Experience prevails on buy-to-let market?

The collapse of property prices has made life very difficult for the slew of amateur buy-to-letters that flooded the market in recent years.

However, recent figures from the Paragon Mortgages’ Financial Advisor Confidence Tracking (FACT) index found that, while new buy-to-let lending has ground to a halt, many experienced landlords are seeking to increase their property portfolios.

The news comes despite increasing concerns about the state of the housing market, with end of year figures from both Nationwide and Halifax showing around a 16 per cent drop in house prices in 2008, largely due to constraints on affordability as lenders tighten mortgage borrowing conditions.

The FACT index surveyed 200 mortgage brokers, and found that the number of new landlords entering the buy-to-let market fell to 10.6 per cent of business in the third quarter of 2008, compared with 18.3 per cent during the same period in 2007. Mortgage Strategy reported that this is the lowest figure recorded by the survey since 2001.

The FACT index survey found that 55 per cent of business was for remortgages, and 30 per cent came from existing landlords who wished to expand their portfolios.

Managing director of Paragon Mortgages, John Heron, told Mortgage Strategy that, “The number of first-time landlords entering the market is at its lowest level and perhaps that is a good thing in the current economic environment.

“Landlords with experience of the private rented sector are well positioned to take advantage of current conditions, particularly with rising levels of current demand.”

Mr Heron continued: “Professional landlords represent the core of the buy-to-let market. They are the investors that base their purchase decisions on proven levels of tenant demand for long-term returns rather than speculative investment for a quick profit.”

A recent survey from the Royal Institution of Chartered Surveyors (Rics) backs the findings of Paragon Mortgages, but highlighted signs of a potential downturn in the buy-to-let sector.

The Rics Residential Lettings survey found that new instructions to let - seen as an indicator of letting supply - increased in quarter three for a second consecutive quarter. In addition, only 0.5 per cent of landlords opted to sell their property on the expiry of a tenant lease.

Rics attributes this trend to unwillingness amongst landlords to accept lower prices for their property portfolios.

The Rics survey found that demand remains strong as first-time-buyers opt to continue renting as house prices fall. However, it pointed to a fall in rent levels - for the first time since April 2003 - as a result of the increased supply of rental properties.

A perhaps more worrying result of the economic downturn comes from more than 20 buy-to-let property clubs across the UK which Investors Chronicle magazine claims are encouraging members to strike controversial sell-and-rent-back deals with desperate homeowners trying to avoid repossession.

Sell-and-rent-back deals offer those who are struggling to make mortgage payments the option of selling their property at a discounted rate, and then renting it back from the new landlord.

With repossessions set to reach 45,000 by the end of the year - a 50 per cent increase on 2007 - and increased unemployment, this sort of scheme is likely to become popular among those who do not wish to move but face the repossession of their homes.

Sell-and-rent-back schemes have been criticised, however, for offering only around 60 per cent of the value of a property and rental contracts that are often not as secure as is claimed. For example, if a landlord were to become bankrupt, property he owned under this sort of scheme may not be protected.

Investors Chronicle has criticised some buy-to-let clubs for encouraging the practice.

“Considering the current crisis in the housing and mortgage markets, you would think that the days of the buy-to-let property seminar were over,” said Claer Barrett, a journalist at the publications. “Sadly, the reverse is true.”

Adam Sampson, chief executive of Shelter, the housing charity, said: “These seminars are basically groups of unprincipled people working together to discuss how they can profit from other people’s misery and distress.

“People who are on the verge of losing their homes are extremely vulnerable and are being preyed upon. Encouraging people to trust their home to a company that may then throw them out after six months, whilst legal, is as good as theft.”

Many of those entering sale-and-rent-back schemes will not have tried selling their home privately or investigated equity release options.