It's a buy-to-let apocalypse

by Harvey Jones on 03 August 2009  |  43 comments
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Plunging house prices, falling rents, lack of mortgage finance and growing tenant defaults.... can anything save investors from the buy-to-let apocalypse?

Who would be a buy-to-let investor right now? After a decade of unbroken growth, amateur landlords are now fleeing their very own four horsemen of the property apocalypse: plunging house prices, falling rents, lack of mortgage finance and growing tenant defaults.

All they need is a plague of locusts for the storm to reach Biblical proportions, and New Labour has done its best to deliver, with a host of red tape and regulation.

So can anything save buy-to-let?

Conquest, war, famine and death

Tumbling property values are only the beginning of the horrors afflicting amateur landlords.

Rents have been hacked from an average £869 a month to £823 a month in the last 12 months, according to FindaProperty.com, a drop of £46 a month.

Lenders are fleeing the market in terror. The number of buy-to-let mortgages has collapsed from 4,384 in April 2007 to just 213 today, a 95% drop.

They are pricier too. The average residential mortgage rate is down by 2.6% in that time, but the average buy-to-let deal fell just 1.51%.

Lenders are also demanding minimum 25% deposits, impaling many landlords on pricey Standard Variable Rates.

Arrears continue to rise, with total unpaid rent up £1.5m in June to £254m, according to lettings specialists LSL Property Service.

And tenants on low incomes aren't the only ones behind on their rent, better off tenants are increasingly sinking into the mire.

Now bring on those locusts.

You know I don't mean everyone

Of course, not every landlord is feeling the pinch, many are still sitting pretty, and no doubt wondering why that no-nothing Harvey Jones is summoning thunder and calamity upon their heads.

But these landlords will mostly have got in early, as winners usually do. They still enjoy the comfort blanket of spare equity, and won't have much trouble finding a competitive remortgage.

This gives them the breathing space to survive void periods, when tenants are thin on the ground, and trim their rents to fill any empty properties.

Some might even have used the house price collapse to stock up on a few bargain properties.

Blessed is the lot of the experienced landlord.

Hold onto your lets!

As ever, it is the last-minute bandwagon jumper who has the worst seat, the rattliest ride, and falls off first.

Investors who bought a new-build flat at the top of the market, with a high loan-to-value and interest-only mortgage, are clinging on for dear life, praying the ride gets less bumpy. Many will already have bitten the dust.

They have my sympathy, up to a point. Most were ordinary people who spotted an opportunity to make themselves a bit better off, but spotted it too late, and dangerously overextended themselves.

But I'm also pleased the speculators have been driven out of the market, because they wreaked a lot damage in their bid to make a quick buck.

Buy-to-let bullies

During the boom, buy-to-let investors held the whip hand, using the spare equity in their homes to thrash first-time buyers out of the property market. They then rented their over-geared investments back to the people who should have bought them, and called it people's capitalism.

This helped force house prices to even more unrealistic levels while aggravating the distance between the property haves and have nots.

It also led to a dangerous market distortion, with many new-build apartment blocks three-quarters gobbled up by amateur landlords, until even the most avaricious lender wouldn't offer buy-to-let mortgages on them.

If you're interested, plenty of flats in these stricken developments are now up for auction in Leeds, Manchester, Liverpool, Newcastle and Ipswich.

It's rough justice, but not without its poetry.

Strange deliverance

Struggling landlords may be glad to hear that Apocalypse Now is slowly becoming Apocalypse Then.

In June, the average rent actually rose by £4 a month, according to LSL. Yields are stabilising and tenants are slightly easier to find. The average time a property is on the market fell from 67 days to 63 days in June, although this is still 14 days longer than a year ago.

And although arrears rose in June, the number of tenants in trouble fell, from 557,000 in May to 529,000.

This may only be a temporary reprieve, however, especially if rising unemployment leads to more arrears troubles.

Perhaps the best hope for struggling landlords is that first-time buyers start returning to the market, and take a few properties off their hands.

How ironic that they should ride to the rescue of the people who helped to price them out of the market in the first place.

Happy ending

Despite the human cost, it is only right that property speculators have reaped the whirlwind they helped sow.

Buy-to-let is still a good idea, but it got way out of hand. So good riddance to the amateurs, and fingers crossed for a healthier property market in future.

The landlords who survive will be the ones who understand the local property market, borrow cautiously, actively manage their investment, are in it for the long-term and appreciate their risks.

They will be fewer in number, and this will leave more space for first-time buyers. Then hopefully we can have a more balanced market in future.

So even an apocalypse isn't all bad news.

More: Get a magnificent buy-to-let mortgage | Buy-to-let investors are getting what they deserve