For a while I’ve been warning on this site that despite mixed signs now is probably not the right time to invest in buy to let. My reasoning has been based on a couple of simple points that you can summarize basically into two worries that have made me reluctant to recommend getting back into buy to let even though property prices have stabilised and rents have been improving. These are:
- interest rates are as low as they can possibly go and these have helped support house prices. Even with rates so low many first time buyers are still priced out of the market. This does not seem to me to be sustainable and if interest rates rise, as they must at some point, then a lot of people currently paying almost nothing on variable rate mortgages will be seriously squeezed financially.
- the main risks on the economy are that it will slow down again or go through a double-dip recession. The government is cutting spending so the civil service will have staff numbers cut. In all past housing downturns there has been a huge correlation between unemployment and mortgage arrears and repossessions. If a lot of people lose their jobs, as now seems likely, then I can’t see property prices staying as high as they are now.
It is now beginning to look as if my worries have not been misplaced. A recent survey showed that most buy to let landlords are most worried about interest rates rising. And the housing market has started to crack. In early August the Royal Institution of Chartered Surveyors (RICS) said its agents reported that house prices have started to fall for the first time in a year. About a quarter of their members said that prices were not falling. Many now think that September will be a key month. This is traditionally quite a busy time in the property market as people come back from the summer holidays and look for homes to buy or put homes on the market. If September is a slow month with more properties on the market than there are buyers then it will be an especially bad sign.
My advice remains the same. If you can find an especially attractive property with a good rental yield and an attractive price then you can probably do okay over the cycle. You need to minimize risk by for instance using a fixed-rate buy to let mortgage, even though these cost a lot more but at least you will be protected against rising interest rates. You will also want to be especially careful with your tenant checks and consider taking rental insurance as well to help protect you against the risk that your tenants will lose their jobs and be unable to pay their rent. All in all now is a difficult time in the market and unless you find an opportunity that is so compelling that you can’t wait, I think you will not be harmed by sitting on the sidelines for another few months to see which way the market is moving. My feeling is that the time to make really great returns on buy to let is still coming.
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