Peter Stephens Image source: Getty Images.
The outlook for the buy-to-let industry continues to be relatively challenging. Not only are mortgages becoming more difficult to obtain due to increasingly stringent affordability tests, the prospects of rising rents may be somewhat limited due to the UK’s uncertain economic outlook. And with the affordability of housing continuing to be relatively low, the prospects for buy-to-let investors could be downbeat.
In previous years, rental growth has helped to boost cash flow for buy-to-let investors. Since there has been a shortage of homes available given the level of demand, rents have generally moved upwards. As such, even low initial yields have not put off too many investors, since the general assumption has been that income returns will rise at a brisk pace over time.
Now though, the UK economy faces an uncertain outlook. The Brexit process may cause disruption in the near term, and consumers could become increasingly concerned about their own financial prospects. And with it being an unprecedented event, a level of caution may remain in place even once a deal or no deal has been decided upon.
Clearly, Brexit could prove to be a good thing for the UK economy. It may catalyse GDP growth and create renewed optimism in the UK’s financial future. However, there is also a risk that it will do the opposite. This could lead to reduced confidence, which may end up translating into a slower pace of rental growth across the buy-to-let industry.
While obtaining a mortgage for a buy-to-let property was once relatively straightforward, new rules mean that there are more stringent requirements in place. Prospective landlords must be able to show that the rental income they receive will cover mortgage interest payments even if interest rates rise rapidly in future years. This could make some areas unviable when it comes to obtaining finance for a buy-to-let investment. And with interest rates due to rise over the next few years, the tests on new buy-to-let mortgages may become increasingly robust.
While house price growth is now viewed as ‘the norm’, the reality is that in previous eras there were periods of severe house price declines. Given the forecast for a rising interest rate and the uncertainty created by Brexit, it would not be surprising for house prices to experience a period of slower growth, or even a fall. And since there may be lower levels of immigration following Brexit, demand for housing may not grow as quickly as had previously been anticipated. As such, the demand/supply imbalance may gradually become less stark.
Since the house-price-to-earnings ratio reached its highest ever level earlier this year of 7.7, affordability remains an issue for many first-time buyers. This could mean that prices naturally fall relative to wages, which could further reduce the appeal of investing in property. And with the stock market having already fallen heavily in recent months, now could be the right time to move out of buy-to-let and into shares.
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