Buy to Let Affordability
April 5, 2008 by David Cowgill
Buy to let has been a thriving investment product for quite a few years now, the fact that many would be purchasers cannot afford to get on to the property ladder has made sure that there is always enough demand for rental property.
Now with the increase in interest rates and the decline of many buy to let mortgages numerous investors have stopped investing in buy to let and are instead looking at other avenues like overseas, flip sales and re-possessed property.
Does this mean the end for buy to let investment? Well let’s look at the factors. The first thing you learn about in any Business Course is the simple principle of demand and supply.
Less Supply + More Demand = Increase in Prices.
More Supply + Less Demand = Decrease in Prices.
So how can we be talking about the decline of Buy to Let if demand is so high, has supply really outweighed demand?
I do not think it is as simple as that, true, there is high demand for property at the moment, and true, this has driven prices up in the last few years. This in turn has led to many properties being priced out of potential purchasers price ranges.
So with property being so expensive now it is harder to purchase a buy to let property that will guarantee you a decent yield. Is it possible to find a way to satisfy the demand for property without increasing interest rates to such a level that you create a slump in prices there by making property more affordable?
Could increasing interest rates not be a double edged sword? Let’s say we have a 1 bed flat at £150,000 that a First Time Buyer wants to purchase, on an 85% LTV mortgage he will be paying approximately £610 pcm. Say the Bank of England increases the interest rate to 6.25%, so a 0.5% increase.
Also let’s speculate that this has a detrimental effect on property prices and they fall by 10%. That same 1 bed flat is now worth £135,000, so if a First Time Buyer was to buy on an 85% LTV mortgage his monthly payments are now £597.
A £13 difference for the First Time Buyer but a nightmare for everyone who already has a variable rate mortgage!
So the problem we have in this country is that there is maybe too much demand for property, this leads to the rises in property values we have had over the past years being achievable where in many other countries a collapse may have happened a long time ago. I think that the Bank of England knows this, they realise that the situation must be monitored closely but any thought of a crash are very premature.
The future may not be rosy but it is not all doom and gloom either. I believe that the slowdown has for the main part helped the property market, stabilising prices and injecting a sense of reality into investors that were gearing themselves too highly.
This guest post was written by Dan Chamberlain. If you have any questions or responses to this article, please post a comment below.
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