February 27, 2008 | posted by Michael Baxter in House prices |

And from one paradox to another. If inspirational first-time-buyers can’t afford to buy a property, how can it be profitable for landlords to buy those properties and rent them to the people who can’t afford to buy them?

The answer lies with the amount of spare equity in a buy-to-let investor’s portfolio. If, say, a 40 per cent deposit is required for rent to cover costs, including mortgage interest, maintenance and voids, and the landlord currently has gearing of, say, 50 per cent, then it arguably makes sense to borrow a little more and invest the money in another property.

This only makes sense, of course, if the investor expects the value of the asset to rise.

Bear that in mind when you hear about the latest findings from the Council of Mortgage Lenders (CML). The number of loans (including remortgages) to buy-to-let landlords in the second half of the year was 179,100, up from 171,800 in the first half of the year and 177,200 in the second half of 2006.

The total number of outstanding buy-to-let mortgages has now passed the million mark, standing at 1,038,000 at the end of 2007 – nearly 23 per cent up on 846,900 a year earlier.

On average, at the end of 2007, lenders had an 85 per cent maximum on the percentage of the value of the property that they were willing to advance, and required rental income to amount to 120 per cent of the required mortgage payment.

CML says, “Arrears remain lower than in the wider mortgage market, with 0.73 per cent of buy-to-let loans in arrears of more than three months at the end of 2007 (up from 0.63 per cent at the end of the first half of the year, and 0.58 per cent at the end of 2006). This compares with 1.1 per cent in the wider mortgage market. The proportion of buy-to-let mortgages taken into possession was also smaller than in the wider market - 0.18 per cent for the year as a whole, up from 0.13 per cent in 2006 but lower than the 0.23 per cent in the wider market in 2007.”

So that’s a pretty rosy outlook for buy-to-let investing then.

Michael Coogan, CML director general, commented:

“Tenant demand for private rented property remains strong, and buy-to-let is fulfilling an important role in helping to deliver an increased flow of high quality homes to rent. Buy-to-let has remained resilient in the face of the funding constraints that have affected the sector and the wider mortgage market.”

Peter Williams, Executive Director of IMLA (Intermediary Mortgage Lenders Association) said, “IMLA members continue to believe that the buy-to-let market will remain well underpinned in 2008 and expect further growth this year. Some further deterioration in credit quality is possible, but the vast majority of landlords will continue to be able to service their borrowings. Indeed, they believe the combination of a slower housing market and rising in tenant demand represents a good opportunity for them to buy additional investment properties on a selective basis.”

Capital Economics, on the other hand said, “Two months have passed since these data were collected. In that time, mortgage lenders have only become more cautious and general economic and housing market sentiment has deteriorated. In our view, house prices will fall this year, and, against that backdrop, we expect a much more subdued BTL sector.”

The key surely lies in what house prices will do. Sure, for buy-to-let investors who are not too heavily geared, it is possible to carry on investing and cover costs – but if house prices then fall a little, or even stay static, what is the point?

It is how property investors react to that key point that will determine the course of house prices this year. If a small fall in prices, which seems quite likely, dampens investors’ enthusiasm, then further falls could follow, ultimately leading to a downward spiral.