Summer 2008 // contents | contact us | current issue | mortgage express

Keeping a steady nerve

Group Economist Peter Charles explains why landlords need to be calm and collected in a more difficult market

There’s little doubt that there have been some alarming headlines in the newspapers and on television of late predicting a housing market crash and a return to the harsh conditions of the early 1990s. However, behind these headlines, the economy is very different from how it was back then.

Investment in property can still offer attractive returns. But, more than ever, a carefully considered approach to both purchasing and letting is needed for success.

Different times

It’s important to remember that, while the UK economy is certainly experiencing some difficulties, it’s nothing like the conditions in the last major downturn. Then, inflation reached double figures, bank base rate peaked at 15% and unemployment reached almost 3 million.

As Mortgage Express’ Chief Economist Peter Charles says: “The economy is much more stable now than it was then. This brings stability to demand for private rental accommodation and support for rental levels. There may be a lack of liquidity in the housing market following the credit crunch, but there remains a lot of potential demand for buy-to-let investment, particularly from existing landlords looking to extend their portfolios.

“Newspaper headlines and features on some TV programmes about people losing their money after investing their life’s savings in city-centre developments in Leeds or Manchester are focusing on a tiny fraction of the private rental sector. These are people who have been attracted by promises of high returns, who have failed to understand the market they are entering and have ended up making very poor investment decisions.”

Mortgage Express has always advised investors to do their research, understand what they are buying and the potential rental returns and capital growth. This remains sound advice.

Peter adds: “We know that house prices are weak at the moment because of the shortage of liquidity in the market. There are good reasons for believing that, in the longer term, there will be a shortage of homes in this country compared to demand and that house prices will rise. Whether this longer term begins in one, two or five years’ time, no-one can tell.”

Covering the mortgage

The shortage of liquidity is also affecting mortgage costs. Those landlords who have come to the end of a fixed-rate mortgage deal may have found it difficult to get another deal and will have seen their mortgage costs increase. If that means that they are no longer covering their mortgage from rental income, they will need to supplement this either from their total portfolio or their employment income for the time being.

“It makes sense to cover any shortfall from rental income if you possibly can,” says Peter. “Hopefully, it won’t be for too long. It seems unlikely that the mortgage market will remain quite as illiquid as it is at the moment. And there is the possibility of being able to negotiate a lower funding rate in return for capitalising a one-off fee. What you really don’t want to be doing is having to sell your property in a falling market, although this may be the only option for some.”

One option to gain further income could be to increase rents. In general, surveys suggest that demand for rental accommodation is still growing, but the ability to push up rents ultimately depends on local market conditions. And there is often a trade-off to be assessed: how far do you want to risk losing an established, reliable tenant against pushing for the maximum rental levels the local market will bear.

There is no doubt that landlords are not immune to the current economic challenges and there may be a small number of borrowers who find themselves overstretched. Those who find themselves in this position should contact Mortgage Express as soon as possible so that any issues can be resolved.

Still confident

It is clear from the results of our latest Confidence Survey that the majority of landlords have planned their portfolios carefully. Those with well-thought-out portfolios should find themselves with no shortage of opportunities to provide housing for the growing number of people seeking rental accommodation.

Peter added: “We are still in the aftermath of the credit crunch and of the Northern Rock collapse. These problems are taking longer to work through than perhaps we (or the Bank of England) had expected. But they will work through in time. Investors should be thinking now about the same things that they have always needed to assess. What is the rental yield and what are the prospects for capital growth?”

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