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The Credit Cruncher was conceived to help you to keep up to date with credit crunch and recession developments, it provides some helpful credit crunch advice and it addresses personal debt. The Credit Cruncher also seeks to explain how the credit crunch started and shed some light on the worldwide recession. Recently, we have begun to look at how BREXIT will affect the UK economy. Please feel free to leave comments where relevant.

24 May 2009

Is the buy-to-let market dead?

Buy-to-let was a buzz-word that became a market of it's own in the last decade or so as many individuals discovered it as a means of generating huge amounts of money, and as a side-issue, huge amounts of debt.
Whilst it is certainly true that the 'Buy-to-let Boom' is over, buy-to-let as a concept is still a feasible business model as long as not taken to the extremes that have left individuals with millions of pounds of debt and a declining property portfolio. One such person was interviewed on British television this week, stating that their debt stood at something like £6.5m and losing properties to repossession on a daily basis.
In retrospect the mistake was fundamental and is basically at the root of the global credit crunch - an over-reliance on property prices to generate capital. Your typical buy-to-let mogul who emerged in the last decade proceeded in the following manner:
After a windfall of some type or other, the budding property magnate decides to buy a property (generally reasonably cheaply) with the intention of renting it out. A few renovations make the house habitable and a tenant is installed. It is probably the case that a small mortgage was taken on the property as the cash windfall would have probably covered a lot more than just the deposit. Let's assume the property was bought for £100k and £5ok of that was mortgaged... in the time between the purchase and the tenant being installed, the property has been improved, the market has gone up and the property is worth £120k, the mortgage is effectively being paid by the tenant and the owner has £70,000 equity in the house...
If this equity is 'realised' (and here is the bit where it all goes wrong...eventually) the house gets remortgaged and the £70,000 goes to be used as a deposit on three more properties where the exact same cycle is repeated.
If, two years later, the property is worth £150,000 then all is well and there is plenty of equity probably in each one of the properties - and this is how things went for a number of years. However if you have stripped equity out of a property and then the market declines, it is a very different story. The incredible part of the story is that mortgage companies seemed perfectly happy to allow property buyers both domestic and commercial to remortgage their houses with no thought as to what would happen if prices went down.
So I return to the question: is buy-to-let dead? No, emphatically no... what IS dead is remortgaging up to 100% of the current market price of your property whether it be your home or one in a string of properties. It is the purchasing of property with the assumption that 'the only way is up' that has hit a brick wall.
There is no reason at all why someone would not invest their nest-egg in a property that will provide rental income along with a (long term) capital return.
There is every reason not to use the equity to invest in another property without doing a lot of careful calculations. With a decline in house prices comes a decline in rental prices as renters become buyers, if you have a mortgage on your rental property you cannot guarantee that your tenants will cover the mortgage and you cannot guarantee that the value of your property will automatically rise in the short-term. If you understand these simple concepts then maybe you are ready to plunge into the market of buy-to-let..

Related posts:
When will the property market recover?
25% house price drop expected
Worse-case scenario for house prices
Sub-prime mortgages to blame?

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