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Saturday, July 12, 2008
Latest lending figures from the Bank of England, show that just 42,000 mortgages were approved for home purchases in May – the lowest level since comparable records began in 1993.
Each week we have read reports in the press of auction sales with knock-down prices of new flats originally bought ‘off-plan’ by new BTL investors on mortgages at inflated valuations. The reality of which is new build flats are the area suffering the most in the marketplace and as many analysts and lenders continue to raise concerns over cities developments there are still lots of flats nearing completion at a time when there’s already a surplus. Developers and building firms alike are shutting down new and existing developments, so we can be sure the supply of new-build will dry up over the next 6 months.
But the picture isn’t as gloomy as all that. Rents will continue to rise as more and more people following recent house sales, first time buyers are now at a 10 year low and existing tenants holding back from making the next property purchase whilst the housing market remains in freefall. In fact most letting properties have a glut of potential tenants and this means that the right property can demand the highest possible yields going forwards. So far, there’s no meltdown in tenant demand.
A big chunk of the BTL market is landlords owing ten or more properties, and the ones failing or bailing out are typically more recent entrants to the market owning just one or two properties.
So what does all this mean, it suggests that now will be good for landlords, with recession and unemployment still concerns, rather than realities. For landlords with 75% or better Loan-To-Value ratios, refinancing shouldn’t be a problem at about c6.5%.
But the real question is about yield. Loans to yields have been available at as low as 100% to loan value with the mortgage lenders up to the end / early this year but have all tightened their belts we are now seeing a return to rental yield requirements of 125% / 130% as they originally were 2/3 years ago and this will become an ongoing trend as lenders continue to consolidate their positions.
Yields will also tell you when its time to buy and you might ask what is the right yield for BTL? Until the boom started 5/6 years ago, BTL returns were 7-8%. Because financing improves net after-tax yields, professional lettings will always use it, but the numbers have to stack up assuming outright purchase. This suggests that 8% is a more realistic figure for long-term gross rental return yields, though of course valuations also depend on the prospects for rises in rental income.
In many parts of the country, BTL gross rental return yields of over 7% are still currently attainable.
So what does this mean going forward we expect over the next 12 months that prices of new-build flats will continue to fall until they reach a sensible relationship with existing older properties. Recent off-plan flat purchasers will continue to be repossessed or bail out, so a lot of these properties will be sold at auction and there will be plenty more doom and gloom headlines yet. But professional BTL investors will be happy to snap these properties up if they can secure rental yields of 7% or more. The big unknown is how long the mortgage famine will effect the homeowner market. The latest Bank of England aid plan has not relieved the position going forwards which has in fact tightened considerably as people find it ever harder to meet the simplest mortgage criteria. So things could be very sticky over the summer, with fewer and fewer properties being sold and the market effectively being frozen till earliest mid / late next year.
While there’s a danger of that causing a downward spiral – some analysts predict a 30% fall in prices over the next two years – this still seems unlikely unless the economic scenario worsens more than anyone expects and the longer we remain in turmoil the higher the chances are of this occurring.
Perhaps then this could be a good time to look for opportunities as a BTL investor, with ability to buy low, with little or no competition, rental yields remaining strong with a good steady demand from tenants and as long as you stay out of the flat market unless buying v strongly at auction a return to the 2 and 3 bedroom type homes looks ever more attractive.
PS Over one million homes are currently on the market in England and Wales, according to property website Rightmove. The staggering figure represents panic selling in the housing market as owners race to sell their property before house prices fall further.
Source: http://www.landlordexpert.co.uk/index.php?news=2045 |
