Buy-to-Let Prediction is "Rubbish"

Published Monday September 4th 2006.

That is the reaction to the prediction by lettingfocus.com that half of all properties will be buy-to-let or second homes by 2026.

"This is more peak of bubble nonsense", said Debt Advice Bureau™ director Stephen Rose, dismissing the prediction as "rubbish".

"The only way it can happen", continued Rose, "is if there is a dramatic decline in homeownership, resulting in millions of people who used to be homeowners becoming tenants once more. Then, theoretically, 50% of properties could be non-main residence properties". Meaning that they are being let out or are second homes.

However, a massive drop in the number of properties owned by owner-occupiers would mean dramatically lower prices, not the higher ones which such a prediction would hope to foreshadow.

Unfortunately, the continuing rise in property prices is not being supported by underlying fundamentals. The reality is:

  1. The growth in mortgages has been in a steady downtrend since the last price peak in 1989. Not supportive of long-term growth.
  2. Repossessions have been increasing since they bottomed in the first half of 2004. Promising an increasing supply of discount properties becoming available.
  3. Lending criteria for buy-to-let have dramatically weakened. This has enabled properties to be purchased with levels of deposit unacceptable just a couple of years ago, multiplying the leverage and risk for purchasers at the same time.
  4. Numerous first-timers, with no landlord experience, have rushed to jump on the bandwagon. Many buying flats in city centre developments, resulting in empty flats as supply exceeds rental demand.
  5. Speculative BTL and off-plan properties are being sold on the basis of capital gains, whilst the negative yield is disregarded. Never an advisable strategy and a sure sign of a market topping as property peddlars try to justify unjustifiable prices.

Whilst the prediction may make an interesting headline, it would be better to take it as a contrarian signal. More proof of the hysteria usually found in the end days of a large speculative bubble. Whether that bubble revolves around how rare a particular tulip bulb is, how earnings don't apply to dotcom companies or how property always goes up in price.