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Don't get suckered into buy-to-let
The buy-to-let property market is bullish once again. But now is still not the right time to get in, says Bengt Saelensminde.
They're back. It's been three years since we last saw them this excitable. But buy-to-let investors have returned with a vengeance.
A report just published by the Council for Mortgage Lenders shows buy-to-let lending was up 14% on last year. And landlords are reported to be rediscovering their confidence after the brutal meltdown a couple of years ago.
"So what?" you say. "People will always find a reason to be bullish on property". Well yes. But they aren't the only ones with a renewed interest in buy-to-let. In the last two weeks, I've had a number of emails from Right Side readers asking what I think of buy-to-let property. And they have a strong argument for why they're looking to get involved.
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Now, these Right Side subscribers aren't mindless property bulls, they know just how dysfunctional the property market is. In fact, they share the same concerns as most Right Side readers.
They're worried about quantitative easing (QE) and what's happening to sterling. And they reckon that property with rents rising with inflation will be an excellent safe haven as the Bank of England pumps cash into the economy. But buy-to-let is no panacea for inflation. And investors taking a sudden interest in buy-to-let are playing a dangerous game.
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I've seen quite a few of my friends end up as buy-to-let landlords. Most of them were looking to buy new homes but didn't want to sell their property into a weak market. So they simply bought the new property and kept the old one to let out.
And I can understand that they've been feeling a bit more optimistic about those rented properties in recent months. The rental market is pretty good for landlords at the moment. People that have amassed some decent equity from property can get the best mortgage deals on offer. You can borrow at around 4%, or 5%, and that's about the yield you'll get on the property once it's rented out. So that's your costs covered.
And if you have lost faith in the financial markets, it's easy to understand why you might be suckered back into the old favourite 'bricksand mortar'.
After all, we are becoming a nation of renters. I bet Maggie Thatcher never saw it coming. But the fact is that her plans to encourage home ownership have backfired. Private landlords have simply replaced the council as landlord. So now we've got local councils and private renters competing in the same market.
That's attracted an army of landlords, many of whom probably now believe that if inflation goes up, rents will keep up too. But there's a problem.
You could get skewered
For the landlord, there's a delicate relationship between the interest on their mortgage and the rental income. If inflation continues to gain traction and bear in mind food prices have been rising at 9.8% then at some point interest rates will have to go up.
And if interest rates go up (to counter inflation) you could get skewered. Your costs could rise very quickly, and there's no guarantee that rents will follow.
In fact, I think that the dynamics of the market have already started to change on the rental side. With the government putting curbs on housing benefit and the costs of living zooming up, rental arrears are on their way up too.
Arrears have doubled in the past two years, with more than a third of landlords reporting that tenants have fallen behind with payments, according to researchers BDRC Continental.
It's a massive assumption that rent will inflate at the same rate as the rest of the economy. A double-dip recession could well test this idea. Landlords will have to compete for the most credit-worthy tenants, andthat could see rents fall.
With house prices now drifting I'd be very careful. Storing your wealth today is difficult, and I can't say that I trust financial markets much either. It's true that people will always need somewhere to live, and a well-placed property should always let. But there's absolutely no guarantee that rents will keep up with inflation, and it's very unlikely that property prices will.
Many a buy-to-let investor could end up a forced seller as they get skewered by rising interest rates. We only have to look to the USA to see the fallout from their property boom. Okay, so we haven't got the supply glut that they've experienced over there, but when forced sellers enter a market, the underlying demand for property can't hold back the tide.
If people can't finance a home, prices will have to fall until the market clears. Many of today's buy-to-letters could end up losing their hefty 25% or 40% deposit.
If you're a cash buyer and you're really scared about the financial markets, then there's probably some merit in property speculation. But if you're borrowing cash on the premise that rents must keep up with inflation, then I'd tread very carefully.
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Bengt graduated from Reading University in 1994 and followed up with a master's degree in business economics.
He started stock market investing at the age of 13, and this eventually led to a job in the City of London in 1995. He started on a bond desk at Cantor Fitzgerald and ended up running a desk at stockbroker's Cazenove.
Bengt left the City in 2000 to start up his own import and beauty products business which he still runs today.
