Only extreme optimists should buy to let
One optimistic interpretation of the recent stockmarket turmoil is that it’s good news for the property market. Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors, told The Independent that people “who were thinking of dipping their toe into the equity market may now be tempted to forget about stocks and buy to let instead”.
It’s one way to look at things. It’s also entirely wrong. The focus on stocks has made it easy to forget that this crisis in fact originated in property. Lax lending standards in the US have lead to soaring arrears and repossessions, which are now spilling beyond the ‘subprime’ (or high-risk) sector. The ensuing panic has made borrowing money more expensive across the world.
That’s already having a knock-on effect on UK lenders. Our own subprime sector accounts for about 10% of home loans, according to The Independent, and at least seven such lenders in the UK, including DB Mortgages and Infinity Mortgages, have hiked interest rates by as much as 1%, or simply stopped lending. Mainstream lenders such as Northern Rock, faced with higher borrowing costs themselves, may have to raise rates too. This will mean fewer people can afford to enter the market, putting more downward pressure on property prices. Higher borrowing costs will also make it even harder for budding buy-to-let investors to cover mortgage interest payments.
The coming UK property crash - and how to avoid it
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Even the mighty London market may be vulnerable. The stockmarket woes mean that City workers can’t expect to get the whopping bonuses they have become used to in recent years. “This, in turn, will dampen the housing market in London,” says Edmund Conway in The Daily Telegraph. Some of those who have bought properties using mortgages based on continued hopes of high bonuses may even be forced to sell. So if you’re tempted by buy-to-let, remember – stocks may be volatile for a while, but there will be some decent investment opportunities by the time it all settles down. It’ll be much longer before we see good value in UK property again.
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