How Has Buy to Let Performed?

Investments these days invariably come with the warning that past performance is no guarantee of future success and this must be borne in mind when making investment decisions. Some analysts have pointed to a slow down in price growth and suggest that affordability has left little room for future gains to rival growth over the last decade in the UK property market. Nonetheless many landlords would argue that by investing in the right property there is still money to be made in the buy to let market.

According to the Council of Mortgage Lenders buy to let mortgages totalling L38.4 billion were taken out in 2006. This is the equivalent of 11% of all new mortgage lending and is a 57% increase (in terms of value) on 2005 figures. These figures tell the story that more and more people are buying to let, and existing landlords are increasing their portfolios. Over the last 5 years property and land has accounted for more new millionaires than any other sector in the UK. According to Halifax’s property price index the value of terraced properties in the UK increased on average by 113% over the last 5 years.

Capital growth in the UK property market has caught the headlines, but for buy to let to work investors have to be able to service their debt through the rent that they are achieving. If landlords are unable to afford their mortgage payments any profit will quickly be swallowed up by late payment and interest charges, and in the final analysis if the property is repossessed the landlord is unlikely to make much, if any return. We have looked at another measure as to the health of the buy to let market, which is the level of arrears on buy to let mortgages. Looking purely at buy to let mortgages, the proportion of loans that fell 3 months or more in arrears fell from 0.64% at the end of the first half of 2006 to 0.59% at the end of the second half of the year. Notably this was lower than the 0.89% representative of loans in arrears across the wider mortgage market.

In the buy to let market, courts are able to appoint a “receiver of rent” to collect rent on behalf of the lender in the event that a landlord defaults on his payments. This is seen as an alternative to repossession in the buy to let market, and 0.06% of buy to let mortgages fell into this category in 2006. The proportion of buy to let properties that were repossessed in 2006 was 0.14%. At 0.20% the number of buy to let properties that were effectively repossessed is higher than the 0.15% in the wider market; however lenders are more likely to enforce their security more vigorously in the buy to let market. This reflects the fact that buy to let is inherently a more commercial market, and perhaps also lenders’ greater sympathy for owner occupiers as opposed to those on 6 or twelve month tenancy agreements.

House price inflation slowed in the first half of 2007 and Martin Ellis, Chief economist at Halifax suggests that “interest rate rises since last summer are having an impact on the market”. However optimists for the housing market will point to government figures that predict that the number of households in England is due to increase by 223,000 a year between 2007 and 2026. Given that new homes cannot be built quickly enough to accommodate this increase, population growth/inward migration may well to continue to apply upward pressure to the UK housing market thus increasing the value of buy to let investors’ portfolios.