BTL fears ‘exaggerated’

Published 05th Sep 2007

Speculation is rife that UK interest rates have now peaked…
Interest rates are considerably higher than they were 13 months ago, since when five increases of 0.25 per cent have put considerable pressure on domestic and buy-to-let mortgage holders alike.

In recent months data on the domestic housing market has varied, with some sets of figures - such as the Nationwide housing survey for July which indicated monthly growth at its lowest in 15 months - showing a slowdown while at the same time others - such as Rightmove's recent figures indicating a rise in annual house price inflation from July's 10.3 per cent to 12.8 per cent in August - suggested the reverse.

However, as time moves on more and more statistics appear to be indicating a slowdown. Before the August bank holiday came the news from property website Hometrack that annual house price inflation fell to 5.4 per cent in August from 5.9 per cent in July, while the last month had seen no increase in prices at all, the first such instance since November 2005.

Sub-prime to intensify slowdown?
Since then the British Banker's Association has indicated that mortgage lending fell by 11 per cent in July. Commenting on this statistic, Royal Institution of Charterted Surveyors chief economist Oliver Gilmartin said concerns over the sub-prime market "could intensify the current slowdown in lending activity over the next six months".

All this being the case, it may seem strange that the buy-to-let market shows no corresponding signs of a slowdown. Yet that is what the Financial Times reports today. It points out the obvious fact that higher borrowing costs mean lower yields, which has led some to trim their portfolios, adding that many are reliant on capital growth to make profits.

Yet the same article points out that many investors are benefiting from higher rental income, quoting statistics from property agents Knight Frank which show that rents in London are 12 per cent up on a year ago.

The Financial Times takes a questioning view of the continued increase in property investment. Yet perhaps this ignores perhaps the most notable trend in property investment, the increasing propensity of people to invest for the long-term, which makes the level of returns during periods of high interest rates less significant.

Property as an alternative to pensions
Buying property as an alternative to a pension to generate retirement income has recently been endorsed by Malcolm McLean, chief executive of the Pensions Advisory Service. He said: "The rewards in property investment - in people's minds - seem to outweigh financial rewards from pensions".

In particular, more women are choosing to take this particular route, with research from property website ThePropertyInvestmentMarket indicating that this is the method of choice for single and divorced women. It quoted Karen Ritchie of CS property consultants, a specialist in pensions and divorce, who said: "I would say 80 per cent of my female divorce clients would opt for property over a pension."

Thus the considerations made by property investors may be very different to those buying their own homes. While many people struggle to get onto the residential housing ladder as rising costs leave their ability to afford homes trailing, investors who have enough funds to comfortably establish a property portfolio in the first place can ride out the higher rates in the expectation of enjoying a longer-term benefit.

Source: ' Assetz '

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