It seems that every day someone comes out with yet another portent of doom about the British property market.
Buy to let has had its fair share of detractors over the last year or so, and it wasn’t that long ago we were asking whether or not it was bye bye to buy to let?
This was due to the fact that buy to let mortgages had dropped by 85% in the last year but despite this, a good percentage of buy-to-let (BTL) landlords are still feeling bullish.
But should they be?
In a recent survey 41% of buy to let landlords said they felt optimistic about the UK’s private rental sector. Meanwhile, 54% thought that property still had the potential to offer better growth than other forms of investment.
In addition 44% said that while letting wasn’t currently their main source of income, they expected it to be in the future.
Oh dear.
- Property ownership pessimism
Even those landlords who are pessimistic have mainly become disillusioned because of the day-to-day aspects of property ownership. About 50% had experienced a void (when the property doesn’t generate rent), which sounds low. More than half had had trouble with tenants; the key issue unsurprisingly being property damage.
Hmm, the landlords apparent lack of concern appears a bit complacent…
This is because rising interest rates have pushed rental profitability to its lowest level since the survey began; average gross rent was £30,140 a year, and the average “portfolio size” was £697,670; so even rental yields before deductions averaged just 4.3%; that is well below the cost of borrowing.
So how can so many still be optimistic?
The main reason seems to be that the average BTL position is still affordable. But that’s only because the average loan is £282,950, making the average loan-to-value (LTV) 40.5%.
This explains why 41% are still bullish!
If they had larger loans, their worsening cash-flow position would by now be more clearly reflecting the deterioration in the financial argument. By being less leveraged, BTL investors think they can ride out the storm, saying they’re “in it for the long-term”.
Even if variable mortgage rates have now risen above 7%, your average BTL investor will still have outgoings of no more than £20,000 against a gross income of £30,140. It would have to be an very unfortunate landlord who suffers £10,000 of damage, maintenance and other costs in a year, so we are assuming most must still be cash-flow positive.
But this is a double-edged sword. If the average BTL investor was instead 100% leveraged, outgoings would be nearly £20,000 higher than gross income.
Would so many be as complacent if that were the case?
- BTL landlords missing mortgage payments
Already, those who do have significant leverage can’t afford any voids at all now. A full 17% say they have already missed a mortgage payment; what is shocking is that this is up 8% in the three months since December.
That means that in the first quarter there was an annualised 32% rise in delinquent BTL borrowers. Earlier this month, Bradford & Bingley confirmed as much when they revealed that in the first four months of 2008, the number of buy to let mortgages that were at least 90 days in arrears had risen by 52% to over 3,000.
These more-leveraged BTL investors already realise how hostile the market has become and its only the under-leveraged, complacent people who’ve been in the game longer who believe they can survive and ride out the current financial storm.
But if the more highly leveraged Johnny-come-latelys are forced to bail out, the whole market will be swept out from under their feet.
It’s time for the 'long-termers' to get their calculators out and try to see it from the other guy’s perspective. With some investors so close to the wire already, repossessions are looking a distinct possibility.
So, do you think buy to let had had its day or is it something still worth investing in?
Why not let us know in the comments?