The slump in the housing market has hit hard. Jeremy Gates finds out what the future holds
DO BRICKS and mortar trump poorly-performing private pensions or low-rate ISAs as a way of building a lump sum for old age?
In that remarkable period from 1996 to August 2007, when the Halifax average house price zoomed from £63,900 to £199,600, many savers became convinced that it was. For a while, pensions trailed in property’s slipstream.
There is also something transparent about regular rental income which pensions lack. Council of Mortgage Lenders (CML) figures show buy-to-let mortgages increased from 3.5% of house purchase loans in 1999 to 28.9% in 2006.
Since the housing-market peak in autumn 2007, however, sentiment has changed abruptly and confidence remains wobbly amid fears of a ’double dip’ recession.
Anyone who bought a home to earn income in February 2008 is facing a 12% decline in its value – which has probably wiped out much of their deposit before they begin the task of finding a tenant with a secure income.
In recent days, two huge shadows have fallen across the image of buy-to-let as a safe investment.
First, the debt solution comparison site IVA.com confirms a sharp rise in the number of property investors seeking serious debt advice. It reports a 53% leap in the number of investors struggling to pay creditors.
Typical debts, it says, ranged from £163,000 to £201,000 – in all reported cases those saddled with property debt were middle-class professionals with big mortgage arrears.
IVA.com director Terry Balfour says: “We have seen a near meltdown in the buy-to-let market, with a combination of rental arrears caused mainly by tenants losing their jobs, void periods and high fixed rate mortgages causing serious problems.
“While it is encouraging to see the total number of buy-to-let repossessions remain a relatively small percentage of the market, our experience is that when landlords do get into trouble, debt levels become very unmanageable.
“Our biggest debt cases are currently solicitors – again, in buy-to-lets – which goes to show even professionals can get it seriously wrong,” he adds.
But the biggest wake-up call is the warning from Fergus and Judith Wilson, the former teachers who built a portfolio of 700 rented homes in Kent worth around £225m at the peak.
“Buy-to-let is absolutely dead and will never return”, Mr Wilson told a national newspaper.
The couple are selling down their portfolio after coming under financial pressure when nearly 100 properties, nearly 13% of the total, were occupied by tenants failing to pay all, or part of, their rent in October 2008.
The Wilsons were saved largely by the collapse of Lehmans Brothers, which saw the Bank of England base rate slashed to 0.5% in March 2009.
They now pay an average 2% interest on their massive loans, on a special deal with lenders who fear the huge portfolio will otherwise be dumped on their doorstep. If the base rate hits 3.5%, the Wilsons’ vast mortgage repayments would exceed rental income.
Against this background, there may be limited interest in an ’exclusive’ mortgage from leading brokers Charcol for new investors: fixed at 6.49% for three years, with an arrangement fee of £999 and loan-to-value limit of 80%, it is a marked improvement on the 75% limit which has been the norm for many months.
Says Charcol senior technical manager Ray Boulger: “If you take the long-term view, perhaps over 25 years, timing an investment in a rented property is not so critical. We expect this new offer to go well.
“Property investment is attractive because it allows a gearing effect, when borrowed money works on your behalf. Nobody in their right mind borrows money to put into a pension pot.
“There are two standard options for small investors: either buy one property with the largest deposit possible, on a repayment mortgage, pay if off by retirement and take the lump sum profit.
“The riskier approach is to buy two properties, with repayments on an interest-only basis. On retirement, sell one, repay all mortgages and income from the remaining property tops up your pension.”
That lump sum on retirement is a major attraction for investors, because after payment of capital gains tax –currently at the relatively low rate of 18% and reportedly under review by Chancellor Alistair Darling – it is cash in hand and free of tight pension rules which force most pensioners to buy an annuity.
