Buy-to-let mortgage loans ‘up 32%’ – The Press Association

New buy-to-let mortgage lending has increased by nearly a third year-on-year, lenders have said. Some 32300 loans worth £3.7 billion were advanced in the first quarter of this year, a …

Rise in buy-to-let landlords as first-time buyers struggle – Telegraph.co.uk

Buy-to-let property investors have made a strong return to the housing market as first-time buyers continue to struggle to get on the property ladder, new figures s …

CML Data Shows Buy-To-Let Mortgage Lending Increased 32% …

CML has revealed data which shows that new buy-to-let mortgage lending has increased by nearly one-third as compared to the figures in 2011.

You know that I’m always banging on and on about how a bubble seems to be developing. I’m still amazed that British house prices haven’t corrected more, especially in the south east and London. Affordability is still as tough as ever for first-time buyers and rental yields in many parts of the country are still far from attractive. I hate to always be a spoil sport, but I’m still waiting for the other shoe to drop.

Most of what it says makes a lot of sense, but I do worry a bit when every man and his dog is suggesting you get into a particular area of the market because that is often an early sign that it is getting frothy. Anyhow, here is the press statement for you to make up your own mind:

The UK Student Property Market Is Heating Up      24 Mar 12

Becoming a student is a good long-term investment in your future and so is property investment. Put the two together and you have a collision that makes student property white hot for investors according to www.colordarcy.com. When most people think of student property they think left over takeaways, beer can pyramids and dusty unused textbooks lying around, however student buy-to-let investors should really be seeing pound signs according to research from www.colordarcy.com. Last year in the UK investors put nearly £348 million into the student property market according to research from CB Richard Ellis. Investors are chasing average net yields of up to 7%. Loxley McKenzie, MD of www.colordarcy.com says, “the student property market is renowned for outperforming the wider rental market – with landlords of student properties generating a higher average income by letting properties on a per-room basis rather than the usual per-property basis.” By leasing property to students on a per-room basis, landlords made an average income of 6.45%, compared to 5.94% from properties rented out to young couples. The West Midlands proved to be a goldmine for those investing in its student property market according to Paragon property. Home to nine universities, including Warwick and Birmingham, the West Midlands offered the highest annual yield for investors of 6.5pc. Yorkshire wasn’t far behind, the region is a hive of student activity with 14 potential locations to choose from including Leeds, York and Sheffield. This reflects in its average annual yield of 6.4%, providing the West Midlands with some healthy competition. Demand for student property shows no signs of being affected. Students still want to pay inflated tuition fees and will simply borrow more money to pick up the shortfall. Analysts at www.colordarcy.com believe it doesn’t take a degree to understand that the student property market will remain one of the most lucrative investment opportunities for 2012. So it is well worth making an educated decision and adding student property to a portfolio this year.

As I said, be careful of bubbles when everyone is suggesting a particular slice of the market. Student lets is an area of the buy to let market that probably still has legs. Rental yields are attractive enough for the moment that many of these investments probably make good sense. But if you keep seeing headlines in the papers or advertisements offering ways to make money from this area, then think very long and hard before following the crowd.

According to the latest survey from LSL Property Sercvices, rents fell 0.4% in December to an average £717 a month. Even after the drop, rentals have increased by 3.5% over the year. That was offset by falling capital values. In total, the returns earned by landlords were a paltry 2.2%. Given the risks and work involved, they would have been better off putting their money in the bank.

But the worse the current situation the happier I am that returns will bounce back. We’re still recovering from from an almighty bubble and I’m holding my financial firepower in reserve until it feels like the pain in buy to let can’t get any worse. That would feel to me like the best time to get back into the market. The stupendous returns that investors earned in the early to mid 2000s created a huge overhang on valuations and until these correct over time, there won’t be much money made in BTL (except through the most selective opportunities).

