Brian Hall, a UK management consultant with 30 years experience of the financial services sector and founder of buy-to-let index The Model Works, claims booming buy-to-let is a myth.
He said: “Over the past five years a cash buyer would have broken even while a geared investor would have lost almost 70% of their original stake if they were to sell their property today. The trend appears to be for these losses to increase.
“Our research highlights that the math is simple. If you bought a buy-to-let property five years ago, with a 10% deposit and a 90% mortgage, and property prices then rose by 10%, you would double your original stake.
“But if house prices fell by 10%, your original stake would be wiped out and you would have made a 100% loss.
The newly launched index uses Nationwide data which shows that prices fell by 12% over the past five years.
Rental yields can’t compensate, said Hall.
“If you bought a property today for £100,000 with a 75% fixed rate mortgage at 5.06% and achieved a 6.60% yield, the repayments would be £441.07 per month and the rental income £550.00 per month – a yield of £108.96.
“But if the property then depreciated by 12% over five years, the loss in equity would be £200 per month.
“Adding arrangement fees, acquisition costs, opportunity costs, voids and arrears, maintenance, management and insurance and selling costs and the losses pile up.”
Hall claims there have been times when substantial losses were experienced.
“Those remortgaging to buy discounted properties today assume that prices cannot fall further, rents will continue to rise and interest rates will remain low,” he explained.
“But the IMF believes the property prices are still too high and could drop by a further 10-15% relative to Britons’ salaries.
“Demand will fall too as tenants’ disposable incomes are exhausted. Voids will rise and so will arrears and this will erode profitability. There are already reports of losses for increasing numbers of smaller landlords.”
Earlier this week BDRC Continental published research suggesting Britain’s smallest private landlords – those renting out one property – are struggling as they feel the impact of voids and rent arrears.
The research house’s independent Landlords’ Panel survey revealed the proportion making either a small or large loss has doubled from 8% in Q1 2012 to 16% in Q2.
Those with more properties fared far better: 40% of those with 5-10 properties, 69% of those with 11-19 properties and 68% with 20+ in their portfolios make a profitable full time living from letting.
In Q1 the report identified a fall in rental arrears for the first time in a year; by Q2 the trend had reversed bouncing back to 49% from 45%.
Almost one in ten single property landlords (9%) experienced voids in the last three months that lasted just over two months or an average of 69 days.
Hall said highly geared investors on interest-only mortgages are particularly vulnerable.
He said: “In the past buy-to-let was a sound investment. Although prices have fallen over the past five years they rose by 77% in the five years prior and by 72% in the five years prior to that, providing enormous returns.
“But given the chaos created by asset price bubbles around the world it is unlikely that a property boom will be allowed to occur any time soon.”