In his first guest blog for us, Dick Jenkins, Chief Executive, Bath Building Society looks at why buy to let investors are having a ‘heavenly’ time.
It’s a pretty good time to be a Landlord in the residential property world right now, a state of affairs I guess is likely to persist for some time to come.
Just thinking about it for a moment, the perfect scenario for Landlords is one where property prices are increasing, offering capital appreciation on their investment, finance is easily available and cheap and relative to the cost of that finance and rents are high with tenant demand for decent property outstripping supply. That Landlord heaven pretty much sums up the British housing scene in 2014.
Landlord heaven part one: House prices
Starting with property prices, they are now starting to rise quite nicely again across most of the country, certainly in Southern England. Even the most dour of the property indices; the series from the Land Registry, shows prices in the South of England to be rising in the region of 5% with certain hotspots reaching up to 10% and beyond. If your version of the gospel comes from the Halifax or the Nationwide add a little to those numbers
Landlord heaven part two: Low interest rates
The cost of housing finance; even for buy to let’s, is pretty much at an all-time low. Yes, lenders charge a premium for buy to let’s but they also offer discounts for lower loans to value, and the fact is that Landlords are often in a position where they have more equity than the average first time buyer. The simple fact is that you can borrow money at less than 3% if you have 25% equity in the property these days, a figure that we would have thought impossible 10 years ago. Whilst certain parts of the market, such as holiday lets and HMOs (Houses of Multiple Occupancy) are still niche segments in which few lenders operate, run-of-the-mill buy to let is now a mainstream offering with most lenders keen to help.
Doubtless the regulators would like to get their hands on this market, but thus far, schemes advanced under the last Labour government to bring in certain controls were shelved and buy to let mortgages have slipped through the net of the Mortgage Market Review. The hoops that lenders are now having to go through to check affordability on owner-occupied loans means that Landlords are getting what is effectively VIP treatment from lenders. That’s another change from 10 years back.
Landlord heaven part three: High rents
Rents are high for a variety of reasons. One of the main reasons is that there are an awful lot of tenants about. Many of them, no doubt, would be first time buyers who cannot find the deposit for a place of their own. Even though the lending industry has lightened up a little in the last couple of years and higher loan to value loans are more available than they were, getting a decent mortgage still needs a chunky deposit and wages have shifted little in recent years. Of course there is a general shortage of housing supply, because despite the recent small blip in house building stimulated by the government’s Help to Buy scheme, we still have a massive deficit in the number of new homes built over recent generations.
A word (or two) of warning
Absolutely everything in the garden is not rosy. There’s a blip up in tenant arrears and Landlords tell me that tenants are getting more and more demanding. But even here many Landlords are finding that passing off these problems to a professional letting agency does take a good deal of hassle out of the equation.
And just to put a little icing on the cake, agents’ letting fees are reducing as the shakeout in the estate agency market over the recession has prompted many to set up as letting agents and competition amongst agents is leading to management fees dropping.
We also need to remember that investing in commercial property also involves considerable costs, such as legal fees, stamp duty land tax etc. Investment in property should also be seen as a long term commitment and one, at times, which might prove to be illiquid. It may not therefore be possible to realise an investment at a time of your choosing and any forced sale could produce returns that are considerably below market valuations.
The Financial Conduct Authority does not regulate buy to let mortgages.