Moderate recovery prospect leaves buy-to-let well placed

One of the most frequently highlighted statistics in the UK property investment sector has been the rise in rents as the housing market has declined. With more and more would-be first-time buyers opting to stay out of the market in these uncertain times, rental demand has been higher and has pushed up prices. Thus while buy-to-let is less of an enticing prospect than it was for those buying in the hope of rapid price inflation, it presently offers a good rental return for long-term investors.

It was for this reason that buy-to-let landlordshave remained optimistic about the future, with a recent Bradford & Bingley survey finding that 86 per cent of them plan to either maintain or expand their portfolios in the year ahead. But what, some may ask, of the prospects for the current market circumstances to remain as they are? Will the housing market continue to slow, leaving landlords in an ever healthier position, or will a renewed housing boom change matters?

The most recent evidence appears to provide good reasons to believe the downward trend is continuing for now. British Bankers' Association statistics produced earlier this week showed that secured lending is still rising, but the increase in November was less than it was in October, falling from £4.8 billion to £4.3 billion. Both figures in turn indicate a longer-term slowdown, with the average monthly increase over the last six months being £5.5 billion.

Similarly, Nationwide's figures for house prices have also indicated a house price fall for the second successive month, down 0.5 per cent in December. This is less than the 0.8 per cent recorded in November, although the latter figure may itself have been a correction of the 1.1 per cent rise recorded in October, a figure which was out of keeping with those supplied by other surveys in the autumn (these typically were well under one per cent monthly inflation).

Of course, one major factor in the coming months will be interest rates. Already down this month, Nationwide's chief economist Fionnuala Earley predicted at least two cuts and possibly more. However, she suggested, this may not have the effect some hope.

She said: "It is true that lower interest rates will probably help market activity recover somewhat later in 2008, as lower house price growth restores some affordability and allows pent-up demand from first-time buyers to be released."

However, Ms Earley continued, this would not be a repeat of 2005, since affordability is worse and interest rates are falling from a higher level. She concluded: "This time around lower interest rates are more likely to stabilise market activity rather than re-ignite it."

This may be not entirely a bad thing for first-time buyers, since a gradual recovery will enable first-time buyer incomes to play catch-up rather than affordability to soar as a result of a price crash that leaves some in negative equity. Indeed, the sort of circumstances in the wider economy which could make a house crash possible - such as a recession like that of the early 1990s - is what the Bank of England will be seeking to avoid by cutting rates, as the monetary policy committee minutes revealed.

Such a gradual recovery may mean a slowing in the rate of rental price rises. This may happen anyway to avoid pricing people out of the market, but if Ms Earley is right, this will occur slowly and in a way that will give landlords plenty of time to adjust. Whatever else 2008 brings, rapid changes in market circumstances, be they price or affordability, are not what the forecasters are predicting.

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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