Buy-to-let still breaking records

Contrary to many peoples expectations, the buy-tolet sector continues to grow at an unprecedented pace, with new lending figures for the first half of 2006 surpassing the previous record set in the second half of 2005.

In the six months from January to June 2006, 152,500 loans (purchases and remortgages) worth a total of £17.5 billion were advanced to landlords - 17% higher than the record set in the previous six months in terms of volume, and 20% higher by value.¹

That brings the total number of buy-to-let mortgages outstanding to 767,000 with a total value of £83.9 billion, accounting for over 8% of the value of all outstanding mortgage lending.

Equity growth overtakes rise in house prices

Whilst current average returns from property investments are reasonable, the continuing rise in house prices coupled with the gradual increase in interest rates may make it more difficult for landlords to gain such high yields in the future. This may put some downward pressure on the numbers of new purchases made by investors over the coming year, assuming the trend continues.

Another factor to consider is the relationship between stock market performance and investment in property

Equities have made a slow recovery since their low in 2002 and this has been regarded as one of the factors contributing to the rapid expansion of the buy-to-let sector. However, since April 2005, equity prices have been growing faster than those of house prices and this reversal in fortunes is seen in some quarters as an indication that investment may now flow back towards the stock market, although professional landlords are unlikely to pull back.

Equity investment and buy-to-let ownership can also attract very different investor types, with equities perhaps being more suitable for those who enjoy a higher risk and making quick decisions, whilst buy-to-let is a more long term investment that involves less day to day volatility.

Opportunity of foreign worker growth

Looking at long-term prospects for the buy-to-let sector, much attention has been directed to the growing numbers of people coming to work in the UK from countries which have recently been accepted into the European Union.

The majority of these people are renting and, in some parts of the country, they form an important part of the rental community. This has been particularly beneficial for landlords in these areas, as it has helped to keep void periods to a minimum whilst maintaining rents at a reasonable level.

However, the government is now introducing regulations to limit the number of Bulgarian and Romanian workers coming to work in the UK when these countries join the EU on 1 January 2007.

However, with income in countries such as Poland gradually rising, there is a possibility that fewer people will choose to come to the UK in future years, meaning there are not enough new entrants to replace those going home.

There has been some speculation that this, coupled with the fact that immigration will be limited from Bulgaria and Romania, will lead to a significant downturn in the buy-to-let sector in areas where large numbers of foreign workers are concentrated.

Source 1 - www.cml.org.uk/cml/statistics, Buy to let mortgages, market summary, 20 November 2006

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