Why landlords won't profit from the rental boom
By
MoneyWeek Editor
John Stepek Aug 19, 2008
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The property crash is great news for buy-to-let landlords. At least, that's what we keep hearing.
Apparently, all those poor old first-time buyers are being forced to rent because those mean banks won't let them borrow enough money to buy a home. And people who do manage to sell their homes, aren't looking to buy again until the market stops crashing.
So that means that demand for rental property is rising, which should mean higher rents too.
There's just one problem. Demand for rental property might indeed be rising. But the supply of rental properties is rocketing too.
It seems that landlords shouldn't be cheering just yet…
Rental demand is rising, but so is the supply of rental properties
The Royal Institution of Chartered Surveyors (Rics) reports that rental demand hit a record high in the three months to July. Trouble is, the number of properties offered for rent has also hit a record. The surge has been blamed on the rise of the "accidental landlord".
Those home owners who absolutely have to move, are finding that they can't sell their own home – or at least, they certainly can't get as much as they want for it. With little other option, they are putting their homes up for rent instead.
One Rics member quoted in The Telegraph says that "the letting market is being flooded by vendors who cannot sell their house."
And as The Times puts it, "the rate at which tenants are seeking property is being outstripped by the number of rental properties coming on to the market." Accordingly, the proportion of surveyors who expect rents to rise rather than fall in the coming months, is slipping. In fact, rents in London are already flattening out. According to the FT, estate agent Savills reports rental falls of as much as 10% in some parts of London and the South East.
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So it seems that buy-to-let landlords aren't in for the bonanza the pundits had promised. The number of landlords selling out of the market remains low – it fell to 2.1% according to Rics, in the past quarter. But that's probably got more to do with the collapse in the market. After all, if home owners can't sell their houses, you can't hold out much hope for buy-to-let investors. Amateur landlords tend to own the types of properties that are usually sold to other hopeful landlords, rather than people who actually want to live in the place themselves.
Meanwhile, gross yields have also risen. But then, as yield simply measures the rent as a percentage of the capital value of the home, you'd expect yields to rise as house prices fall. If they start falling even while prices are diving, that'll be a real disaster for landlords.
The buy-to-let sector is set to shrink fast
Financial services group Skandia has warned that it expects the value of outstanding buy-to-let loans to fall from £120bn at the end of 2007, to as little as £44bn during the next five years. And even at £44bn, the market would be a lot larger than the £2bn it was worth in 1998. "Private investors have accumulated significant amounts of equity in buy-to-let properties after a long period of strong growth in home and flat values." But rising costs and "falling property prices will cause investors to reconsider their exposure to residential property," says Nick Poyntz-Wright, chief executive of Skandia UK.
The overall point makes perfect sense. There's no reason for anyone to enter the buy-to-let market just now. And even if they wanted to, lending has dried up, and rental cover and deposit requirements are far more stringent than they once were. So the number of new entrants will drop off sharply, which will mean the sector shrinks as others sell out.
Of course, Skandia is an investment group, and part of its pitch is to highlight other investments – such as the stock market – that it would prefer to see money flowing in to. After all, one reason that buy-to-let took off so sharply was the general disillusionment with stocks following the tech bust. Skandia and its peers would like to see some of that money come back. As Poyntz-Wright continues, "with inflation rising, investors realise the need for strategies that preserve their wealth. Asset diversification, as well as taking advantage of efficient tax wrappers, is an essential ingredient of any investment strategy."
House prices have a long way to fall yet
Trouble is, Skandia might be a bit too late if it hopes some of that buy-to-let money will make its way back to the stock market. All the equity that private landlords have managed to accumulate is already evaporating at a record rate, as property values collapse. Many of those who haven't sold out already have probably left it too late to salvage what's left of it.
But that doesn't mean they should stop trying to sell out. House prices have a long way to fall yet – for an idea of how far, read this story from my colleague Jody Clarke: Why house prices could fall by 50%.
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