Buy-to-let: here comes the crunch
By Chris Gilchrist 21st November
2007
I've been predicting a bloodbath in the new-build sector of the buy-to-let market
for two years and have been amazed at how it has defied gravity.
Now the sector's biggest prop has been removed and tumbling prices cannot be far
off. Builders and lenders have reported sharp slowdowns in the market. Some builders
of city centre apartments are delaying projects because they don't have enough buyers.
Typically, these builders will only start on a project when they have pre-sold a
certain proportion of the units they plan to build. And the people they had been
selling to were mainly individual investors. The biggest BTL boom has been in people
owning just one or two properties.
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The easy credit has dried up for buy to let investors
Until recently, these small-scale buy-to-letters found it easy to raise the money.
Last year a few lenders were offering 95% BTL loans.
Today, if you want the best lending terms, you often need to put down a deposit
of at least 20%. Most first-time investors don't have that kind of money available.
Lenders and agents both report a decline in enquiries and in new BTL mortgages.
Obviously, if the vast majority of purchases are financed with loans and loans become
a) harder to get and b) more expensive, demand is likely to be a lot lower.
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Lower demand plus oversupply equals disaster
As for the builders, while there were plenty of small-scale buyers, they could get
away with deals whereby they gave discounts to buy-to-let clubs. Club members never
realised that the builder was giving the club operator a fat commission as well,
and that bigger discounts could easily have been secured.
Now the real pros in the BTL market - people owning 100 properties or more - are
the only remaining buyers and they are squeezing builders until it hurts. You might
argue that cutting supply of new-build will help the market. Not much.
There's still too much being built and coming onto the market, and most of it is
still priced too high relative to existing property. And investors who bought with
a rental 'guarantee' that expires now will in some cases find they simply can't
get as much income as they need to pay their higher mortgage costs. So it's likely
more small-scale landlords will bale out over the next year.
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Lending market will get tougher and tougher
Lenders have already started to tighten up criteria for BTL loans. Higher LTVs are
one step, more rigorous checks on buyers' incomes are another, and the next almost
certain step will be a return to the practice of requiring 130% cover for the loan
payments from rental income, a ratio many lenders relaxed to 100% at the peak of
the boom last year.
'It's clear that changing conditions in the housing market have brought to an end
the boom in buy-to-let' says the British Property Federation. Now we all have to
worry about the possible knock-on effects on the wider residential market.
Article produced by EveryInvestor.co.uk
