The Credit Crunch & House Prices and Rents – Advice from LettingFocus.com

THE CREDIT CRUNCH, HOUSE PRICES AND RENTS – ADVICE FROM LETTINGFOCUS.COM

What property buyers need to know about the credit crunch by David Lawrenson. Ask us for help with your buy to let and property investments.

Landlord expert David Lawrenson of www.lettingfocus.com says, "It’s got tough in the credit markets. All the main mortgage lenders have now cut back on the amount they will lend relative to the value of properties and tightened their criteria for new loans. This change has hit both residential mortgage lending and loans for buy to let."

In this article I’ll examine how mortgage availability has been tightened and the implications for the housing market in general and buy-to-let in particular.

Residential mortgage lending is getting tighter

If you want to buy a property either for yourself or to let out and you have not got a decent deposit to put down or you have a bad credit record things will have become a lot tighter for you recently. In fact, things have become quite a bit tighter for everyone.

Loans to value of over 90% have almost disappeared and the best interest rates are only now available on loans of less than 80% loan to value.

So, it seems the days of cheap money have disappeared for a while and we can see the back of six times income multiples at least for a year or two.

In the year 2007, it was thought that about 150,000 people borrowed over 90% of their property’s value, so this clampdown on loan to value really does have the potential to reduce demand for houses and could hit prices harder than we have seen so far.

The best deals in the standard residential mortgage market are available to those borrowers who have to borrow the least. Nationwide has said its best mortgage rates would now only be available for borrowers who put in at least 25% of a property’s value!

And what of house prices?

As we near the end of 2008, we have only seen a gentle tailing off in house prices so far. Mortgage approvals are also at very low levels.

One interesting question is how far the credit squeeze will impact on house prices because so much of the growth in the financing of the mortgage market has been through the capital markets (rather than via savers’ deposits). Indeed, some analysts think that up to a half of mortgage lending in 2007 may have been funded from other mortgage backed securities.

Now that fear stalks the credit markets and the securitisation markets are “closed for the duration” the banks' other sources of borrowing have soared in cost which have been passed on to borrowers, thus trimming the impact of central bank base rate cuts.

Bad time to get mortgage loans

This has come at a bad time, of course because in 2007 and 2008 a lot of people – some estimates put it at 1.2 million - are coming off fixed and discounted deals taken out two to three years ago and are facing big increases in their mortgage rates this year.

However, whilst repossessions are going up, they are still well short of their 1991 peak and less than they were at any time in the 1990s. But it is possible that things will get worse and property values could fall more sharply. Indeed many professional landlord investors are hoping for just such an outcome, so that they can come in and hoover up property at bargain prices.

Buy to let mortgage picture

It has also got tougher for buy to let borrowers. Moneyfacts.co.uk calculated that UK landlords in 2007 and 2008 will need to find at least £5,500 more of their own money to buy the average buy to let property than they would have had to in 2006. This confirms a similar finding by RICS.

Also, buy to let borrowers will now have to find at least 20% of the property value - the days of 10% have long since gone.

Woolwich, never the most gung-ho of lenders, has just cut the amount it will lend landlords to 75% LTV and most lenders are now demanding a 125% or 130% rental cover to interest ratio.

A survey by Savills said that about a quarter of landlords would be unable to make further purchases because of this tightening in credit criteria.

And yet figures from the Council of Mortgage lenders showed buy to let lending continuing to hold up, no doubt as professional landlords chase the increasing rental returns caused by so many would-be homebuyers becoming tenants.

Future predictions

Much will depend on how the rest of the economy bears up and in particular the growth in personal earnings and the rate of unemployment.

And we should not forget that as long as immigration continues to increase, the resultant population growth from this source alone could keep house prices going up. (But this could be one to watch too, because government stats show that the recent fall in the Pounds value against the Euro linked currencies has meant that the UK is not quite the shining light it once was for those from Poland and the Baltic states.)

But, don’t forget, we are not building enough houses either so this in itself points to increases in house prices.

Making predictions is hard tight now because of what that nice Donald Rumsfeld might call the “Unknown Unknowns” The fact is we simply don’t know what further credit bad news awaits!

However, one thing we do keep seeing is that rental rates are going up strongly. (Well, they are outside the “oversupplied me too buy to let ghetto flats” sold to novice landlords by sharp suited salesmen)

Partly, this increase in rentals reflects the problems would be first time buyers face in getting mortgages and partly it’s because these buyers believe all the bad news about house prices that the media is printing and are choosing not to buy.

For the brave and those with access to credit, this could be the best time to buy for years because the state of the current market means vendors will listen to cheeky offers and buy to let landlords will see rental incomes grow due to the increased pool of tenants.

About David Lawrenson and Lettingfocus.com

If you need more advice on the credit crunch or the outlook for house prices please ask me. I’m David Lawrenson from property investment mentors www.lettingfocus.com.

I’m the author of “Successful Property Letting - How to Make Money in Buy to Let” - the UK’s top selling property book. Buy the new edition here: buy to let book. It is fully up to date with all the recent changes to tenancy deposit schemes, HMOs, licensing, capital gains taxes and it has new sections on buying below market value.

What’s unique about lettingfocus.com is that we offer independent property coaching because unlike most people in the buy to let and property “advice” business we are not linked to a property company, developer, estate agent or bridging loan financier and do not receive commissions from any of these sources either.

We offer advice both at our property seminars and also on a one to one basis.

Lawrenson and Lettingfocus.com – Freelance Writer, Speaker and Consultant

I am an independent expert on the UK property market and a well known property investment blogger. I contribute to newspapers and a host of property websites as a freelance property writer.

My work as a consultant also stretches to helping companies such as banks, building societies, housing associations and web portals with their buy to let and property products and services.

You can read more of my landlords blog and read details of my networking, advice and buy to let networking programme at my website LettingFocus.com. For contact details, follow any link to the site.

My next London property investors networking meeting is coming soon. Contact us for more information.