Useful website for tenants/lodgers:http://wwwshelter.org.uk/http://www.shelter.org.uk/
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MSE - Forums > Pure Money » House Buying, Renting, Selling & Prices Forum:http://forums.moneysavingexpert.com/forumdisplay.html?f=16http://forums.moneysavingexpert.com/forumdisplay.html?f=16
Buy-to-let landlords head for the exit
The proportion of buy-to-let (BTL) landlords selling properties has risen to its highest level for two years as agents report a glut of flats for sale. Could the property market be turning down?
The Royal Institute of Chartered Surveyors (RICS) produces the authoritative quarterly survey on the UK BTL market. Its latest shows that in the three months to April, 5.2% of landlords sold properties, a sharp rise from the 4.1% of the previous quarter.
Falling yields and rising interest rates were the probable triggers, but while in most areas the conventional residential housing market is pretty tight, many agents now report gluts of flats for sale in many parts of the south-east - a development Ive been predicting for several months.
Demand for lettings is over-concentrated
And heres a straw in the wind: individuals now account for the highest-ever proportion of new lettings (83%), while students now barely feature in the figures and corporate letting are down to their lowest level of under 10%. Students have got nice new purpose-built student blocks which are financed by pension funds, so they dont need to rent normal flats, and most companies with spare cash will buy a flat rather than rent it. Sharply lower demand from two groups of potential tenants isnt good news for landlords.
Leave early to avoid the rush
You may think that one in 20 landlords selling properties isnt that many, but the price of property is set at the margin - its the extra few properties for sale in an area that bring asking prices down. With another interest rate rise almost certain in the next few months, the returns for new BTL investors are falling, and though this hasnt yet been reflected in new BTL loans, thats the next area where I expect to see a significant change in the trend in the next few months. If we get lower demand and rising supply, theres only one way prices can go.
Any BTL landlord thinking about taking chips off the table should do so fast, in my view - its best to get in ahead of the rush. RICS predicts a soft landing for BTL - well, they would say that, wouldnt they? In the very long run, you may still do OK from BTL, but the next few years are likely to see price declines for new-build, especially blocks that have been sold off-plan and where early buyers are looking to flip.
It isnt cool to bank on a greater fool
When I search for off plan, I get links to hundreds of firms promoting high-risk property investment from here to Thailand. That alone should tell you its getting too warm out there.
Off-plan investing was huge in the US in 2002-05, but has since crashed and burned. The concept is simple and terribly appealing. For signing up to buy a flat in a new-build block, you only need to put down a 10% deposit - sometimes even less. If - as you and the developer hope - prices keep rising, you sell your flat on before its even built for a fat profit. How fat? Well, if the price of a £200,000 flat rises to £215,000, and you only put down a 10% deposit, then you have made a gain of £15,000 on an outlay of £20,000, which is a 75% profit margin. In the US, hundreds of thousands of people played this game and flipped their condo purchases at a profit from 2002 onwards. But, as in Old Maid, those left holding the cards when it all went wrong in 2006 lost not just their deposits - because the contract required them to pay the full price. Many were bankrupted as they had to buy flats they had contracted to pay for £200,000 but that they could only sell for £150,000. The US property market is still falling.
In the UK, the game has been a little more sophisticated. Developers have joined forces with clubs or marketing operators to sell off-plan at a discount and with rental guarantees. Often, the rental income guaranteed for the first year or two is well above the actual free market rent in the area. That makes the flat look like a good investment. But its real capital value depends on the free market rent it can command, so unless theres a big rise in rents after you buy, you could find the resale value lower despite the discount. Ive watched with some amusement over the past three years as UK mortgage lenders have regularly upped their Loan-To-Value maximums, lowered the rent cover requirements and generally made getting a buy-to-let mortgage easier than a homeowner one.
Bankers will even tell you with straight faces that lending on buy-to-let is less risky than lending to salary-earning homeowners. You dont have to think hard for long to realise that simply cannot be true. One thing Ive learned in 35 years of watching the financial markets is that when bankers fall over themselves to lend money on something, its better to be a seller than a buyer.
One way of looking at off-plan purchases is that you are going into partnership with the developer. Your deposit replaces costly (and maybe hard-to-get) bank lending so that the place can get built. But if the developer doesnt sell enough off-plan, and cant get enough bank finance to complete, then the project could grind to a halt, locking up your money until some sort of sale can be achieved. There are thousands of unfinished condos all over the US where off-plan investors may eventually get back a few cents on each dollar they invested.
Flip off abroad
So far, UK off-plan buyers have been able to flip profitably, thanks to falling interest rates and rising rents. Now interest rates are rising. Rents have risen too, but not nearly as fast as mortgage repayments. So increasing numbers of potential buyers, especially younger ones, are deciding the game is more profitable overseas- Bulgaria, Turkey, Croatia, Thailand. Thats where the off-plan party has migrated. I guess its natural for a party to migrate to where the booze is cheaper and the cops are always fast asleep.
In these countries the off-plan game gets much, much riskier. Many of the firms doing the developing are one-off cowboys. Local law may make it hard to establish 100% bomb-proof legal title; theres not a well-developed local rental market, so what the actual free market rent of a property is may be hard to establish (and could be affected anyway if theres a huge rash of development going on); the promoters, who earn big commissions on sales from the developers, are unlikely to be around to deal with any problems that arise; local mortgage lenders may prove somewhat more muscular in repossessing a property if you dont pay your interest than would be the case in the UK.
Both here and in the relevant countries, property investment is unregulated and caveat emptor applies in its red in tooth and claw form. Few countries have a developed framework of commercial law governing property investing, which means going to court will be expensive.
In fact, off-plan investing is not investing at all - which implies a long-term commitment- but speculation. It is based on the expectation that there will be willing buyers you can sell to at a good profit. And the big risk is: what if there arent? The greater fool theory says that its OK to be an idiot when you buy something so long as theres an even bigger idiot who you can sell to. But as US off-plan speculators have discovered, the greater fool game gets very ugly when the music stops and the idiots suddenly all wise up. So the rule you should apply if you want to join this or any other speculative game is: only play with money you can afford to lose.
In the worst-case scenario the one being played out right now in the US - you could lose all of it. Do not kid yourself that there are special factors that make it different here, there or anywhere else. The present off-plan property game in undeveloped countries is about as obvious a bubble as Ive seen in the past 30 years. After the boom there will be a bust. Leave the party while there are still plenty of people arriving if you want to avoid a nasty hangover.
by Chris Gilchrist
June 07 2007http://money.uk.msn.com/Mortgages/BuyToLet/article.aspx?cp-documentid=5182780http://money.uk.msn.com/Mortgages/BuyToLet/article.aspx?cp-documentid=5182780
A very interesting article I believe and extremely poignant if anyone has purchased a house recently, BTL or not.