Housing bubble fears 'overblown'

Recent reports have stoked buy-to-let bubble fears

Fears that the buy-to-let market could trigger a house price crash are exaggerated, new research suggests.

The report by housing economist Michael Ball for the Social Market Foundation says there is no evidence that the buy-to-let sector is over-mortgaged.

"The doom-mongers are almost certainly wrong about buy-to-let," said Professor Ball, from the University of Reading.

Recent reports have warned the upsurge in people buying houses for rental could be feeding a property bubble.

In February, investment bank Durlacher forecast a fall in house prices of 30% from their peak, driven partly by the way that buy-to-let mortgages had outstripped those taken out by first-time buyers.

Several other institutions and economists have also said recently that the buy-to-let factor is increasing volatility in the market and might prompt a sharp price downturn.

House prices are like the weather: everyone has an opinion Michael Ball, Reading University

Remortgaging of existing properties to fund buy-to-let meant that flat rents and thus returns from the sector gave it an effect on UK house prices far beyond its small slice of the overall market.

Key role

But in a paper about the private rental sector compiled for the Social Market Foundation, the Royal Institution of Chartered Surveyors and housing investors' lobby group the British Property Federation, Professor Ball said the concerns were based on insufficient evidence.

"House prices are like the weather: everyone has an opinion and everyone thinks they know what's going to happen," he told BBC News Online.

The result was the appearance of certainty about future prospects where none existed, he said - not least because hard evidence about the rental market is even more sketchy than about the mortgage business.

"What's more important is to take a more level-headed view rather than make it sound like crash, boom, crash."

The private rental sector was playing a key role in UK housing - albeit on a much smaller scale than in some European countries - and needed to be encouraged, he said.

'Low risk'

In particular, he warned that predictions of a collapse caused by the knock-on effect of falling rents and returns on buy-to-let owners with heavily mortgaged properties were probably wide of the mark.

"The arguments that are being made for a crash sound like they're taking events with a fairly low probability and making them sound like certainties," he said.

Professor Ball calculated that less than 30% of the 2.4 million private rented units in the UK have mortgages, and a far smaller percentage are highly leveraged.

Some of the doomsayers are "assuming that all the highly leveraged people are not going to get tenants", he said.

To keep the market contributing to the national need for property, Professor Ball recommended the government should move ahead with Property Investment Funds (PIFs) to encourage investment in a housing market increasingly dominated by small-scale firms and individuals.

He also called for tax incentives such as the depreciation allowances common in Australia and Germany, to encourage rental property owners to invest in refurbishing their properties.