Having always lived at least a 90-minute train journey north of London, I have always had a degree of jealousy of those who live in the capital and can enjoy the nightlife, sporting events and so on. In terms of the current buy-to-let market, however, I am delighted to be at least 90 minutes from London.
I think it is possible that the buy-to-let market could fall dramatically in London – almost as fast as it rose. But beware the prophets of doom. I believe the UK-wide prospect for buy to let is positive.
In London, the market does appear to have overheated and prices are apparently falling. Clearly, 30 per cent growth is not sustainable. Rents and, consequently, rental yields have fallen and this could result in several things happening.
First, disposal of properties forces lower prices and, in turn, fewer properties are available to rent. Usually, this leads to medium-term increases in rents due to scarcity of property, perhaps not a healthy environment. Second, there is likely to be extensive remortgaging of buy-to-let loans.
Mortgage plc sales director Peter Beaumont says: “Most have good equity, as buy to let has typically stopped at 80 per cent LTV, so remortgaging is perfectly possible. However, if the borrower faces financial difficulty, then they may need to raise cash to avoid selling up. This can mean their yield falls again, due to stagnant rent but an increased borrowing on the remortgage.”
We agree that the London market faces particular problems. Beaumont says: “New London landlords need to be a little more careful and buy the right type of property and be able to fund it, taking account of voids as well as lower rents and yields. Most serious, rather than amateur, landlords look thoroughly at yield and not just capital growth.”
My view is that the buy-to-let market across the rest of the UK still looks healthy, as long as the same principles of caution are applied. It is not just geography which influences the viability of the market, it is also hugely dependent on borrower/landlord expectations. For example, if borrowers look at maximum 80 per cent LTCs and sensible growth plus a reducing balance on a product such as a current account mortgage, then we see the market continuing well into the distant future. Contrast this with the fact that perhaps too many inexperienced borrowers have come into the market believing it is a gravy train.
Verso director Eddie Smith says: “Many amateur landlords woke up one morning and decided they would get into buy to let. This was successful and they purchased another. This category of borrower may not have income to support long periods of rental voids. Professional landlords are typically in for the long haul. So there is probably no major threat in this area as property prices have appreciated well. Additionally, most are well covered on LTV and, crucially, will also have financial reserves for voids.”
There is a clearly still a great deal of scope, especially outside London. Mortgageforce's recent research suggests that a staggering 36 per cent of those buying in the North are Southern clients.
The research also revealed that there has been a dramatic increase in three particular client categories – expatriates, parents buying for student offspring and people buying for relatives, where perhaps the family member is not mortgageable. This latter category is particularly interesting, as people with adverse credit may avoid punitive sub-prime rates by getting a relative to operate a buy-to-let arrangement for them.
The phenomenon of London clients buying at some distance from their own home creates more buy-to-let sales. The increase in foreign clients buying properties in this country creates yet more buy-to-let sales. Relatives buying houses and letting to family also creates buy-to-let sales. The blood-pressure might be high but the pulse is still very strong.
Robert Clifford is managing director at national broker franchise mortgageforce