James Scott-Lee, spokesperson for the Royal Insitution of Chartered Surveyors:
The appeal of buy to let
The appeal of the buy-to-let sector seems to be that there is disenchantment with equities. Equities have driven the pensions of all of us for many a decade. But the stock market hasn't really been exciting and people have been disappointed with the amount of pension they would be able to draw.
And buy-to-let is seen as an opportunity of controlling one's own destiny, running one's own portfolio to provide an investment by way of pension provision. Now for many people they just don't trust the big companies to do it property because they've had bad experiences in recent times.
The size of the buy-to-let market
Buy-to-let sector is a very important sector and figures vary but between ten and twenty percent of the whole seems to be about the mark. In this country people are driven to own their own homes and what has happened is that the investor/buyer has come in and competed with the first time buyer and that has held up the bottom of the market.
On the risk of relying on capital growth
It's made the investment in property very attractive for people who know little about buy-to-let. They have seen that just to own a property it is going to accumulate capital growth at a fantastic rate, outperforming most other forms of investment. And, therefore, inexperienced people have been attracted to the sector. Many of these people have never had to deal with the falling market and there are concerns that with interest rates rising and house price inflation easing off these people will catch a cold.
The risks of buy-to-let
To service the investment one needs the rent. And it needs to be at the right level. Otherwise one is putting one's hand into one's pocket. Now I don't know how risk averse everybody should be. My personal view is that if people are borrowing more than seventy-five percent they have to think very carefully. And it is our experience that those people who have borrowed in the higher percentages the eight-five, nineties, etc., that have been experiencing difficulties and have been repossessed.
On buy-to-let in 2007
I think buy-to-let investors should be aware of what's going on in the world economy for that matter. I think we've had a very good run with huge capital growth. I don't think we can expect that to go on and on. But what we can expect is for rents to rise as people earn more money and there is not enough property in this country, so the demand is going to be there.
And with positive immigration and not building enough properties the long term future for buy-to-let is very good. But it is long term, it's not get rich quick any more. That period is definitely over.
Jamie Dannhauser, economist with Lombard Street Research:
The origins of the credit crunch
The origins very simply were in the United States and originate in the, what they call the sub-prime element of the mortgage market, that's mortgages to people who have low incomes and find it difficult to document their income in particular. But that's now spread across the world through the financial markets and the effect in the UK has been very simple, it's banks have become very unwilling to lend to each other they have felt they need to hoard money, in the case that people they have lent to want to get their money back, so what's basically happened is that banks don't lend to each other and this has forced up the cost of borrowing in what they call inter-bank market and ultimately for the UK, as will be for European banks as well and United States, the banks have to pass these increased costs onto somebody, they want to maintain their profit margins and ultimately that's going to hit retail interest rates as well.
The credit crunch and the buy-to-let
Since the middle of last year the Bank of England has raised interest rates 5 times. This has ultimately passed through into mortgage rates generally, but the key thing is the credit crunch has imposed secondary effects on the mortgage market. Banks have lost money, they want to recoup it somewhere they're likely to keep mortgage rates higher for longer. The key point for the buy-to-let segment of the market is given it's the most risky they're likely to tighten the standards on which they lend most for buy-to-let investors.
Buy-to-let and a housing market downturn
There are a number of channels at the moment which we believe are driving, or pushing down or slowing the growth in average house prices generally, namely average house prices now reaching unaffordable territory. This is because incomes have been growing very slowly in the UK, mortgage rates have gone up and it's only house price growth that has remained strong, so it's becoming more and more difficult for the average person to buy a house and those mechanisms are going to cause a slow down in house price growth, but the buy-to-let market has the potential to be an accelerating factor, in particular if the sort of rental yield mortgage sort of comparison becomes more and more tricky and they don't… expect capital growth they may be forced to put properties on the market which may effectively accelerate the slow down in house price growth that is coming just generally through, sort of, the general channels in the housing market.
Do property prices always go up?
The idea that property is a good long-run investment is probably very true, in particular in the UK where we have this, you know, 20, 30 year problem of a lack of supply of housing and all the quangos that do work on housing supply and demand all say the same thing. Namely that sort of 20, 30 years into the future we are still going to have a problem where demand outstrips supply, year after year unless more houses are built, so totally agree with the concept that over the long run housing, residential housing remains in the UK, remains a very solid investment. But what we're talking about here is a cyclical development, totally different from the sort of long run structural trend, in the housing market, this is a cyclical development where affordability has got too stretched, demand for housing is going to suffer quite a lot and the demand side correction is going to be what causes house price growth to slow quite markedly.
Merryn Somerset-Webb, editor of MoneyWeek:
On the cost of borrowing
I think that the cost of borrowing has got to have a huge impact on buy-to-let investors, we already know that the yield on the average new buy-to-let investment is something more like 4% than 6%, but we know that the cost of borrowing is somewhere between 6 and 8%. So anyone who buys the average buy-to-let investment now is going to lose money every single month.
A housing market downturn?
We have seen quite a few surveys showing that prices are falling in some parts of the country particularly down in parts of the South West, in Wales etc, and we know asking prices have come off quite a lot, well not a lot, a few percent, even in Central London – which suggests there is some confidence leeching out of the market. That's important. We also know that repossessions are going up a lot, we know that there has been a return to the market of the people who offer to buy the houses of the desperate for much less than their market price and then rent them back in the short term, all these sort of things, they're signs of stress in the market and as interest rates go up or mortgage rates go up we know many more buy-to-let investors are going to start feeling the stress and they're going to start selling. I don't see how they can't.
The property market bubble
The property market has long, long been a bubble in search of a pin and I think that the credit crunch may be it, not necessarily Northern Rock as Northern Rock is a symptom rather than a cause of the credit crunch, but the credit crunch in general. We know, that prices are far too high, they're at multiples of income than historically have never been seen before and you can fiddle the numbers however you like, and lots of property people do, but the basic point remains that house prices are far, far too high by any conventional measure and with the credit crunch meaning that people can no longer borrow the absurd amounts of money, that they could borrow only 6,7 months ago. It's I think, it's inevitable that prices have got to drop back to more realistic levels.
What buying below market value tells us
We last saw this business of companies existing who would buy your house below the market value and then let you live in it for rent at the bottom of the last property collapse and so I think it tells us something quite nasty, it tells us that people who want to sell their houses cannot do so at the price an estate agent would tell them they should be able to and they certainly can't do it in a hurry, and it tells us there are enough desperate people out there for these companies to be able to make a business from it. That's not good.
Do property prices always go up?
Well I say it's absolutely true that property prices do always go up over the very long term, the line of property prices would always go something like that over the very long term, but prices over the shorter term don't actually follow that line, they go in a cycle, so they'll move around the line like this, going up over the long term but up and down in the medium term, so what you want to ask yourself, if you're going to buy now, is do you want to buy there on the cycle or do you want buy it there on the cycle and right now we're here, so if I was wanting to invest in property, I think I would wait until we were more like here.
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