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Tuesday, 7 May, 2002, 07:43 GMT 08:43 UK
UK rental market 'wobbling'
People who have bought properties in the UK specifically to make money from renting them out - known as buy-to-let investors - have been urged to take a more cautious approach.
Income from rental properties has fallen for the fifth quarter in a row, the Royal Institution of Chartered Surveyors (RICS) has said.
But RICS said there was evidence that this was now rippling out to other parts of the country.
Too many landlords
Ray Barrowdale of RICS told BBC News Online that while landlords were still making a profit, average returns from property investments were falling.
"What's appearing now, in some parts, is a waiting list of landlords. Normally there is a waiting list of tenants," he said.
He said people needed to be careful and should do their homework before putting money into property.
Malcolm Harrison, spokesman for the Association of Residential letting Agents (ARLA), told BBC News Online that there had been a decline in rental yields in prime London areas.
Rental yields were about 5% to 6% in these areas, far off the amounts people were getting a few years ago.
In simpler terms, this means that people are on average getting between £5,000 and £6,000 a year from rental income on a £100,000 property, rather than £9,000 or £10,000.
Mr Harrison said that these 9 and 10% yields were "unsustainable".
However, while the rental yields might not be so good, people were still benefiting from the increasing value of the properties they had bought, Mr Harrison noted.
"Even if yields have dropped away from an unsustainable level, they are still getting a certain amount of the cake," he said.
According to the Council of Mortgage Lenders (CML), there are currently about 200,000 people with buy-to-let mortgages - and the buy-to-let sector, as a whole, is estimated to be about 7% of the total private rental market.
Over the last year, there has been a 77% rise in the number of buy-to-let mortgages.
Mr Harrison said that landlords who have overstretched themselves and not "done their sums" could get caught out by declining yields.
But providing they entered the market at the right time, they were still likely to make a profit, as house prices have increased so dramatically over the last few years.
Rental yields should also improve, he said, if the housing market drops.
As an existing landlord of 5 years standing, I cannot understand why new landlords are still buying. With the rental yields so low, the only business case for buying is hoping for capital growth, but this cannot be sustainable longer term.There was a similar oversupply of properties to rent three years ago causing actual rents to fall, and it took over a year for rents to recover and start rising again.
The fact that 77% of Buy-to-let mortgages were taken out in the last year is alarming evidence of a bubble in it's final throes.
A lot of people are going to get seriously burnt by this speculation.
Your portrayal of the market dynamics in this report is not as clear as it could be; in that mortgage servicing costs for most landlords have fallen dramatically in the past 12 months as interest rates have fallen. This has resulted in NETT yields ( i.e. rental income less financing costs and management fees etc ) actually improving for many landlords.
I considered buying a two bedroom flat to let. But there is too much competition in the rental market in London. 5-6% rental yields are fine if interest rates remain low but if rates rise as projected, house prices will have to fall to sustain the yield. Buying to let is not an attractive investment opportunity at present.
Some people never learn, as a finance and economics graduate, watching people argue that house prices will not fall due to low interest rates, supply demand disparites etc., is like watching someone with no notion of gravity decide that the ball they have just thrown up in the air is not coming back down due to upcurrents in the wind and the slight possibility it might be eaten by a passing albatross.
You probably all bought tech stocks didn't you.
Newbury where i live has ridiculous rent prices for 2 bed flats in the area. The equivilent in mortage payments would be to a 200,000 pound house. Landlords are becoming far to greedy in a bid to make as much as they can.
Please explain why I am wrong. I borrow some money (a mortgage), I have someone else pay off the interest/capital by giving me money to live in the house. I sell the house some time in the (distant) future and make money from the rental and from the (hopeful) property price increase. My only investment has been a deposit, some effort and the odd payment to fill in the gaps where the house is not let. How can I lose ? Each year I edge the rent up so that after (say) 10 years the rent will be well in excess of the mortgage. This is why people are still buying. Its the usual suspects who are looking for a quick return who are going to get bitten. I'm not an accountant but this seems pretty simple to me !
The fall in rental yields is part of the fall in the London property market. Buy to let investors will be forced to sell as rental income fails to cover related mortgage repayments. This is driven by the fall in business volume in Financial services over the last two years. Demand in high end properties has already dried up. Distress sales in the buy to let sector will drive the London property market down hard. Sell now for whatever you can get, it will be much less in 18 months time. My guess is that London flats could fall as much as 60% from the market high.Question marks will also be raised (in hindsight) against aggressive lenders in this sector. They will be seen as charging excessive margins and arrangement fees and failing to determine the suitability of their clients.
buy-to-let mortgages have only been available in this country due to (an unwise) change in the law. They have caused rental prices to increase as landlords expect tenants rent to cover their repayments. This has only helped fuel the house price rises and rental increases for many years. It is now cheaper to buy a property with only a 5% deposit rather than pay rent on an equivalent home in many areas of the UK. A market adjustment is long overdue along with a change in the law.
