The buy-to-let market has expanded dramatically over the last few years. Figures from the Council of Mortgage Lenders show a 77% increase in the value of buy-to-let loans during 2001.
At the moment economic conditions are favourable which has encouraged strong demand for property. Real take-home pay is growing at its fastest rate for two years and despite recent high-profile redundancy announcements, employment levels are holding up. Mortgage rates remain low.
Although we expect some increase in interest rates, the outlook for property is relatively benign. We expect house prices to rise by at least 6% during 2002, providing possible capital appreciation for property purchasers. This means that for those with capital to invest with a long-term view on investment the housing market will remain attractive, particularly given poor returns on traditional forms of savings and investments.
However, buying requires careful consideration. Some areas have seen a reduction in rental yields over the last year as more properties become available to rent. In addition, house price performance at a local level can be quite diverse so it is important to do some research about the area where the property is to be bought. Our analysis shows some hot spots have seen price growth in excess of 20% over the last year. This is unlikely to be sustainable over the medium term. Buyers should not justify overstretching themselves to buy on the basis that prices can keep rising at these sorts of rates.
With regard to the longer-term implications of buy to let, it is wise to spread investments over a number of alternatives and investors need to be realistic about how long they wish to keep the property for and the possible return available.
All these points need to be addressed as part of a professional financial review of the investor’s personal situation.