Buy-to-let starts to Creak in the UK

With the latest hike in the bank rate not expected to be the last, eyes are turning towards the buy-to-let market where the number of properties being repossessed do to none payment are on the increase.

With the recent increases in interest rates over the past few months in the UK from 4.5 percent to 5 percent, the cost of servicing a mortgage dept has increases by over 11 percent. For those buy-to-let landlords who took out mortgages on properties two years ago the costs of servicing the properties have increased by over 20 percent.

It’s impossible to pass these costs directly on to people renting so the landlords have taken umbrage in the potential increase in value of their properties. The catch with property value increases is that the property needs to be sold to realise that value.

At the same time the yields of the properties are not fully covering the ever-increasing costs of owning the properties. While yield rates are often quoted in the region of 4.5 percent to 5.3 percent this might sound like it will cover the costs, but in reality the yields quoted exclude commission, tax and exclude times that the property lies empty.

The Financial Times reported this weekend that many would-be landlords are now falling foul of the real costs of ownership of buy-to-let properties and finding that the properties are being repossessed and sold at auction, often putting the landlord out of pocket considerably.

According to the FT –

Last week the Department for Constitutional Affairs released figures for mortgage repossession actions entered in the third quarter 2006 of 34,626, a rise of 15 per cent on the same period last year. Mortgage lenders are cagey about what is driving these repossessions and bodies such as the Council of Mortgage Lenders do not differentiate owner-occupier repossessions from buy-to-let repossessions.

But auctioneers report that buy-to-let investors who have had their fingers burnt are accounting for a large slice of repossessions even though buy-to-lets still only account for a tiny fraction of the total mortgage market at just over 8 per cent.

The property industry has tried to keep the lid on the figures so it is difficult to get definitive numbers for the number of repossessions from the lenders themselves.
Auctioneer Gary Murphy of Allsop, one of the leading auction houses for commercial and residential property said “Currently over half of repossessions are buy-to-let. It has grown significantly,”

At the same time many repossessions are currently sold through the usual estate agent network at knock down prices, so the real numbers are likely to be still higher.

The worst hit sector of the market may be the new-build sector, where large numbers of buy-to-let speculators have been sold high specification new-builds at over inflated prices and underestimated the potential pool of affluent renters. In many cases modern riverside properties in the capital and larger cities are being offloaded and not reaching the original purchase prices, further putting pressure on yields. As such, although we hear about companies such as Abbey increasing leverage for personal borrowers, the opposite is happening for new builds – last year the Portman Building Society became the first in the UK to refuse to offer buy-to-let mortgages on new-builds. Since then other lenders have increased the deposits from the standard 15 percent (on buy-to-let) to 25 percent – thus covering themselves in case of repossession.

The FT also reports that-

Figures from Savills Research show that gross rental yields – which do not take into account repairs, management costs or void periods – were 4.7 per cent in prime Central London last year, compared with 5.3 per cent in the South East and 5.5 per cent in Scotland.

The buy-to-let market is coming under increasing pressure with the latest increase in rates from the Bank of England. Further expected rate hikes early in the new year may push many more landlords over the limit and result in an even greater downwards cycle in the buy-to-let sector.

It has been said that the buy-to-let sector has been propping up the ‘bottom end’ of the property market. As interest rate hikes take their toll on the sector, it’s downward turn may be a major contributing factor to the fall in the market.