For the past 3 years some commentators have been predicting the imminent collapse of the Buy to let sector. House prices are rising faster than both average earnings and now rents. The economic fundamentals behind the strength of the sector are starting to decline. However despite concerns there are some reasons to be optimistic
Strengths of Buy to Let Sector.
Mortgage defaults are lower in the But to Let sector than other areas of the Housing market. The proportion of buy to let mortgages 3 months in arrears is only 0.59% lower than 2006 and lower than the average for the UK housing Market 0.89%
Continued shortage of housing is pushing up prices of renting. Not by as much as house prices, but the strong demand for the rented sector means that the amount of time when the house is not occupied is much less.
Foreign workers continue to move into the UK from the EU. This is another factor strengthening the renting sector of the housing market.
Relatively low real interest rates (real interest rates = nominal interest rates – inflation. It is a more accurate guide to the real cost of borrowing). Despite 3 rises in interest rates in the past 6 months real interest rates are still quite low, especially if the old RPI measure is used for measuring inflation.
Weakness of Buy to Let Mortgage Sector
Rental yields are falling because of the rampant house prices inflation.
Banks are making it easier to get a buy to let mortgage through relaxing the rental yield returns. Alliance & Leicester for example require only rental yields of 100% for some buy to let (traditional return is 130%). This makes an increasing number of buy to let mortgage susceptible to a rise in interest rates.
Interest rates in the UK are still predicted to keep rising because of the underlying strength of the consumer sector and consequent inflationary pressures.
New licensing regime for renting. This makes landlords hand over tenant deposits to government 3rd parties. There are also more restrictions on the quality of the rented sector.
R. Pettinger manages a site about Mortgages in the UK. This site includes a guide to different types of mortgages and news about UK Housing Market and the UK mortgage industry. http://www.mortgageguideuk.co.uk/blog.html