I agree with the finance graduate, there are far too many GLOBAL factors poised to threaten our economy the thought that prices will not come down is dangerous and premature. If fuel can go up 5p just because the market is feeling unsettled, how will it react (and in doing effect our economy) if the gulf once more kicks off?
Ten years ago, I rented out a property worth £50K and yielded aproximately 10% on my investment, less expenses of course. Nowadays that same property has probably doubled in value but the rental income has only increased by about 20%. Therefore my yield has dropped significantly as a percentage of my investment but the yield is increasing at say the same rate as the RPI. It strikes me that your article is simply bandering numbers around and that the TOTAL yield must be considered over the investment term and that will also include the capital gain. Property still looks like a very good investment.
It's about time people realised that so much buy to let one of the factors causing house prices to go up so much. Greedy landlords are coining it while the rest of us are struggling to get a foot on the property ladder, unable to save for a mortgage because we're paying exorbitant rents.
My wife and I have been renting for 5 years now, and in our area I have noticed an unusual activity in rent prices, that is they extremely varied, I have seen 2 bed flats advertised for anything between £700 and £1100 ! I can only assume that those expensive ones have been bought to let very recently and need a higher rent to cover mortgage costs (the clause in those mortgages where the monthly rent has to be at least a certain percentage of the value of the mortgage), but who is going to take them up on that offer? If it sits empty too long...I'd hate to see the state of the owners finances then!
In the last boom, my parents were advised to buy-to-let (by an estate agent), and all went well, until the time came to sell, just after the peak, and they couldn't get the tenants to leave. It took a court order, but by then the price had reduced dramatically.
By-To-Let owners, be warned! not that I feel sorry for you, I blame you for pricing me out of the market
Where i live, has ridiculous rent prices for 2 bed flats in the area. The equivilent in mortage payments would be to a 200,000 pound house. Landlords are becoming far to greedy in a bid to make as much as they can. no wonder the market is wobberly, with a saturation of properties to let, from my experience people are beginning to buy casuing a house shortage.
I can't believe people are still jumping on the property band wagon with the prices being so high. You just have to look at house price history to see that there are peaks and troughs, even well before the boom and bust eighties. The prices now are bound to fall at some point and people are going to get burned. Instead of paying a premium for property today, people are better off paying off any existing mortgages they have instead of saddling themselves with potential negative equity.
I am an "attempted" first buyer who cannot afford to buy any property because investors have bought all the suitable property to let - and i cannot even afford to rent it after they have leased it!
These greedy buy-to-let landlords are the main reason for the property crisis in London, and deserve no-one's sympathy. They are getting very rich indeed off the backs of the younger generation, who are unable to afford to buy the smallest flat. Gordon Brown should introduce a punitive tax on third and subsequent homes to give the young a chance, and redistiribute the money to key workers to provided deposits for the first homes.
Beware and remember the first rule of investment policy: don't put all your eggs in one basket.
In Dublin, property prices and rents have increased astronomically to levels that shock many. Paying in excess of £200k for a single bedroom flat is the norm, even in "bad" areas. The one thing we have noticed here though is, especially since the IT bubble burst, a distinct plateau in both rental demands and property prices. At one point 2 months ago almost two thirds of auction properties were failing to meet their reserve prices. While the vast bulk of the young population here have given up on the notion of ever owning their property- at least a semblence of reality and normality is slowly permeating into the rental sectors, and some rents are actually decreasing. There is not the same over supply of residential rental property here that exists in certain parts of London, but we definitively have a major problem looming in the commercial sector.
The market is becoming saturated. Buy to lets are promoted as "easy money" in the press and no real emphasis is put on the legal /safety requirements and other issues ie voids ,tenant default etc etc. The amatuer landlords will be in for a rude awakening in the near future.
It is so frustrating for people on low incomes these days. Not only can they find it a struggle to even be able to afford to buy. But even if they do wish to buy there are queues of greedy landlords waiting to snap up all the smaller properties. And as soon as that happens they put such high rents that people cannot afford to pay. It is getting to a situation where more people will be forced onto the streets.
Some very good comments here. I suffered through the over-priced-poor-quality British housing market for too many years. I'm glad I'm out of it now and living abroad. Why is British housing stock such poor quality? Everything from the plumbing to the bricks and the fixtures.
There is a reason why mortgage payments are so much lower than rents. First is intertia, it takes time for rents to come down. The other is that the BTL landord is being paid to take a risk. The risk is that house prices drop. A increase of interest rates from 4% to 6% is a 50% increase in mortgage payments. You cannot put the rent up by that much, so the landlord will either have to sell or contribute. This will cause the market to fall.
Interest rates are currently really low so it's not surprising that buy to let mortgages are so popular. A few job losses, a rise in interest rates and the picture will change dramatically. Greedy landlords will suddenly find themselves struggling to cover their mortgage repayments and second properties will then have be sold to make ends meet. For a first time buyer, I can't wait.
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