000 in both Wales and Northern Ireland.
It’s strange isn’t it? There is supposed to be a shortage of property in the UK.
Then comes news from Standard and Poor’s. It has produced an analysis after studying 200,000 securitised buy-to-let loans. Its finding: at the end of June, 3.7 per cent of this number were in arrears – this compares with an average of 2.9 per cent of owner-occupied homes. Standard and Poor’s reckons between 20 to 40 per cent of the buy-to-let market could fall into negative equity next year.
And the third piece in this damning jigsaw comes in the form of the latest report from RICS, out this morning. Something unprecedented happened to rents in October.
RICS asks its members whether rents went up or down and the balance forms its key headline lettings survey index. Last year, this index peaked at a score just shy of 40. For the next few months it fell slightly, but only modestly, so that in July the index stood at 31.
Well, since then, the index has just collapsed, falling to minus 12 in October. That is the lowest reading ever recorded.
RICS says: “London and the Southeast have been hardest hit with the net balance of surveyors reporting rises or falls in rents for London houses falling from a stable zero per cent in the second quarter to negative -53 per cent in the third quarter, while flats fell from a positive five per cent to a negative -33 per cent. However, the biggest turn around was in the Southeast, with the net balance of surveyors reporting rises or falls in rents for houses plummeting from 53 per cent to -33 per cent. Equally, expectations for future rises in rents turned pessimistic for the first time since July 2002.”
Okay, now it is time to stop reading, and start writing. So, pens out please. There is one question in today’s exam. If rental income is falling, if house prices are falling, if a growing number of buy-to-let mortgages are for more than the property they are lent against, and if there is a massive supply of vacant properties, what will happen next?
If your answer has the word crash in it, then you will probably get top marks.
Haven’t we been down this road before? I believe that the demand for housing will always be more than the supply. It may well be that the price of property will not be as high as we have known it in the last decade, but it will go up in the next five years.
So people don’t want to buy, and now they don’t want to rent either. Three possible explanations that I can see:
- mass emigration
- many more sleeping on the streets
- lots moving into spare bedrooms (cf. earlier articles on this site).
Not having seen any recent news about the first two options, I guess it’s primarily the third that people are taking.
Your analysis is correct as far as it goes. But there is a step further to consider. There are at least two distinct groups of landlords. First comes the “established” property investor who has been in the sector for say 10 years or more. He (or she) bought wisely putting a reasonable deposit into the investment and has NOT remortgaged as the value of the property rose. Then comes the “get rich quick” “can’t go wrong with property” landlord. They bought without putting any deposit into the venture (quite often the builder paid back to the investor the deposit apparently paid for the purpose of the mortgage application). Then this type compounded the error by remortgaging as the property increased in value. Some of these bright sparks even used the proceeds of the remortgage to finance a certian lifestyle (well property never goes down in value, does it).
If we could divide the property landlords who are in arrears along the lines above, I too would offer a small prize for the successful conclusion
there is a shortage of property but only affordable and rents of £500-£1000 p/m are just a joke Rental properties are now looking for 30-40% of ave income and that just wont work. In the inercities everyother property has a for let sign replacing the for sale sign. Any rent above £500 p/m in Scotland is just not affordable as the council tax will cost another 200 p/m. If a landlord looks at a property at antthing over £75,000 and based on 80% occupancy level ( if you are lucky) and interest at 6.5% you will just break even and thats alot of ifs and buts and does not take into account any capital repayment good luck time to jump
Yes, and when does a crash become a crash though?
Looks like we’ll all be filling up our spare rooms with people, immigration will slow or reverse and as you say the myth of UK housing shortage disappears. Or is it the houses we all aspire to live in that are in short supply?
Its happening so fast. If oil, food and house prices wind back 5,6 7 years or so, we should be set for an economic boom like we’ve never seen before.
optimistically, Lance
re. David Morgan.
I suspect your answer is more prescient than you (may) realise. I reckon that there is (or is soon to be) mass emigration and the streets will soon be filling!
Oh, and crash.