House-cowed
Buy-to-let landlords could be forgiven for feeling fearful as capital gains dry up and mortgage terms get tougher. Sylvia Morris reports
Investors in buy-to-let property had a difficult 2009, as mortgage loans dried up in the credit crunch. Experts predict that, for those who have to borrow heavily to finance their investments, 2010 will be just as tough.
Investors are caught in a double pincer of rising mortgage costs that eat into their income and no capital gains. At the same time, they could find renting out their property more difficult.
Lenders are not willing to put up funds for those with less than a 20 per cent stake in their property. New buy-to-let investors who need to borrow more than 80 per cent of the value of a property have been shut out of the market. Those in the market with loans above this level will have to revert to their lender’s more expensive loans when they come to remortgage, which will eat into their profits. This situation is expected to continue during 2010.
Tough times
David Hollingworth, mortgage specialist at mortgage adviser London & Country, says: ‘The lack of mortgage finance is an issue for new investors. And those with only a small amount of equity in their property have no option but to go onto standard variable rates with their existing borrowers. The market will be okay for established landlords with modest or large portfolios and experience in the buy-to-let market. Smaller investors are unlikely to not be there.’
Martin Ellis, housing economist at Halifax, agrees: ‘With no big capital gains to be had, the market will be dominated by professionals and institutions.’
However, this environment can give cash-rich buyers the opportunity to pick up property cheaply from distressed sellers, as long as they are willing to wait for capital gains. That’s because property prices are expected to fall in the short term. The boost in house prices in the second half of 2009, due to a property shortage, is not expected to last.
Tony Key, professor of real estate economics at City-based Cass Business School, says: ‘Increased unemployment and tax hikes mean the recovery in house prices will be short-lived. I would expect them to fall by 5 per cent or 10 per cent in 2010.
‘The buy-to-let market is a very different ball game now. Over the 15 years to 2007, investors made an average real return of 4.4 per cent a year. In the next few years it will be much lower.’
Ed Stansfield, property economist at Capital Economics, adds: ‘While the timing remains highly uncertain, if the market were to move back to a better short-term demand and supply balance then, with mortgage credit still rationed and unemployment rising, the recent upward pressure on prices could reverse pretty quickly. If so, we expect house prices to drop back, perhaps by 10 per cent, in 2010.’
Forced sales
Liam Bailey, head of residential research at estate agent Knight Frank, expects prices to fall by around 3 per cent in 2010. He says: ‘Continuing growth in unemployment, allied to wage freezes and tax rises, and a rise in average mortgage rates will force a number of sales which, in the absence of greater demand, will see prices slipping back.’
However, there will be regional variations. He adds: ‘Our forecast points to annual growth of 3 per cent in central London prices in 2010. It will benefit from the global economic recovery. Sterling is set to remain relatively weak in the medium term, encouraging international demand.’
Potential first-time buyers who cannot afford to get on the bottom rung of the property ladder will keep up demand for rented property. But unemployment could dampen it, according to Stansfield.
‘Demand for buy-to-let is hard to read. Developments in the labour market may be more damaging for landlords over the next year or two than for the mainstream market. The rise in unemployment among the young – a key demographic in the private rental market – suggests that a rise in tenant defaults cannot yet be ruled out.’
