Buy-to-let doomsters are way off the mark

The buy-to-let market has had a rough ride recently, with falling property prices and rising interest rates prompting fears of a bubble about to burst and frightening off all but the most experienced landlords.

The buy-to-let market has had a rough ride recently, with falling property prices and rising interest rates prompting fears of a bubble about to burst and frightening off all but the most experienced landlords.

But even though the housing market is slowing, the prospects for buy-to-let in the long run are encouraging, according to a new report from independent research agency Mintel and mortgage broker Charcol.

The report reveals that several factors will combine to fuel growth in the buy-to-let sector over the next decade. These include a shortfall of over half a million properties available for purchase - meaning potential buyers will have to rent longer than they would have liked - and a belief that first-time buyers will have to delay getting on the property ladder as they can't afford to buy in their 20s.

An expected 8 per cent rise in the student population should also provide landlords with plenty of prospective tenants. And the Bridget Jones effect- women delaying settling down until they are in their 30s - will contribute to a predicted 1.2 million more single households in the next decade.

An increasingly flexible job market, new tax-efficient property investment opportunities and more competitive mortgages will also help.

And encouragingly, rather than seeing buy-to-let as a way of making a fast buck, two-thirds of investors are in for the long haul, according to a landlord survey from the Association of Residential Letting Agents (Arla).

"There's been plenty of speculation about jitters in the sector, but a convergence of factors suggests strong prospects over the next decade. And two out of three landlords say they're in the market for at least this long," says Ray Boulger, senior technical manager at Charcol.

"The reasons for the recent yield dip are clear, but as the base rate peaks, the housing market steadies and rents edge up, landlords will enjoy healthier returns."

The changes in pension rules, allowing landlords to include buy-to-let properties within their pension fund from April 2006, will also be an attractive proposition, says Mr Boulger. "We believe this will be one of the biggest triggers for market growth [as it will] attract significant tax relief.

"And whereas a decade ago the margin between buy-to-let and residential mortgages was considerable, in some cases it is now less than a quarter per cent. We can only see this lender competition stimulating the sector still further."

The Bank of England's decision to leave interest rates on hold last week at 4.75 per cent came as no surprise. But it should have a positive effect on buy-to-let mortgage rates. In the past few years, furthermore, the Bank has resisted raising the cost of borrowing in December or January, which could mean a respite for the housing market until February at the earliest.

And it needs it: more data released last week, this time from the Halifax, the UK's biggest mortgage lender, reveals that the average house price fell by 1.1 per cent in October. This, along with weaker-than-forecast economic data - notably a fall in underlying consumer inflation to 1.1 per cent in September - means the financial market consensus is that the cost of borrowing has now peaked.

Some lenders are already reducing their fixed-rate buy-to-let deals in anticipation of a fall in the base rate next year. According to finance journal Business Moneyfacts, six lenders have cut rates on these products in the past fortnight, including Standard Life Bank, Lloyds TSB Scotland, NatWest Mortgage Services, Mortgage Trust and Kent Reliance building society. The Bank of Scotland also reduced its fixed rates on 18 October but withdrew the range completely on 28 October.