UK buy-to-let property market under pressure

All indicators from lenders, surveyors and state agents suggest the downturn in UK house prices is to continue – analysts only differ on the rate of decline. Some pessimistic estimates factor a 16-per cent fall, like the US market. Pressure is growing on homeowners, especially those who have longer period mortgages on their properties and those moving from fixed-rate mortgages to variable rate mortgages.

High street retailers started to feel the squeeze of consumer spending due to evaporating equities on properties. Some companies are issuing early warnings about their sales and profits this year. In the UK in particular, consumer spending is closely tied to the housing market as most Brits own their homes.

As the house prices have more than doubled in recent years, many have invested in homes as a saving pot for retirement. Prudential Equity Release Index reckons retired homeowners in England and Wales held £734 bn (Dh5,248bn) of equity in homes in February, £150bn of that in London alone.

Price fall and the prospect of high interest rates to curb inflation are pushing many homeowners in bad credit position to sell their properties and rent it. A growing number of homeowners see sale and rent-back as the answer to their problems if they sell at a price below vacant possession value to an investor or a company, and remain as tenants in the same property.

Most buyers in this troubled market use buy-to-let loans, allowing occupants to enjoy only an assured short tenancy for a maximum one year. But regulated companies established in buy-to-let investment can guarantee long-term tenancy. The cut price for such sales rely on loan-to-value ratio and, as number of sellers is growing, investors are ripping off owners-turned-tenants.

Some analysts in the market see more than 10 per cent drop in the sale value in such deals recently. For example, a year ago, you could get a maximum LTV ratio of 85 per cent in the sub-prime mortgage sector, now that is cut to 75 per cent.

Another indicator on the ailment of the buy-to-let sector of the UK property market is the latest problems of the main provider of buy-to-let mortgages, Bradford & Bingley bank. Also the rise of the number of homeowners in difficulty is persuading many un-regulated investors into the buy-to-let market.

The Office of Fair Trading commissioned a study of sale and rent-back likely to be published in autumn, and the 14,000 member National Landlords Association wants to produce a code of practice later this year. It wants transparency on pricing and fees payable, an independent disputes procedure and landlords entitled to seek possession of properties only if tenants break the terms of their tenancy agreement.

People keen for a bigger slice of the booming property market in recent years, bought extra properties and let them. Buy-to-let landlords put £1.5bn into property in the last decade. That was justified investment as house prices rose 224 per cent between July 1995 and August last year, putting the 180.3 per cent growth in the FTSE 100 over the same period firmly in the shade.

Tide is turning now, as the market is changing direction. Though rents are still good return on properties, it might be difficult to raise it more than inflation rate with a slowing economy.