Buy-to-let stands while housing market falls

More information has emerged today to demonstrate the contrast between the buy-to-let UK property market and the residential house buying market.
The ability of buy-to-let to withstand a housing downturn or even slump has been questioned, although Ray Boulger of John Charcol said this week the investors who are looking to the long-term will have factored ups and downs in the market into their calculations. This will leave only those looking for a quick buck to get their fingers burned, a group which, according to figures this month from the Association of Residential Letting Agents, amounts to just 2.5 per cent of residential landlords.

News of the contrasting fortunes of the two differing sectors of the property market were demonstrated again today. House price growth, as shown by the Nationwide monthly housing survey, saw prices rise by 0.7 per cent in September, which was up on August's 0.6 per cent and defied expectations of a fall to 0.4 per cent, but continued a trend of low growth that has reigned in the annual rate of house price growth. This rate fell to nine per cent, the lowest since October 2006, from 9.6 per cent in August.

With Nationwide's chief economist Fionnuala Earley stating that the credit crunch would also "take some of the froth out of the market", it can reasonably expected that the inflationary pressures in the housing market will weaken.

The same weakening is apparent in the mortgage market, with British Bankers' Association (BBA) figures for August showing that gross lending was just one per cent higher than in August last year. Compared with August 2006, home purchase approvals were down in number by 14 per cent and value by seven per cent. David Dooks, the BBA director of statistics, said: "Loan approval numbers also endorse our view that customer demand was starting to moderate even before the September difficulties in the financial markets."

Set against those figures, news from Paragon Mortgages today told a far more positive tale for buy-to-let. Average rental yields remained steady at six per cent, while total annual return averages were 10.3 per cent, up from 9.4 per cent three months before.

Nigel Terrington, chief executive of Paragon, explained that the slowing buyer market was helping to bolster demand for rental property: "The current housing market is in many respects a positive signal for buy-to-let, which has certain counter-cyclical characteristics relative to the mainstream market."

It is these counter-cyclical characteristics, by ensuring good rental returns, which lie behind the optimism of investors and industry experts alike. Such a trend provides a bulwark against the potential loss of value of a property should it be sold in a fallow period.

But if rental returns are good, then those in it for the long run can enjoy those returns and not concern themselves with sale values until market conditions are more favourable. As buy-to-let investor Steve Chippendale told Paragon today: "Buy-to-let can still make good economic sense, but you do need a long-term viewpoint."

Jim Barnaby is a real estate investment broker and successful property investment adviser delivering research and selected UK and overseas property investment solutions with experience in spanish properties, french property investment, German property, Cyprus holiday homes, Property in Cape Verde, German property investment, cape verde property buy to let property