How the buy-to-let dream became a nightmare

Property: How the buy to let dream became a nightmare - at - the best of the week's international financial media.

For some months now I've been keeping an eye on the price of a four-bedroom house in Paddington, writes Merryn Somerset Webb. It came on the market in January, clearly the work of amateur developers (wood flooring and minimalist fixtures through out) and priced at a fiesty £750,000. There were no takers. The price fell to £695,000 and the house began to appear in the rental lists too. Again no takers. Today, the house is still for sale (at £595,000) and still for rent. I'm glad I don't own it: the developers must be feeling a good amount of financial pain by now. However, they can take some comfort from the fact that they are not alone. A great many people are beginning to realise that the glory days of the property market in the south of England are long, long gone. A recent Hamptons International report confirms this: it seems that more and more landlords are trying to sell. The number of rental properties being withdrawn is 16% higher than last April and 23% more than March this year, and last month UK letting stock actually dropped by 5% as landlords tried to get out. Dayle Hodgson, who looks after lettings in Hamptons International's central and south-west London offices, told The Daily Telegraph that "Landlords were getting a 7% to 8% return three years ago. That has dropped to 4%. Many have commented that they are better off putting their money in the bank." They're right, of course; at the bank they can lock in a good 5.5% - risk free.

This is exactly what Abigail Hofman seems to wish she had done. In the FT, she explains how after a career in investment banking she was lured into "the honey trap of buy-to-let." In the spring, she bought a small flat in Notting Hill as an investment, but the dream has slowly become a nightmare. She envisages a net rental yield of around 4%, but given the average mortgage fixed rate in April was, according to the Council of Mortgage Lenders, 4.99%, "you need to be a magician to make the rental inflow cover the mortgage outflow." And that's assuming she can find a tenant in the first place. The best-case scenario as Hoffman sees it? Meagre rental returns and massive stress levels.

Others face the same dilemma, but on a larger scale, says Penny Jackson in The Independent on Sunday. Seven years ago the Kennedy family did not own a single flat for rent. Today, they've bought into the buy-to-let dream big time and own 100 in central London and West Sussex. But they aren't happy either. "We're getting roughly the same rents today as we were getting seven years ago", says 25-year-old Justin. The Kennedys also own eight fast-food outlets. "Without that business, the property business wouldn't be sustainable," says Justin. "We are a financially secure company, and not just in property - so if we are worried, and we are, I don't know how the individual who has gone into buy-to-let is managing." If he sounds breathless, he has a good reason. "I'm running round our properties all day and I'm going home to my dad at night and saying, We're doing all this work, losing money, just holding on and hoping it will come back'." Will it? Justin isn't sure. "The whole world seems to have heard about the good returns [that you could get in buy-to-let] and everyone wants a penny of it", he says. "There are too many people in the market and that's how they shoot themselves in the foot."

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