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News: BTL mass exodus fear overdone

Fri, 16 Nov 07

How much of an impact will the credit crunch have on BTL...?

Buy-to-let investors have been a key support to house price growth in 2007, and have replaced some demand from first-time buyers dropping out of the market. But as interest rates and house prices have risen, rental yields have become much less attractive and investors have had to rely on house price growth to deliver good returns.

As the slowing economy causes house price expectations to be revised down, there is likely to be less interest in new buy-to-let investments, particularly from those with shorter investment horizons. On top of this, the credit crunch is likely to lead buy-to-let lenders to tighten their rental cover and LTV criteria, making it more difficult for new investors to enter the sector.

Tighter credit conditions

Nationwide’s Fionnula Earley commented: “While poor yields, lower house price expectations and tighter credit conditions are all likely to take some froth out of buy-to-let and limit its contribution to price growth, recently reported fears of a mass exodus from the sector appear overdone. The growth in buy-to-let appears to have been driven by a shift in preferences toward property as a retirement provision, following the equity bear market earlier in the decade and the emergence of large deficits in company pension schemes.

This is consistent with survey evidence suggesting most landlords are long-term investors rather than speculators, and that they would not exit the market abruptly. Even with only modest house price growth, those in it for the long-haul can expect satisfactory returns. Our overall view of buy-to-let is therefore that the rapid growth of recent years will moderate, but that pessimistic sentiment about the sector’s prospects should not be exaggerated

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