Buy-to-let property investment is today’s hot investment ticket
We recently had a question posted to us from a potential property investor. Before he and his wife stepped into property investment opportunities, he wanted to know our thoughts about the competition from other buy-to-let investors and what effect it would have on rental prices.
Here I’ll tell you why I think buy-to-let property investment concerns are overdone, especially when it comes to rental prices. You’ll also read some very revealing comments that were posted in response to an article about buy-to-let property investment on a respected news website – these comments, many from experienced property investors, could be some of the most compelling I’ve ever read (and not for the reason you might suspect).
Rental prices are going up – here’s why
· The housing market is evolving rapidly in favour of buy-to-let property investors
Since World War II, the UK property market has grown drastically. It’s moved from one dominated by private landlords, through the social (council) housing, to private ownership (Thatcher’s right-to-buy policy), to the private rented sector (PRS).
· PRS is growing faster than ever
The PRS is expected to increase at an incredible pace over the next ten years. Today there are around 5.4 million households that rent from private landlords. According to PwC, by 2025, a quarter of all UK households will be renting in the PRS. That’s 7.2 million households – 1.8 million more households than today.
Demand for rental properties is rising strongly
· Buy-to-let investors are withdrawing from the market
The Council of Mortgage Lenders has recently announced that new buy-to-let mortgage applications are running at around 6,000 per month in 2016. That’s down by around 53% on the number during the previous year. Estate agent Haart has said that its buy-to-let transactions were down by more than 60%.
It is a clear indication that buy-to-let property investment has reduced. Property investors are running scared of the effects of the changes to UK property tax:
- The change to mortgage interest rate relief
- Stamp duty increases
- Scrapping of maintenance allowance
Supply in the PRS looks like it could be constrained in the coming years, at exactly the time that demand for rental properties is rocketing.
It’s this dynamic that leads me to believe that now could be a great time to invest in buy-to-let property. If the research, studies, and analysis from all corners of the property market are correct, there’s going to be less competition and more demand in the PRS.
Be cautious about “advice to be cautious”
An article on the BBC website titled “UK rental market ‘wobbling’” reported that “People who have bought properties in the UK specifically to make money from renting them out – known as buy-to-let investors – have been urged to take a more cautious approach.”
It spoke of falling rental yields in London and a rippling out to other parts of the country. A representative from RICS said that average returns from property investments were falling, rental yields were going down, and property prices were rising.
Comments on the article include:
As a current landlord of five years standing, I cannot understand why new landlords are still buying. With the rental yields so low, the only business case for buying is hoping for capital growth, but this cannot be sustainable longer term. There was a similar oversupply of properties to rent three years ago causing actual rents to fall, and it took over a year for rents to recover and start rising again. The fact that 77% of buy-to-let mortgages were taken out in the last year is alarming evidence of a bubble in its final throes. A lot of people are going to get severely burnt by this speculation.
Richard, Nottingham, UK
I considered buying a two bedroom flat to let. But there is too much competition in the rental market in London. 5-6% rental yields are fine if interest rates remain low, but if rates rise as projected, house prices will have to fall to sustain the yield. Buying to let is not an attractive investment opportunity at present.
Some people never learn. As a finance and economics graduate, watching people argue that house prices will not fall due to low-interest rates, supply demand disparities etc., is like watching someone with no notion of gravity decide that the ball they have just thrown up in the air is not coming back down due to currents in the wind and the slight possibility it might be eaten by a passing albatross. You probably all bought tech stocks didn't you?
I can't believe people are still jumping on the property band wagon with the prices being so high. You just have to look at house price history to see that there are peaks and troughs, even well before the boom and bust the eighties. The prices now are bound to fall at some point, and people are going to get burned. Instead of paying a premium for property today, people are better off paying off any existing mortgages they have instead of saddling themselves with potential negative equity.
Stefan Gibney, Sussex
And then there is this one:
Please explain why I am wrong. I borrow some money (a mortgage), I have someone else pay off the interest/capital by giving me money to live in the house. I sell the house sometime in the (distant) future and make money from the rental and from the (hopeful) property price increase. My only investment has been a deposit, some effort and the odd payment to fill in the gaps where the house is not let. How can I lose? Each year I edge the rent up so that after (say) 10 years the rent will be well more than the mortgage. It is why people are still buying. It’s the usual suspects who are looking for a quick return who are going to get bitten. I'm not an accountant, but this seems pretty simple to me.
Dave R, UK
Now let me tell you when the article and the comments on it were published: May 7th, 2002. And here’s what’s happened to the UK buy-to-let property market since:
- Average monthly rent in 2002, £390 – Average monthly rent in 2016, £892 +128%
- Average house price in 2002, £103,501 – Average house price in 2016, £205,937 +99%
During this time, as rents and investment property values have doubled, interest rates have taken mortgage costs down. In fact, on that investment property bought in 2002, the average mortgage interest rate was 5.1%. On a 75% mortgage, the interest would have been £320. Today that mortgage would cost around £281.
If you’d taken the advice of that article back in 2002, or of the majority of commentators which included property gurus, economics graduates, and buy-to-let landlords, you’d have missed out on doubling your capital and a positive cash flow today (after mortgage interest) of about £600 per month.
This lesson from history tells us that Dave R should, by now, be a rich man from property investment, while there are a lot of people who decided property investment was a poor investment and missed out. I expect that the story will be similar in another 14 or 15 years.
How can you take advantage of today’s strong buy-to-let investment dynamic?
The changes to UK property tax is an issue that all property investors face. Many are investing under a limited company or partnership structure to reduce the tax burden and increase profitability. Whether such a setup is best for you depends on your personal circumstances and tax position.
Contact one of our team today on +44 (0)207 923 6100, and we’ll be happy to discuss the benefits of different investment structures and help you make the profits that so many missed because they were too cautious about the prospects for the rental market back in 2002.
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STOP PRESS! CBRE has just announced a revision to the need for new homes. It says that London now needs to build 52,000 new homes per year and that only 300,000 are planned in the next decade.