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Making the first move

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  • 17/06/2003
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With first-time buyers dwindling, the buy-to-let market is set for another phase of growth and brokers should not fight shy of developing this area of their business

As discussed in the previous features, only a few months ago the media were claiming that the buy-to-let bubble was about to burst, but such claims are beginning to look far fetched when set against the backdrop of the changed state of the housing market. And it now looks a fair bet that the buy-to-let market is on the cusp of yet another phase of growth.

In this current uncertainty first-time buyers, and to a lesser extent home-movers, are reluctant to commit their financial future to a new home. Many fear they may get caught out by dipping house prices if they buy into the market at this stage, and are happy to play a waiting game until they feel more comfortable about such a large commitment.

Figures from the Council of Mortgage Lenders (CML) confirm this trend. The proportion of mortgage lending accounted for by first-time buyers fell below 30% for the first time ever in February. Only 29% of all lending for house purchase was to first-time buyers, compared to a long-run trend of more than 45%. And overall gross mortgage lending eased back from £19.4bn in January to £17.8bn.

The knock on effect of this is the market has started to turn towards the rental sector again as many would-be first-time buyers have decided to rent for a further six to 12 months and see what the next year brings for the property market.

This process, like all other economic trends, is cyclical. The rental market boomed in the early 1990s when interest rates were high, and the property market entered a period of negative equity. Prospective buyers deferred purchase, and saw renting as a safer and more financially attractive option.

Obviously the current economic climate is not comparable with the events experienced in the 1990s. Nevertheless, the withdrawal of first-time buyers from the property market is leading to an increase in demand for rental properties.

The shrewd property investor is already using this relative lull in buying activity to leverage purchases.

Many estate agents will admit that some properties have been on their books for a disconcertingly long period of time. John Archbold, business development director at Allied Surveyors, one of the UK’s largest independent firms of chartered surveyors, admits that there is a downturn in prices in some previously overheated hotspots, particularly apparent in the South and in the upper end of the market where sales are often being agreed well below asking price.

Easing prices will help to improve investors’ rates of return, which had dropped to as little as 3%-4% for prime property as a result of price increases over the last two to three years.

With the potential to negotiate 10% plus discounts on property purchases, landlords can instantly see a better return on their investment. More importantly, they can take advantage of any future rise in rental prices as demand grows.

Long-term growth

Astute landlords are looking to strike bargains with eager sellers happy to accept a reduced price to move things forward. Not before time the long-term potential of the buy-to-let market is becoming apparent. However, the UK rental sector is still small in comparison to most other parts of the world, and it represents a small proportion of lending.

At the end of 2002 there were an estimated 275,500 outstanding buy-to-let mortgages worth £24.2bn ‘ accounting for around 3.5% of all residential mortgage lending, according to the CML.

And yet buy to let remains a relatively safe investment. No one needs to be reminded about the disastrous performance of other forms of investment in recent years. And the low level of default for buy-to-let mortgages speaks for itself. Only 0.42% of buy-to-let loans were three months or more in arrears at the end of 2002 ‘ less than half the equivalent proportion for the whole mortgage market.

Therefore advisers need to be reminding their buy-to-let clients of the changing dynamics of the market. If they are not already doing so, they should be considering new purchases. There is now plenty of potential for intermediaries to set up a forward buying facilities or capital raise on existing properties to assist portfolio growth for clients.

Professional investors tended to pull out of the market around a year ago as values rose and rental yields suffered. This is changing rapidly, as demand for rented property rises and prices level off. Intermediaries can be sure that smart landlords are now reviewing their options and planning their next moves.

Growth in the mainstream mortgage market is predicted to slow this year, so, if they are not already doing so, intermediaries should be looking to re-focus their efforts on the buy-to-let sector. If they do not, they have only themselves to blame if their business suffers as a consequence of lack of activity in other areas of the market.

key points

Recently only 29% of lending has been to first-time buyers, meaning that more will be looking to rent.

The property market is slowing and estate agents are more open to dropping prices.

Professional landlords need to discuss getting back into the market during this lull.

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