How to get poor quick – invest in buy-to-let today

Britain's second-largest buy-to-let lender, Bradford & Bingley, is to raise interest rates and deposits in response to tougher conditions. It looks like buy-to-let is now a rich man's game - but would even a rich man want to buy in?

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Buy-to-let is now just a rich man's game, apparently.

That's what the head of Britain's second-biggest buy-to-let lender, Bradford & Bingley, suggested yesterday, amid a set of woeful results that saw the share price plunge by 23%.

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Chief executive Steve Crawshaw warned that the bank would be looking for better profit margins (that means higher interest rates) and more equity (that means higher deposits) from landlords. Higher costs tend to lower demand, and arguably would shut out amateur landlords, leaving the field to only professionals and the wealthy.

Sounds like really bad news for the buy-to-let business, eh? Of course it is.

But don't expect them to admit to that

Bradford & Bingley chief executive Steve Crawshaw yesterday warned the market that buy-to-let is becoming more expensive. Bear in mind that B&B is a key player in this market, accounting for a fifth of outstanding loans.

Crawshaw said: "We expect fewer new people will enter the market. Growth will come from the established landlords." He went on. "People are now talking about this being a rich man's game. There's an element of truth in that."

OK. So fewer people will be buying into the market. And unless you've got a lot of money, you won't be able to do so. In other words, demand is falling. Falling demand tends to lead to falling prices, and as prices are about the only thing a buy-to-let landlord cares about, falling prices in turn lead to falling demand.

So the market's in trouble, surely? But remember, this is the UK property market, so of course it's not in trouble. Nothing bad ever happens in the UK property market. Apparently, demand for buy-to-let mortgages will still grow "faster than the mainstream mortgage market," says Crawshaw.

The buy-to-let bandwagon

We doubt it. Buy-to-let is a bandwagon. People jumped on it very quickly when it was doing well. Now that house prices are falling, the stampede to get off will be at least as rapid.

And established landlords aren't daft. The professionals focus on getting decent rental yields, and making sure they can cover any void periods. So plenty of them bailed out of the market a long time ago, realising exactly where it was headed. In fact, I remember reading in one of the weekend supplements a couple of weeks ago, about a buy-to-let professional who had stopped adding to his portfolio as far back as 2001, because he wasn't happy with the yields.

Sadly, the housing market has been propped up by a string of buy-to-let latecomers who have overstretched themselves, often to buy dubiously valued city centre flats, who will now find that they are in serious financial trouble. That means repossessions and fire sales ahead. Buy-to-let may now be a rich man's game, but no rich man who wants to stay that way will pile in now.

This isn't the only thing B&B has to worry about. In fact, all in all, the mortgage lender's results nicely encapsulated a lot of the problems likely to beset the UK (and global, for that matter) economy in the coming year.

More nasty surprises ahead from the banking sector?

There was the unexpected £144m writedown, due to investments with exposure to US sub-prime mortgages. And bad debt provisions on its own mortgage portfolio tripled to £22.5m, most of that in just the past six months. More than one in 50 of its mortgages is now in arrears or facing repossession. With life set to get much tougher, the forecast bad debt for this year of £30m looks more than a little optimistic.

Rising bad debts, and nasty surprises from sub-prime investments. One thing's for sure if the rest of the banking sector's results are anywhere near as grim as B&B's, then the stock market has another miserable few weeks ahead.

By the way, I meant to say yesterday if you have a spare minute, then Jeff Randall's column from yesterday's Telegraph is well worth a read. It's an entertaining, and entirely accurate rant about just how insane the UK economy would look to someone landing from Mars.

Turning to the wider markets...

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Nikkei soars on surprise GDP data

In London, the FTSE 100 ended the day 29 points in the red, at 5,880, despite briefly tipping into positive territory in the afternoon.

Bradford and Bingley was the heaviest FTSE 250 faller, down over 23%, whilst fellow mortgage bank Alliance & Leicester led the blue-chip fallers. For a full market report, see: London market close.

On the Continent, the Paris CAC-40 was 14 points higher, at 4,855. In Frankfurt, the DAX-30 was 5 points higher, at 6,973.

Across the Atlantic, an unexpected rise in retail sales saw the Dow Jones industrial average rally 178 points to close at 12,552. The tech-heavy Nasdaq was 53 points higher, at 2,373. And the S&P 500 was 18 points higher, at 1,367.

Japanese stocks soared by 58 points to 13,626 as economic data out today showed that Japanese GDP grew 3.7% in the fourth quarter, beating analysts' estimates.

In Hong Kong, the Hang Seng rose 852 points to 24,021.

Platinum tops $2000

Crude oil had extended yesterday's gains this morning and was last trading at $933.70 a barrel. Brent spot was also higher, at $93.96 in London.

Spot gold

had risen to $908.30 and silver was also higher, at $17.38. However, platinum was the biggest precious metals story of the day once again, jumping to $2,002 an ounce, as Impala Platinum Holdings - the world's second-largest platinum producer - reported a drop in earnings.

currency markets

And in London this morning, Diageo - the world's largest drinks maker - reported a 8.9% increase in H1 profit, beating analysts' estimates. Diageo shares were up by as much as 3.5% in London. The company has raised marketing spend in the core US market by 4% on concerns that the economic slowdown will hit disposable incomes.

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John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.