UK buy-to-let market pushed onto critical list

Seasoned landlords are offloading their exposure to risky portfolios just as new buy-to-let beginners are jumping into the market in droves. Some say it’s like watching ‘Lambs to the slaughter’ – never has such a phrase summed up the abject state of the ‘buy to let market’ so succinctly.

For some time commentators, this newsletter included, have been predicting the stall or collapse of the housing market, as first time buyers see the opportunity of ever buying slip further and further into the distance as prices continue to increase against all odds.

So who has been buying the properties?

It seems that its people who already have mortgages and are using the equity increases to channel the gain back into buying more properties and increasing their loans in the process.

Yesterday the Council of Mortgage lenders released a report citing that in the first half of this year 152,500 loans were buy-to-let loans – valued at a total of £17.5bn  – representing a new record in such loans.

Ordinary investors have been convinced of the success of the buy-to-let market, as lenders have steadily lowered barriers to entry in order to drive more loans for their businesses. The growth of the buy-to-let market means that 8 percent of all housing loans are now from this sector.

But alarm bells are finally starting to ring – with inexperienced investors jumping into the market basing their expectations on capital growth, not income. Even where income is considered, the gross yields generally don’t take account of the ‘fallow’ periods, time when the property is empty (usually about 25-30 percent). As such the amateur investor is more likely to ‘convince’ him/herself of the value proposition even if the portfolio isn’t performing.

The other risk is that the buy-to-let investors are significantly ‘geared’ and highly exposed to a market that has all but peaked, a small increase in interest rates, a turn in the market or extended periods of unlet property could be enough to turn the investment into a liability.

Significantly, if there is a turn in the market it’s the new buy-to-let owners who will be caught first. Selling property is not like phoning your broker and selling on the stock market – in many cases it will take months and in general the property will need to be empty in order to secure a purchase – this will add to the cost.

We think the government and the Bank of England needs to keep an eye on this sector of the market, as the amateurs rush in, just as the pro’s are getting out, there could be trouble stored up as the ‘domino’ effect of the buy-to-let market collapsing will accelerate any down turn in the normal market.