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Rent asunder

Growing repossession figures may be the first sign of cracks in the wall of buy-to-let lending that has grown up in the last few years and now rising interest rates and falling rental yields look set to further undermine the market’s foundations, says Samantha Downes

The buy-to-let market has proved resilient to expectations of a property downturn but experts are warning that things are about to change.

Outstanding buy-to-let loans hit a record level of 938,500 at the end of the first half of 2007, according to the Council of Mortgage Lenders. The value of loans totalled £108bn, an increase of 14 per cent within six months, and buy-to-let lending accounted for 10 per cent of outstanding mortgage balances compared with 3 per cent five years ago.

However, the CML’s figures also note a modest rise in the number of buy-to-let mortgages in arrears of more than three months to 0.63 per cent compared with 0.58 per cent six months agoBuy-to-let repossessions were lower than for other mortgage lending, at 0.08 per cent compared with 1.06 per cent, although the figure was up from 0.06 per cent previously.

Paul Walshe, head of lender services at Southampton-based repossession lawyer Moore Blatch, says there has bee a noticeable increase in buy-to-let repossessions and he predicts the figures are likely to increase.

He says: “Traditionally, buy-to-let has been resilient to property price fluctuations because investors could sell and move on.”

But Walshe says there is increasing anecdotal evidence that downward pressure on rent combined with affordability, as lenders start to raise rates in the aftermath of the credit crunch, could ruin the party for buy-to-let investors who have overextended their borrowing.

He says: “If prices do not rise and investors are unable to get the rental income they need to account for increased rates, then it will become harder to off load for the price they bought it for.”

However, Walshe admits it is difficult to assess the state of the buy-to-let market. He says: “The CML and the Ministry of Justice keep track of repossessions but it has only been in the last year that the CML has started separating buy-to-let lending. So the historical comparison is not there. There is quite simply a black hole in our knowledge.

“The only thing we can be sure about is that buy-to-let lending has increased very dramatically in the last seven years. It has gone up from 50,000 outstanding mortgages in 2000 to 938,000 outstanding in 2007.”

Walshe admits that as the buy-to-let market expands, so does the likelihood of repossession, but he says there are distinct signs that many smaller buy-to-let investors, who make up the majority of lending, may soon find themselves facing a credit crunch of their own.

He says the proliferation of new-build developments and the willingness of developers to offload their properties at a discount has encouraged investors to over-extend themselves.

He says: “What we have seen is an explosion of new-build properties hotspots like Manchester and Birmingham. These oneand two-bedroom flats are not being bought by first-time buyers but by buy-to-let investors who may be buying several properties at a discount.

“These developments take a very long time – you are talking seven years from planning permission to completion – and during that time the property market has changed. While there is a need for new housing, oneand two-bed flats are not the sellers they once were.”

Developers anxious to offload their properties are offering huge discounts and many investors have been able to build up big portfolios without using any of their own money by using 100 per cent mortgages.

Walshe says downward pressure on rental yields and increased interest rates spell a double whammy for which these investors should brace themselves.

Bob Young, managing director of buy-to-let lender CHL, believes many lenders have been irresponsible in their lending strategies.

He says: “There are buy-to-let investors who will lie about their income, the same way a residential borrower would. We have had instances where people have been downloading forms from the internet and using these to fake their salary on a self-cert mortgage application.”

He claims lenders are not even requiring proof of rental income, which amounts to “lending suicide”.

Young says: “Why would someone self-cert if they are employed? It is just an excuse for an income stretch.”

But John Heron of Paragon claims landlords are still sitting pretty. He says: “Landlords are in a better position now than they have been and there no reason why they should not meet repayments. We are, after all, at the peak of a rate rise.

“There will be a marginal increase but it will be covered by the downward trend in interest rates. The Royal Institution of Chartered Surveyors says rental demand has never been higher and the Association of Residential Lettings Agents says the same thing.”

Heron claims the UK’s high employment rate will continue to drive demand higher. He says: “Things should ease, whichever way you look. Buy to let is better placed to cope with it because of the credit quality.”

Heron also cites research which shows the average landlord’s portfolio gearing – the proportion of borrowing to the level of equity in the portfolio – fell from 48 per cent in 2002 to 38 per cent in 2007.

He says: “The level of gearing for landlords with three or fewer properties is even lower at just 25 per cent.”

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