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EDITIONS
Wednesday, 29 May, 2002, 16:56 GMT 17:56 UK
The buy-to-let bubble softens
An estate agent's window
Fewer buy-to-let deals could mean less pressure on housing stocks

Traditional etiquette dictates that certain subjects are forbidden at social gatherings.

The troika of taboo topics usually includes sex, politics and religion - which, on the face of it, would pretty much silence most people.

The novelty has worn off... There'll be nearer 4-5% growth a year rather than the double digit rates we've seen

Richard Cole
Datamonitor
Not in the UK, though. As long as Britons are allowed to babble about housing - prices, locations, mortgages and the whole panoply of bricks-and-mortar questions - then they will chat till the last bottle runs dry.

But some of the fun could be about to depart this conversation piece.

The past five years have seen a soaring number of individuals investing in houses and flats which they then rent to third parties.

Almost one in 25 mortgages in the UK are currently for this purpose, statistics from research group Datamonitor suggest.

But Datamonitor and a clutch of other organisations are now warning that the party is over.

The shine comes off

"The novelty has worn off," says Richard Cole, Datamonitor's financial services analyst.

"The boom looks set to taper... there'll be nearer 4-5% growth a year rather than the double digit rates we've seen."

And Patrick Currie, chief executive of property database company Hometrack, agrees.

"The bloom is off the rose," he told BBC News Online.

"The easy money's gone.

"There are clearly more risks, there are fewer properties to buy - it's not a no-brainer - there are fewer renters around, and interest rates could well go back up."

A game everyone can play

But hold on just a minute. Ten years ago, no-one but the wealthy would have even considered buying a second, third, fourth or even fifth home to do up and rent out.

An upscale London terrace
The financial services recession has hit up-market rental demand
Now, as Mr Currie points out, he finds himself in taxis where the cabbie is bemoaning the fact that his string of flats are becoming harder to offload.

"You get the cab driver saying he's a little worried because two properties in the east end of London were so easy to rent out to American mugs working in the City of London a year ago, and now he can't find takers for them," he says.

What changed was a one-off set of circumstances.

In 1997, a change in the law meant it became easier for landlords to evict tenants who weren't paying their rent.

Suddenly, lenders took a new-found interest in the letting market.

It's much safer, after all, to lend money secured on a property if you're sure the borrower can lay his or her hands on it if required.

No alternative?

Combine that with a return to the boom days of the housing market - which by the mid-to-late 1990s had finally recovered from the trough seen earlier that decade.

The rapid climb in house prices meant more and more people were having to rent as mortgages spiralled out of the reach of their salaries.

Finally, stir in the stock market slump which began in 2000 and the consequent dive in interest rates - now at a 38-year low of 4% in the UK.

At the same time, the UK's traditional obsession with investing in housing remained undimmed.

No wonder, then, that the buy-to-let market went batty, with the total amount of buy-to-let mortgages more than doubling to 6.6bn in 2001 from 3bn in 1999.

Turnaround

But not anymore, if the surveys are to be believed.

There's still opportunities to make money... But the days when a rank amateur could jump in and hope to make a killing are gone

Patrick Currie
Hometrack
It is no longer the case, as in 2001, when anyone wanting to see a decent return was avoiding the stock market - and cash investments - like the plague, points out Datamonitor's Richard Cole.

Interest rates, too, are likely to go up in the medium term.

A single percentage point rise - by no means an impossibility - could see mortgage interest payments go up by 25%.

And as Mr Currie maintains, rents aren't going to go up again any time soon.

In London and some other big cities, the boom in financial services helped feed buy-to-let; but those days are over.

"The reality of the situation is that we've seen rents on the most expensive places go down by as much as 40%, and even mainstream prices are down 10%," Mr Currie says.

"What that means is if you're buying to let, you're going to get yields of about 4%, and that's going to make it pretty difficult to cover your mortgage unless you have a very big deposit."

Still, those with more modest ambitions might not do so badly.

"The top-end market is distinct from the Peckhams of this world, catering to the real world rather than the City," he said.

"Maybe yields have fallen off a little bit, but they didn't have explosive growth in the first place, so they're pretty steady."

Down to earth

So what next for buy-to-let?

The experts are in agreement - the odds on a loud popping noise and a massive implosion are very slim indeed.

The most likely outcome is a slowdown, as buy-to-let becomes just another investment, rather than a golden egg-laying goose.

Do your homework, research the market, cast around for as much expert advice as possible and be prepared to dig in for the long term - and there's probably a place for buy-to-let.

"There's still opportunities to make money," says Mr Currie.

"But the days when a rank amateur could jump in and hope to make a killing are gone."

Dinner parties will just have to be that little bit quieter in the future.

See also:

29 May 02 | Business
29 May 02 | Wales
29 May 02 | Business
28 May 02 | Business
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