The days in which anyone could make a killing in property investment are over.
With net income yields as low as 3.2 per cent, and house prices in many
areas starting to fall, the arguments for purchasing property as an
investment look weaker than they have at any time in the past decade. But
although we are likely to see an end to the rapid expansion of the
buy-to-let sector, a large-scale sell-off by existing buy-to-let landlords
is equally unlikely: research from Savills shows that only 5 per cent of
investors are seeking to reduce their property holdings.
Those who stay the course are in for a rocky ride. Over the course of 2007,
the outlook for buy-to-let investors deteriorated, gradually at first and
then more sharply with the advent of the credit crunch in the summer. Three
interest-rate rises, offset by one rate cut in December, increased the cost
of borrowing by half a percentage point, while the reluctance of banks to
lend to each other has made mortgages even more expensive, as well as being
harder to come by. Those lenders following the Northern Rock funding model,
such as Paragon Mortgages, have found money increasingly difficult to raise,
and have all but ceased to make new loans. Over the past few months, house
prices across the country have begun to falter as the volume of transactions
has collapsed.
Amateur buy-to-let investors, particularly those who have purchased properties
recently, are particularly vulnerable to the downturn - and none more so
than those landlords who have bought new-build flats in city centres, where
in many cases supply exceeds demand significantly. Figures from Savills show
that new-build flats form a significant part of more than 60 per cent of
entrants to the market over the past six years. For these investors, 2008 is
likely to be a difficult year. According to the Royal Institution of
Chartered Surveyors (RICS), the sector of the market most vulnerable to a
downturn is “commodity new-build flats” - small properties without character
that are in oversupply. The RICS also believes that prime Central London
properties will continue to lose value if City bonuses are low this year.
Naomi Heaton, chief executive of London Central Property, the property
investment company, says: “The alarming coverage of the credit crunch and
the uncertainty surrounding the Government's tax treatment of non-domiciles
may create nervousness among investors.” However, she argues that there is
almost no land with development potential available in the centre of the
capital, so pressure on supply will continue.
A downturn in prices is not the only problem that landlords face. Despite
interest rates being forecast to fall by at least half a percentage point in
2008, it is unlikely that buy-to-let mortgages will get much cheaper.
Jonathan Moore, of Mortgages for Business, the specialist buy-to-let broker,
says: “The availability of competitive mortgage funding will become an
increasing issue in 2008, as securitised lenders who have previously sought
funding from the City find new finance either harder to come by or priced at
a higher level.” He believes that investors may have to resign themselves to
paying higher arrangement fees on mortgages.
Although tales of amateur investors in trouble are now commonplace, the
majority of professional landlords are refusing to panic. In fact, a recent
report from Bradford & Bingley showed that 86 per cent of landlords plan
either to increase their portfolios or to leave them untouched in 2008.
According to Jeremy Law, head of buy-to-let at Bradford & Bingley:
“Landlords' views are the most authoritative in the industry, as they are
expressed by those who are at the coalface of the buy-to-let market. These
are the people who are taking out the mortgages, buying and maintaining the
properties and managing the tenants.” Moreover, larger professional
landlords may well be able to take advantage of the amateurs' difficulties
by snapping up bargains from distressed sellers. “The new year will be a
great time for buyers to capitalise on a weaker market,” says Robert
Bryant-Pearson, chief executive of Allied Surveyors.
Research from Savills shows that investors are most likely to react to the
deteriorating investment climate not by disposing of assets but by
concentrating their efforts on maximising income, for example by seeking to
reduce management costs. And there is already evidence that many investors
are taking a more cautious approach. Figures from Hamptons Mortgages show
that in November the proportion of buy-to-let loans taken out to fund
purchases fell by more than a quarter. Moreover, some have already taken
profits. An RICS survey has shown that landlord sales were at their highest
level for two years during the second quarter of this year.
Those investors who remain in the market will no longer be able to count on
strong capital growth to boost yields. Most commentators now predict zero
house-price inflation for 2008, which will probably mean a slight fall in
prices. Housing market bears, such as the research group Capital Economics,
are more pessimistic, predicting falls of 3 per cent in 2008 and in 2009.
There is some good news, however. Figures from Paragon show that strong tenant
demand pushed average rents to a record high of more than £11,000 in
October, up 10 per cent on the same month in 2006. Total annual returns for
the year to October were 15.5 per cent, Paragon says. Moreover, rents are
forecast to continue rising as net immigration and the rising number of
one-person households continue to put pressure on the supply of housing.
Even more important is the decline in the number of first-time buyers.
Halifax figures show that there were fewer first timers purchasing property
in 2007 than at any time since 1980.
The party's over, the easy funding has gone. Those with 95+% cheap fix mortgages may have to shell out tens of thousands or face repossession as no one will lend to them. 2 bed city flats are already unsaleable in most areas due to oversupply and this will inevitably drag down the price of other properties as their desperate owners start to offload them cheaply to cover their loans. Expect a tidal wave of 2 bed flats hitting the market after next April when the CGT law changes and sellers overcome their hesitation over paying for HIPS.
Chang, Epsom, UK
your 'good news' comes from reports commissioned by Paragon and B& Bingley !!!!!
kk, bristol,