Buy-to-let value soaring

It is hardly a secret that the scale of buy-to-let has been growing rapidly in the UK in recent years, but the latest research indicates this is showing no signs of slowing down.
Sainsbury’s Bank carried out a survey of the industry over the year between November 2006 and November 2007, in which it found the aggregate value of buy-to-let properties owned by landlords had risen from £571.38 billion to £641 billion, which equates to an increase of £5.79 billion per month.
Commenting on the figures, the head of home insurance for Sainsbury’s Finance, Steve Johnson, stated: “People have invested a huge amount of money into this sector and as a result of rising house prices many have seen the value of this investment grow substantially.”
Figures such as this suggest that there is no sign yet of a slowdown in investment, given that the period covered includes several months after the onset of the credit crunch, when the overall property market was clearly slowing down. What is undoubtedly the case is both that the total value of these portfolios has risen in recent years through both price growth and higher amounts of initial investment.
The latter fact is borne out by a further finding of the Sainsbury’s research, which showed that buy-to-let mortgages grew by 98 per cent in the three years from the first half of 2004.
Of course, some will wonder out loud whether such an upward trend might continue through slightly tougher times. The answer, according to recent surveys, is yes. The Association of Residential Lettings Agents survey last month revealed two key findings in this regard. Firstly, that nine out of ten landlords planned to hold on to their investments for the long-term, which means that periodic downturns in the market are of less significance than would be the case for speculative investors looking for quick gains. Secondly, four out of ten respondents said they planned to add to their portfolios this year.
In any case, there may be good reasons to believe the overall property market is bouncing back, with increased affordability making buying, whether residential or buy-to-let, cheaper than last year. The Council of Mortgage Lenders has commented today that slower property price inflation and falls in interest rates will improve this situation. As director general Michael Coogan stated: “Affordability has been stretched further in 2007 but the recent base rate cuts and the expectation of future cuts will ease debt servicing burdens in 2008.”
One blot on this horizon may be the spectre of inflation, with the Office for National Statistics revealing today that the consumer prices index rate had increased from 2.1 per cent to 2.2 per cent last month, mainly due to rising petrol, fruit and furniture prices. How much of an effect this may have on interest rate policy may not be clear. In its statement after cutting the base rate last week, the monetary policy committee said it had to “balance” the various risks of higher inflation now against the potentially deflationary effects of lower growth.
In acknowledging that food and fuel could have an upward effect on inflation but that the impact of these factors “should begin to fade later in the year”, the MPC may have factored this scenario in, accepting higher inflation in the short-term in the expectation that it will fall without requiring a tighter monetary policy. This view would be in line with that stated in the November 2007 quarterly inflation survey.
The next such survey, as it happens, will be published tomorrow. Its projections, which the MPC will already have seen, may make clearer to the wider world what is expected to happen in the months ahead. It could well be that the decision made last week reflected an optimistic longer-term outlook. In the meantime, the optimism of buy-to-let investors over their long-term prospects has remained strong.
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