David Newnes, director of LSL Property Services, owners of Your Move and Reeds Rains, said :

“Following their relentless march upward throughout the year, rent rises have taken a pause for breath.    Landlords are looking to avoid having properties vacant over the Christmas period, and can be less aggressive with pricing as tenant activity slows in the run up to the New Year. But across the country, the limited supply of rental accommodation means there will still be strong upward pressure on rents in the early part of 2012.”

The slightly depressing news in terms of rents and capital values does need to be balanced out by the fact that rental yields are moving towards more sustainable and attractive levels.

LSL calculates that the average rental yield was 5.3% in November. That’s starting to look attractive, especially when compared with low interest rates on accounts (but still, you have to consider that you can get an almost certainly risk-free 3-4% if you put your money on a fixed deposit for 3 or 5 years.

But if you can stomach the risk and find the right opportunity (and are prepared to see property values possibly fall further yet) then the cash flow and returns on a rental yield of 5.3% can start to make sense.  According to LSL the movement in returns over the past year has comprised £7,700 in rental income, offset by a capital loss of  £3716.

When it comes to forecasts, returns are likely to be even worse, according to LSL, which says that if property prices continue on their trend over the past three months, then investors can expect a total annual return of 0.7% over the next year. That certainly doesn’t account for the cost of capital or risks involved. So once again, my personal advice is to stay put and keep watching, only stepping into the market if a property offering exceptional value arises.

David Newnes continues:

“Total annual returns might be reined in by falling house prices in the past three months, but it is currently yields rather than capital gains that are attracting investors to the sector. It is rental
income that pays a landlord’s mortgage, and while capital gains are important over the long run, the strength of demand and rents underpin sensible investment decisions. With property prices weakening, and rental income strengthening, long‐term investors are exploiting cheap interest rates to pick‐up bargain properties that will provide a strong yield.”

An article on This is Money notes that since 2008 the number of buy to let mortgages has doubled since 2008 and that average rents are still rising (the latest figures put them at £720 a month on average according to LSL Property Services).

The article also points out that a large number of lenders are easing their requirements for buy to let mortgages:

Woolwich has become the latest lender to relax criteria for landlords, now offering loans for those with a 25 pc deposit instead of the 40 per cent previously required.

Meanwhile, Northern Rock seems particularly keen to attract new business, offering £750 cash back to anyone who takes out a new buy-to-let loan.

But it also has a pretty stark warning that a bubble is inflating. They quote several experts who warn that the market is fragile:

Andrew Gold, chief operating officer at Mutual One, the building society auditor, said: ‘It’s a case of when, rather than if, first-time buyers will return to the housing market. When they do — the question is whether they will burst the bubble.’

In this case, rents may start to fall, perhaps as interest rates are starting to rise, which would erode landlords’ yields. However, the dysfunctional mortgage market and shortage of good private rented properties means that rents are expected to stay high for now.

David Hollingworth, associate director at broker London & Country, says: ‘Landlords can get a great income at the moment, but with house prices falling in many parts of the country their capital growth is not so certain in the medium term.

The warning should cause you to sit back. Especially if you think that rents only go up. We are looking at a few long and hard years facing the economy in the UK. The latest Autumn budget from the Chancellor was not in the slightest bit optimistic about the economic outlook. Many economists are talking about a lost decade in which real incomes (that is, after taking inflation into account) are the same by 2016 as they were in 2006. If that is the case then one should not expect rents to keep increasing. Property can be a valuable hedge against inflation, but for the moment the main economic risks seem to be deflation. That means property prices may well fall quite a bit yet before they start to rise.

My advice would be the same as in recent months – to sit on the sidelines and only buy if an especially attractive opportunity comes along.

The report is the latest House Price Index from Rightmove (a property website) which shows that the asking price of houses has had its biggest fall in four years as house sellers either pull properties off the market (because demand is so weak) or are forced to drop their prices sharply to try to get a sale.

