Slow growth restrains buy-to-let investors

Buy-to-let purchases fell to a new low of 7 percent of total property buying in the second quarter of this year, down from the previous quarter's 9 percent, First National Bank's estate agent survey for the second quarter shows.

Along with this decline, agent confidence in the near-term prospects for this segment of the property market also deteriorated in the quarter.

Even though the buy-to-let market is not setting the world alight, agents still point to some improvement in rental market fundamentals this year.

Agents surveyed say there has been a noticeable increase in estimated average gross yields on rental properties, and therefore a rise in the percentage of properties where they believe the rental income can cover at least 100 percent of repayments on a 100 percent bond.

"This is mildly better news for those buy-to-let buyers who use credit, although such properties do not yet constitute the majority," FNB home loans strategist John Loos says.

"This improvement seems to correlate with Rode data that indicate some renewed flat rental inflation this year after last year's slump."

He says that, ironically perhaps, these gradual improvements in the fundamentals that underpin the buy-to-let market are probably partly a result of a lack of new rental stock coming onto the market due to weak buy-to-let buying. "Such is the nature of cycles.

"So why no significant buy-to-let market improvement yet, if yields are turning for the better?

"Probably because a significant portion of the household sector is still under financial pressure following the recent recession, and it has high levels of indebtedness to work off."

He believes many would-be buy-to-let investors focus more on capital growth than on income stream, and while house price inflation has shown some recovery this year, it has been tepid.

Mr Loos says that while the fundamentals of the rental market also appear to have been improving, suggesting an improving environment for the potential buy-to-let investor, the improvement appears mild at best.

He warns that with early signs of slower economic growth ahead, salaried individuals should be careful not to rely too heavily on bonuses to fund financial commitments, as in many industries bonuses can fall away in tough times.

Even in a case where 100 percent of a bond repayment can be covered by the rental income that the property can or does achieve, Mr Loos says, buyers should remember the additional costs that must be covered.

These include assessment rates and maintenance costs.

It is also important for buyers to remember that tenants do not come without risks, and the risk of default on rental payments, and of vandalism of property in some instances, can be problems for landlords.

While inflation numbers are not showing any major risks to inflation or interest rates in the near term, the future, as always, is a less than certain place, Mr Loos says.

By historic standards, SA's interest rates appear to be at a relatively low point in the rate cycle. At such low points, he says, "we believe it wise to do scenario planning".

The past two phases of rising interest rates saw increases of four and five percentage points respectively, he says, so a rule of thumb is to calculate bond repayments at interest rates of four to five percentage points higher.

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Posted at 09:23AM Jul 21, 2010 by Editor in Residential  |  Comments[2]