With first-time buyers squeezed out of the market, demand for rentals is up – and so are yields for landlords
A string of new surveys show increasing numbers of investors returning to buy-to-let as restrictions on mortgages continue to force would-be first-time buyers into the private rented sector.
Data from the Council of Mortgage Lenders reveals that in the first nine months of 2012 £11.8bn worth of buy-to-let mortgages were agreed, a 19% rise on the £9.9bn in the same period of 2011.
A survey for the National Landlords Association shows that four out of five buy-to-let investors regard their property income as their pension. About 61% plan to live entirely off their rental income when they retire, and 39% say they will choose a retirement date based on the state of the housing market and their investments’ value.
Research for Paragon Mortgages shows more than one third of brokers reporting that it is easier to obtain buy-to-let mortgages in the third quarter of 2012 than at any point earlier in the year – a higher figure than on similar surveys at any time since 2008.
The surge in interest in buy-to-let comes as average rents in the private sector in England and Wales hit a high of £741 per month, according to LSL Property Services, which owns lettings and estate agency chains including Reeds Rains and Your Move.
The lowest average rents are in northeast England at £529 and the highest in Greater London at £1,092.
“Every pound monthly rents go up, there’s another pound renters cannot save for a deposit for their first home,” says LSL director David Newnes. “This is lengthening their stay in rented accommodation and increasing competition in the private sector.”
Landlords get more good news from Savills, the estate agent. In its forecast for the 2013 housing market, released on Friday, it says average rents across the UK will rise 2.5%, and there will be a cumulative hike of 18.2% between now and the end of 2017.
The biggest rises will be in Greater London, where population and economic growth will be the highest in the UK. Savills says rents will grow 26.4% in the next five years.
“In London the number of households in the private rented sector has risen 90% over the past 10 years while the population of 20- to 34-year-olds has grown by 18%,” says Savills’ research head, Yolande Barnes. “At the same time, the average first time buyer deposit has risen from £12,000 to £58,000.”
The type of property which produces the best annual yield for landlords is likely to be houses in multiple occupation (HMOs) according to Mortgages for Business, a mortgage broker. It says yields on buy-to-let houses across the UK now reach 6.7% – thanks to recent rent increases and falling values of homes in most areas – but HMO yields are 11%.
“The owner-occupier market is sinking deeper into the mire and dragging property prices down,” says David Whittaker, managing director of Mortgages for Business. “It’s great news for buy-to-let investors, able to snap up cheaper property, usually at a higher loan to value ratio because lenders are willing to advance more when property prices are lower.”
Such landlord optimism is based on the assumption that mortgages will remain hard to secure, particularly for first-time buyers.
But investors who believe they can enjoy a double benefit of high rents and long-term capital appreciation, twin benefits of buy-to-let until the downturn, may have to think again. Estate agent Knight Frank is forecasting that house prices – which across the UK are already an average of 10% below pre-downturn peak levels – will slide further in 2013. Falls will vary from 0.6% in Greater London to 3.8% in Wales.
“A further correction is needed as the relationship between average earnings and average house prices is well above the long-term average,” says Grainne Gilmore, Knight Frank’s head of research.
In a warning to the entire market, she says average prices seen in 2007 will not be regained until 2019 at the earliest, making this the longest housing downturn for six decades. Even more startling, Gilmore claims: “Once inflation is stripped out, average UK house prices are unlikely to hit 2007 levels again in real terms until 2031.”
The emphasis for landlords will therefore be on rental income and not capital growth, a fact which means only one thing – hard-pressed tenants will have to pay even more in future.
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