The average asking price for a property in November slumped to £232,144

This was a drop of 3.1% over the month and takes property prices over the past year to just a 1.2% gain. So after inflation, property prices have fallen over the past year.

Now part of this may be seasonal. November and December are two of the worst months to be putting a property on the market for sellers (which means they can be good for buyers) but this is still a particularly sharp fall.

According to Rightmove’s Miles Shipside:

 “Markets dislike uncertainty, and so do people who are deciding whether or not to enter the property market. Agents report that many would-be sellers are postponing their marketing until the new year, influenced by the current wall-to-wall media coverage of the Greeks and Italians attempting to get their own far-flung houses in order. It’s no great surprise that those who have braved the stormy conditions have had to accept a substantial ‘haircut’ on their asking prices”

This does, however, open up some opportunities for Buy to Let investors:

Some winter buying opportunities in areas of oversupply will be available for bargain hunters, and interestingly many agents report that buying activity is on the increase from investors. Buy-to-let investors looking to raise finance for new purchases are benefitting from increased lender competition, resulting in higher loan-to-value ratios and lower interest rates. With over half of tenants expecting rents to be higher in 12 months’ time, according to a recent Rightmove survey, investors will be feeling more confident about improving yields too. They have the benefit of greater access to finance than first-time buyers, with whom they are often competing when buying, and the ability to pay down the mortgage more quickly due to the prospect of improving rental returns.

Shipside adds: “Reports suggest that buy-to-let mortgage approvals are at their highest for nearly three years. With good prospects for long-term tenant demand from those that cannot buy and consequently solid rental returns, investors will be looking forward to seeing sellers suffer a longer than usual buyer slowdown this winter. The result is a window of opportunity for buy-to-let investors to bag some bargains, spend less on finance and charge more in rent”

Given the way rents are looking quite strong at the moment it seems sensible to be looking for opportunities offering good rental yields. But my gut feel is still that property prices will keep on weakening and that even better opportunities will emerge next year.

Property has fallen for a few years

The first point that Merryn makes is that house prices have been falling steadily after they are adjusted for inflation.

Some people think that house prices haven’t crashed in the UK. They’re wrong. Prices are actually down 25-30 per cent in inflation-adjusted terms and show every sign of continuing their descent to some kind of fair value.

She thinks that the descent will keep going because of several factors. These include

• very low interest rates will come to an end
• first time buyers are completely priced out of the market now
• banks are cutting customers a lot of slack rather than taking back the keys to houses because they don’t want to be lumbered with loads of properties that could cause a real crash if they all came onto the market.

What difference might Europe make to that? Another banking crisis would restrict credit even further and push up its price. In October, the average interest rate on a two-year fixed-rate mortgage rose from 2.92 per cent to 3.04 per cent. This week, Yorkshire and Barnsley Building Societies both pushed up their rates. If things get worse in Italy, everywhere else will, too. And the higher mortgage rates go, the lower house prices will go. It isn’t making me want to get into the buy-to-let market much.

What about gold?

Merryn has been a big fan of gold for the past few years, and I have to give her credit that she has been completely right on this score. But I’m not completely convinced that gold should play a big part in most people’s savings. It is easy to forget that gold essentially went no-where for 25 years after its previous peak in 1980.

Also, gold doesn’t earn (or yield) anything at all, so it is an asset that just sits in the vault. Even Merryn concedes that:

It isn’t so cheap now. But it still has insurance value. Holding gold – the world’s only independent currency – gives you some protection against theincompetence and idiocy of Europe’s bickering politicians. So keep it.

I would add to that to say that if you don’t have any yet, buying gold now would be really risky and I wouldn’t recommend it. In any case, if you own property and have a mortgage on it (whether it is your home or a BTL property) then you already have a pretty powerful hedge against inflation. Your bigger worry in a circumstance like that is deflation, and gold won’t help protect you against that at all.

