Will buy-to-let bubble burst following sub-prime chaos?

Permalink: Will buy-to-let bubble burst following sub-prime chaos?
by Kay Murchie

House prices are plummeting at the fastest rate in the US, Countrywide, the country’s biggest mortgage provider, is struggling and the US subsidiary of London estate agent Foxtons, is thinking about calling in the receivers.

According to The Telegraph, it has all the characteristic of a full-blown housing market crash triggered by the sub-prime sector. The American slump was caused by the problems in sub-prime loans for poorer households but here in the UK, it could be the spark for a similar crunch in the buy-to-let sector.

For over 12 months, the buy-to-let sector has not been the investment it used to be, yields have declined and due to the high cost of borrowing, landlords are likely to find themselves making a loss on their investment in the short-term.

For at least 10 years, this sector was gushing out a constant flow of money to investors. Research by The Telegraph established that investors are selling the new apartments they purchased just a few months ago for just 60% the value they originally paid.

However, latest figures show that buy-to-let lending is still increasing fast.

The majority of buy-to-let lenders fund themselves not from the by borrowing from the money markets. Consequently, they have already had to increase their rates, because life is now more costly for those who finance themselves through this method, making life more difficult for landlords.

Furthermore, there have been some instances of oversupply in Liverpool, Manchester and Leeds, so many flats have been built in these areas that prices have dropped considerably. This may only be a problem in these cities but it could become a national one.

The Telegraph added that property prices will probably start declining shortly. Lombard Street Research, the economic consultancy, anticipates that prices will decline by at least 5% next year.

Recently, landlord.co.uk, the property website, said that buy-to-let landlords could spark a house price crash as a growing number are selling their properties following worries of price falls and rising interest rates.

A spokesperson for landlord.co.uk cautioned that the buy-to-let market is plunging. If the majority of landlords continue to sell, the property market could crash. Landlords have decided that market conditions are looking bleak.

The Royal Institution of Chartered Surveyors commented that the uncertainty in the market is making landlords nervous. Those with the smaller portfolios are more vulnerable.