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A consumer&#39s view

Standard Life storms into the buy-to-let market, read a news headline a couple of weeks ago.

Perhaps it is just journalistic cynicism but it is difficult to dismiss the thought that this will probably signal the top of the property investment market, at least in the short term.

Those of us who have been around for a while can rem-ember the mad stampede by mortgage lenders to buy into estate agencies at the end of the 1980s.

Fancy prices were paid for estate agencies and the only people who made any money out of these deals for many years were the sharp sellers who knew better than anyone that the property market had peaked.

The Standard Life product is very competitive, with a 5.24 per cent starting rate and a loan to value of up to 80 per cent. It is bound to attract a lot of interest.

Buy to let has expanded dramatically in recent years, with the Association of Resid-ential Letting Agents reporting that small landlords now account for more than 5 per cent of the residential rental market.

The fall in equity investment returns and the collapse of annuity rates have encouraged investors into buy to let as an attractive alternative to pensions.

But there have been warning signs around for some time. The Council of Mort-gage Lenders estimated earlier this year that buy-to-let mortgages rose in number by 10 per cent between the first and second half of 2000. This is a substantial increase in the number of letting properties on the market.

In March this year, Arla revealed that the average mortgage on a buy-to-let property had risen from £76,600 for the three-month period to December 2000 to £102,039 for the following quarter to February 2001.

This 33 per cent increase is substantial and although part of it is attributable to an increase in property prices, this cannot possibly account for it all. The conclusion must be that buy-to-let investors have geared up and have increased the proportion of loan to purchase price.

This is worrying and should concern all buy-to-let lenders, including Standard Life, not to mention investors.

The biggest market for buy to let is London and the South-east. There is no reason to suppose that the experience of previous property cycles will not be repeated. Central London leads the way in property price movements and the effects gradually ripple out through the suburbs and commuterland.

Anyone who simply walks the streets of prime residential letting areas such as Nott-ing Hill, South Kensington, Chelsea and even further out in areas of West London, such as Chiswick, Richmond and Twickenham, cannot have failed to notice the proliferation of to-let boards.

The danger is that too many people are moving into the buy-to-let market with very high loan-to-value ratios.

What many seem to be doing is remortgaging their existing home, in which they have substantial equity, for a bigger amount and using this as the 20 per cent deposit which is required by most buy-to-let lenders.

They then sign up for an 80 per cent mortgage on the investment property.

So far as the lender is concerned, there is 20 per cent equity in the rental property but the fact remains that the investor has borrowed 100 per cent of the purchase price.

If property prices level off or fall at the same time as rental demand, then many of these recent buy-to-let inves-tors are likely to have difficulty finding a tenant at the rental they need and become forced sellers.

If they cannot let their property for enough to cover the mortgage payments, they will sell, depressing the market still further.

Until recently, we had a buoyant economy and full employment and demand for rental properties and therefore rental levels in London and the South-east has held up.

But you only have to look at the daily headlines on redundancies, particularly among airline staff who are frequently renters rather than buyers, to see that there could easily be a fall-off in demand.

Anyone going into the buy-to-let market now, whe-ther as a lender or investor, would be wise to take a cautious approach.

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