Rising interest rates are boosting buy-to-let sector

In the wake of July’s 0.25% base rate rise – the fifth in the past 11 months, which takes the base rate to 5.75% – a report published by Nationwide’s specialist lender, UCB Home Loans, says that rising interest rates and increasing house prices are making it easier for landlords to let their properties.

“The combination of high house prices and more expensive loans is pushing more people into the rental market, where, as tenants, their overall outgoings are generally lower than those of homeowners,” said Keith Astill, managing director at UCB Home Loans.

“Ironically, people are renting for longer because it’s more difficult to afford to buy, which is in turn providing a boost to the buy-to-let sector,” he said.

The lender also says that sales of buy-to-let properties are still rising quickly, despite the fact that both property prices and interest rates on buy-to-let mortgages and have been increasing. It says this is because property investors typically take a long-term view of fifteen years or so when making a purchase, so short-term variations in interest rates are of less concern to them than might be the case in the mainstream mortgage market.

According to latest figures from the Council of Mortgage Lenders, the value of buy-to-let lending increased by 57% last year, with 330,300 mortgages worth a total of £38.4 billion being taken out. Buy-to-let purchases represented 11% of all new mortgage lending in 2006.

UCB Home Loans expects no particular change in the situation over the coming months, with many prospective first-time buyers continuing to rent for the time-being.

“House price increases are likely to hold back a little during the latter half of this year, as interest rate increases bite. As a consequence, I suspect prospective purchasers now feel less anxious about making a purchase quickly before prices shoot up again,” said Keith Astill.

Nationwide figures show that average house prices increased by 1.1% in June, up from 0.5% in May. However, despite the 11.1% increase in the year to June, the lender’s forecast is for this to drop to between 5% and 8% by the end of this year.

UCB Home Loans says that rising house prices have increased the value of property on landlords’ books, but have consequently put a slight downwards pressure on yields, despite the fact that rents have also risen slightly.

“The latest Association of Residential Letting Agents (ARLA) figures for average weighted returns are down marginally from 5% in the first quarter of this year, to 4.8% in the second quarter for houses, and from 5.1% to 5% for flats. This appears to be a reflection of the rise in house prices rather than a reduction in rents,” said Keith Astill.

Astill admits that the increasing level of buy-to-let purchases has helped to fuel house price increases in some parts of the country.

“The huge increase in purchases of buy-to-let properties has had an effect on house prices in some parts of the country, although I think this is generally confined to areas in which landlords have been purchasing large numbers of properties,” he said.

“Nationally, the effect has been pretty negligible though. In general, house prices have risen simply due to the level of demand in the mainstream mortgage market, compared with the level of supply. In a nutshell, more houses need to be built,” he said.

The UCB Home Loans report also criticises the Government’s last-minute u-turn on Home Information Packs (HIPs).

“This isn’t the first time that decisions have been left until the last minute on matters relating to housing,” said Keith Astill.

“We had a similar situation with SIPPs around 18 months ago and it seems to indicate that decisions are being taken without being properly thought-through,” he said.

Looking ahead, the UCB Home Loans report predicts a gradual cooling in the number of purchases in the buy-to-let sector over the next few years.

“For some while now, landlords have benefited from a gradual increase in the population of people wanting to rent property,” said Keith Astill

“Whilst the market is likely to remain reasonably strong for the foreseeable future, there will come a point where natural forces come into play and the market balances itself out,” he said.

“By 2010 I suspect that growth in the buy-to-let sector will have calmed down,” he concluded.