Don’t buy to let on a falling market
Last updated 09:56, Monday, 23 June 2008
Here in the UK we are obsessed with property. People who would not invest £10 in the stockmarket because it is too risky are comfortable with the notion of borrowing thousands of pounds to buy a house, spend thousands more on renovations and then let a complete stranger live in it.
Some people have made a lot of money from doing this, but is it still a good investment?
In November 2007 I wrote about how the credit crunch had reduced the number of mortgage deals available to house buyers.
The buy-to-let market has seen the number of mortgage deals available fall by 73 per cent since then.
Those lenders willing to make money available will now expect a deposit of between 20-30 per cent rather than the 10-15 per cent acceptable then.
I have always been a fan of property as an investment, but not convinced enough to join the crowds of buy-to-let speculators encouraged into the market by TV programmes showing how easy it is to make your fortune by becoming a property developer. After all, the value of property never goes down – does it?.
“House prices are down six per cent in just the last five months, and the worst of the credit crisis still lies ahead,” said Michael Saunders, head economist at Citigroup. He had predicted that house prices would fall by 15 per cent in 2008 and 2009 but now he says that drop could be even greater.
People who got into the market early enough should have sufficient equity to ride out the storm, as long as they have the right tenant – one who can afford to pay the rent.
A survey by market researcher BDRC found that profitability among landlords is at its lowest and levels of missed rent at their highest since the survey began (admittedly only in October 2006).
Nearly one in five landlords had missed a mortgage payment in the past quarter because of non-payment of rent.
So, to answer my own question – is buying to let still a good investment? – would have to be no... for now. The one thing that isn’t rising in price just now is property. This month we heard the Royal Institution of Chartered Surveyors say that sales are at their lowest levels since records began in 1978.
Let’s just be clear on that – housing sales are now lower than they were during the crash of the 1990s.
In the past three months, the numbers of sales per estate agent has fallen to 17.4, down by about 30 per cent on the year, and compared to 26 per agent in the depths of the 1990s crash.
The theory behind successful investing in any market is to buy low and sell high, so on that basis buying while prices are falling may not be the most sensible approach.
I would be tempted to stay away from the buy-to-let market for a little while. If you are still keen on property investment why not consider a good property fund? This will give greater diversification, including international property, without the hassle of direct property investment.
- For advice on property investment call freephone 0800 195 2161 or email moneymatters@armstrongwatson.co.uk.
