However, as expected, the rate of growth is now slowing and this trend is expected to continue over the next couple of years.
Over the past year, interest in purchasing buy-to-let property has shifted towards more northern areas. Latest figures from the Association of Residential Letting Agents show that 50% of all new buy-to-let mortgage lending now takes place in the Midlands, the North, Scotland and Wales. This shift reflects the changing pattern of house price increases, which started in London and the South East and gradually moved northwards.
Figures released in September by the Council of Mortgage Lenders show that gross buy-to-let lending totalled £7.7 billion in the first six months of 2003, compared with £6.7 billion in the second half of 2002. The total size of the market at mid-2003 was 334,800 buy-to-let mortgages worth £31.2 billion, accounting for around 4.3% of all residential mortgage lending. Figures for the last six months of the year will be available in March.
Re-mortgaging has become increasingly popular in the buy-to-let market, accounting for 39% of gross mortgage lending in the first half of last year. “The market has seen a big increase in the number of re-mortgage applications received over the past year, as people’s initial benefit periods for fixed or capped rates come to completion,” says Charles Reed, managing director at UCB Home Loans. “Investors are also taking advantage of increases in property prices by re-mortgaging and ploughing the money into new purchases.”
Rapid house price increases have spurred interest in the buy-to-let market, where the combination of capital growth and rental income has been seen as an attractive proposition when compared with returns from pensions and other forms of investment. “The equity market actually had a better time in 2003 than many people expected, so we may see a gradual cooling of this attitude over the coming year,” says Charles Reed.
Figures produced by Nationwide Building Society show that the annual rate of house price increases was 25.3% in 2002 and 15.6% in 2003. This is expected to fall to around 9% by the end of 2004. Interest rates are expected to remain low throughout 2004, rising from their current level of 3.75% to around 4.75% by the end of the year.
Increasing numbers of would-be first-time buyers are now renting property whilst they save for the deposit on their first purchase. Choosing to rent is becoming more acceptable for a wider group of people, particularly those who are young and single. The larger number of rental properties available is leading to higher expectations among tenants regarding the standard of property that they rent.
“With greater competition to find tenants in some areas, investors need to undertake thorough research to make sure that they buy the right type of property in the right area,” says Charles Reed. “They should take a long-term view of returns - preferably over ten to fifteen years - when considering a buy-to-let investment. The key is to focus on its suitability as a longer-term investment, rather than its potential to deliver a profit from short-term house price rises.”
UCB Home Loans reports that rental yields vary from area to area, but landlords can generally expect to receive between 7% and 9% gross annual rental return in more active parts of the country, and nearer 5% in areas where house price rises have slowed down and the ratio of landlords to tenants is higher.
Residential developments in cities such as Birmingham, Leeds, Liverpool, Manchester and Newcastle have helped to re-establish renting as a socially acceptable way of living across all income groups.
The UCB Home Loans report gives a detailed breakdown of current buy-to-let activity across the UK and refers to a number of areas in which buy-to-let activity is buoyant, including Bristol, Southampton, Leeds, Manchester, Liverpool, Newcastle and Glasgow.
