Buy to Let Mortgates - Increasing Demand.

Despite uncertainties over the future of the UK Housing Market, the buy to let sector is forecast to continuing increasing in size.

Currently about 330,000 buy to let mortgages are sold per year in the UK, this is forecast to rise to £361,000. By 2011 Mintel forecast the % of buy to let mortgages to rise to 550,00 per year; this will account for 10% of the mortgage market.

Since the early 1990s the buy to let market has been booming and outperforming the standard mortgage market.

Reasons for Increase in Buy to Let Mortgage Sector

1. Housing seen as a good investment for retirement. Housing provides both income and capital gains, in recent years the housing market has strongly outperformed other investment options like the stock market.
2. People using Capital Gains to reinvest. The rise in house prices mean many homeowners have seen large increases in wealth. This has enabled them to remortgage and buy a second home.
3. Increased willingness of Banks and building societies to lend
   
4. Lower Real Interest Rates making buying more attractive.
5. Increased Difficulties for First Time Buyers. The increased cost of UK housing means many first time buyers are being pushed out of the housing market, therefore, there has been a buoyant demand from the renting sector. This has maintained the profitability of the buy to let market

• Buy To Let Mortgages
• Prospects for Buy to Let
  

Mr Davies added: "The buy-to-let mortgage market has experienced meteoric growth since the late 1990s, outperforming the wider mortgage market over the past few years.

Is the UK Property Boom over?

Prospects for UK Housing Market and Buy to Let Sector.


For the past 3 years some commentators have been predicting the imminent collapse of UK property prices the Buy to let sector.

Because house prices are rising faster than both average earnings and now rents, the economic fundamentals behind the strength of the sector are starting to decline. However despite concerns there are some reasons to be optimistic

Strengths of Buy to Let Sector.

Mortgage defaults are lower in the But to Let sector than other areas of the Housing market. The proportion of buy to let mortgages 3 months in arrears is only 0.59% lower than 2006 and lower than the average for the UK housing Market 0.89%

Continued shortage of housing is pushing up prices of renting. Not by as much as house prices, but the strong demand for the rented sector means that the amount of time when the house is not occupied is much less.

Foreign workers continue to move into the UK from the EU. This is another factor strengthening the renting sector of the housing market.

Relatively low real interest rates (real interest rates = nominal interest rates – inflation. It is a more accurate guide to the real cost of borrowing). Despite 3 rises in interest rates in the past 6 months real interest rates are still quite low, especially if the old RPI measure is used for measuring inflation.

Weakness of Buy to Let Mortgage Sector

Rental yields are falling because of the rampant house prices inflation.

Banks are making it easier to get a buy to let mortgage through relaxing the rental yield returns. Alliance & Leicester for example require only rental yields of 100% for some buy to let (traditional return is 130%). This makes an increasing number of buy to let mortgage susceptible to a rise in interest rates.

Interest rates in the UK are still predicted to keep rising because of the underlying strength of the consumer sector and consequent inflationary pressures.

New licensing regime for renting. This makes landlords hand over tenant deposits to government 3rd parties. There are also more restrictions on the quality of the rented sector.

UK Housing Market
source for stats

Prospects for Buy to Let UK

In the Short term the buy to let sub market is performing well.

1. Uncertainty over the direction of house prices and interest rates is discouraging more people from buying at the moment. This is increasing demand for alternative renting.
2. Shortage of Supply. Recent studies show there is a chronic undersupply of houses in the UK. This is keeping prices for renting and buying high.
3. Immigration and oversees buyers is increasing demand for houses, even though UK first time buyers are being priced out of the market

However in the Long Term there are concerns about the prospects for the Buy to Let Market

1. House Price to earnings ratio has increased so much that it is difficult to justify continued rising house prices. Many experts argue house prices in fact are fundamentally overvalued. See house prices will fall.
2. Inflation in the UK is at the higher end of the governments target. If global inflation starts to increase due to rising commodity prices this could mean higher interest rates in the medium term. This would eat into the profitability of buy to let and therefore could lead to falling demand.

Buy To Let Mortgages: Is Now a good time ?

Buy to let mortgages have become increasingly popular in recent years due to 2 main factors.

1. Rising UK house prices. House prices have increased by over 100% in the past 12 years, leading to excellent capital gains for homeowners. In addition some areas of the country have benefitted even more.

2. Strong renting Market. Returns from renting have remained good, due to high demand for relatively low number of renting opportunties

3. Low Interest rates. Interest rates are much lower than in the past.

Many feel that the above factors may start to change. Firstly many economists believe that house prices may fall significantly in the near future, because they are overvalued. Therefore buy to let investors would be well advised to avoid buying at the moment. See house prices may fall 2007.

1. However there is no certainty house prices will fall. There are certain economic forces to explain the rising house prices. There is no evidence this has changed significantly. House prices may not fall

2. With a continued shortage of housing, the renting sector is likely to remain strong. However in some areas the income from renting is now failing to meet the requirements of being 130% of the value of the mortgage payments.

3. Interest rates have increased several times in the past 2 years, but economists suggest the future direction of interest rates could be downward by the end of the year. Inflation is still close to its target of CPI 2%. Also it is worth noting real interest rates are still very low by historical standards.


In the short term there may be some risk. But in the long term buy to let mortgages are probably a good investment affording the investor both a steady income stream and scope for equity gains.

See: Buy to Let Mortgages In UK