Keep some cash

On the third option, Merryn suggests that people keep some cash. Even though it is being eaten away slowly by inflation, it is useful to keep your powder dry because if things get really cheap (and I’m waiting for stocks and housing prices to fall a lot in this crisis) then you want to have cash available to snap up the real bargains.

In September, the average rent in England and Wales rose by 0.7% to £718
per month, surpassing the previous record high of £713 in August. With
annual rental inflation at 4.3%, the average rent is £29 pcm higher than
September 2010.  The average yield in September rose from 5.2% to 5.3%.

The news isn’t all good, because even though higher rents have led to improved rental yields, total returns being earned on Buy to

Let properties have fallen because of weak property prices:

The total annual returns on a rental property dropped
back in September after property prices fell annually.
The average total annual return in September was 1.8%,
the equivalent of £3,005 – £7,661 in rent, with a capital
loss of £4,666

A second issue to worry about highlighted in the report is tenant arrears. This have dropped back a bit from September, but they are still high enough to be a worry with more than£300 million in rent arrears in August.

The glut of retirees becoming amateur landlords has been created by the absence of alternative ways of boosting their income.

For example, David Wright, a retired train driver, paid £67,500 for a one-bedroom house at Ilkeston, Yorkshire. He calculated that the £4,500-plus income he would get each year by letting the property out was much better than alternative investments.

“The interest in a savings account doesn’t compare to the seven per cent yield that I’m getting as a landlord. The decision was a no-brainer from the word go,” he says.

In short, the newspaper says that rising rents are making properties much more attractive investments than either cash or shares at the moment. That’s not hard given how tough the share market is, and with a big fall likely returns on stocks will probably only get worse. But I still think that although there are good opportunities for some properties out there at the moment, I still think that the market will soften more and that most investors could sit things out a little longer before diving in.

I also agree with the advice in the article that says:

The key task for successful retirees is to select the right type of property, at a good price, in an area where rental demand is high. This could be due to the expansion of transport hubs, a growing university or a regenerated town centre. In these circumstances, the property should produce a rental profit each month, even if the overall value of the property does not increase in the near future.

It also has a real word of warning that I would agree with:

But experts warn that however strong the rental market is now, history suggests it is unwise for retirees to sink all of their money into one buy-to-let property. This is in case the sector undergoes the sort of difficulties encountered a few years ago.

“Supply can easily outstrip demand, as happened in late 2008 and early 2009, when many landlords flooded the rental market with properties they couldn’t sell,” advises Primelocation’s Nigel Lewis.

“If that happens again, rents could plummet, so buy-to-let landlords need to factor this into their financial planning.”

In short, be careful and make sure that the cash flows you expect will more than cover your costs (mortgage and maintenance) with a safety margin in case the market turns down.

It is a lesson that a lot of investors should have paid more attention to during the boom and it may cost them dearly now. Standard & Poor’s, a credit rating agency, has just put out a report in which they say that “even relatively mild declines” in house prices could put some 30% of buy to let mortgages into negative equity.

That’s the bad news. But there is also some good news in the report. The first, and I don’t want to sound too goulish, is that if you have cash to spare you may well be able to pick up pretty good bargains in a couple of years. Estate agents generally push a hard sell as they’d rather have a deal done now rather than in a few years, but if you are patient you may well find that the best buy to let deals will only come onto the market when their owners are feeling the strain of negative equity. There is nothing quite like being underwater to focus the mind on deciding what parts of a portfolio to sell off.

The other bit of good news is that cash flows in buy to let seem to be improving. One reason is that there is still strong demand for rental properties while supply is struggling to keep pace. That is helping hold up rental yields and borrowers have healthy debt-service cover ratios.

All these are good signs. I’ve been urging caution with regard to the market over the past year or so. I think it is still justified. With prices either flat or falling there is little reason to dive right in, especially if the real bargains are yet to come onto the market.

1. 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.
2. 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.