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Outside edge

It never fails to amaze me how the pundits change their views on the housing market. Last week, Hometrack lowered its projection of 7 per cent house price inflation for next year to a drop of 5 per cent – a movement of 12 per cent in less than a month.

We should give its view more prominence than most as its data is the most up to date in terms of sentiment in the market. Contrast this with the Chancellor&#39s more bullish outlook for the economy and you are left asking if anyone knows where the market is going. We simply have no valid historical references.

Perhaps the most telling sign of all is that the Berkeley Homes group, the biggest developer of riverside properties in London, is suddenly introducing incentives to shift its stock. Tony Pidgeley has had an uncanny knack of calling the market for the last 20 years so he may know something that the rest of us don&#39t. Berkeley is highly relevant to the London market as more than half its flat sales are into the investment market.

The reality is that the buy-to-let market is unlikely to perform uniformly. Institutional investors, such as Schroders, have largely avoided the frothy markets, sensibly basing stock selection on areas of sustainable rental demand, with total returns based on realistic long-term views of property inflation. Private investors, however, have behaved the same way they tend to in the stockmarket – buying for short-term gain in bull markets and avoiding the market when values or sentiment fall to more realistic levels.

This all suggests that the immediate outlook for buy to let is diverse. Sensible long-term investors, particularly those who have concentrated on the essential worker market should not be concerned, provided they have purchased in areas of continuing demand. These areas will continue to deliver earnings-related rental yield inflation and values will be underpinned by this.

By contrast, the overpriced “new urban dream” investor who has pursued short-term capital gains will be hanging out to dry unless he can afford to weather the storm for two years while waiting for supply and demand to equalise.

Yields in London and other urban upper-end locations have fallen already and will continue to do so. The recent pick-up in demand for rented accommodation in these areas, at albeit reduced rents, will fall away as prices correct and purchase becomes affordable again. The explosion in high LTV lending on such properties over the last year compounds the situation. This has not only encouraged more amateur investors into the market but has allowed existing investors to extract equity from their portfolios for further purchases.

Drops in yield and extended voids will mean that many of these investors will become forced sellers. It is already happening in parts of London, where distressed buy-to-let investors are selling new builds at discounts of up to 25 per cent of purchase price.

This figure has a common ring to it. Bulk off-plan investors have been negotiating discounts as high as 20 per cent while the price premium measured in £ per square foot of new versus traditional stock is a similar figure. Overall, I believe we will see a fall in the value of new-build stock in hot spots of around this amount – far worse than the owner-occupied market will suffer. The ones with the really charred fingers will be off-plan buyers possibly locked into overpriced forward commitments.

Buy to let is an important investment sector and should form part of most investors&#39 portfolios but the looming crisis in certain sectors should serve one positive purpose and that is to reinforce the long-term nature of the investment class. It may also force the FSA to re-examine whether regulation should extend to this area, as it seems that a combination of estate agents and mortgage brokers are effectively providing investment advice – hardly a holy union.

Mark Chilton is an independent mortgage expert


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