This week, the next big thing in the UK property investment world would appear to be buy to let - again. Having obviously not learnt from the last hype and furor that Buy to Let caused, the pr gurus of the world seem hell-bent on making us believe it's "ripe for a comeback"
Ripe indeed - unbelievably, Buy to Let is making the headlines once again. Having conveniently forgotten that this is one of the main reasons the UK housing market is in the state it is, the mortgage and finance world have still yet to realise that you cannot polish a proverbial.
The changes in the budget opening up the residential market to REITs and lowering of stamp duty to encourage residential property buying in bulk has led to mortgage companies the length and breadth of the nation to wheel out ever more inventive mortgage products. All designed of course, to entice you into borrowing vast sums of cash that you can just about afford now - but have more chance of seeing Satan himself dancing on ice than paying the monthly mortgage bill when interest rates go up.
Buy to Let as a concept has worked out ok for a few landlords over the years, but usually only on the short term, and only when built up relatively slowly. In the list of "quality long term investments" in my life I have considered Buy to Let several times, only to repeatedly apply the phrase "If that goes in there I'm a magician" - simply because it has far too many variables in the vast majority of possible circumstances.
What's the problem?
We don't need to wind the clock back all that far. Buy to let first began to boom when equity release became a common product in the mortgage industry. For the few of you unfamiliar with the idea, equity release was bought in to enable people to borrow or extend their mortgage on the rising value of their property - in essence, free up cash to do other things with and pay it back at a mortgage rate rather than a personal loan rate.
Equity release as a tool has been abused before - stocks and shares firms had been peddling the concept to encourage more investment volumes into the markets in the late 80s, only to have that loophole closed rather sharply.
In the previous buy to let boom, OPM (Other Peoples Money) investing touted by the likes of Guy Kawasaki of "Rich Dad - Poor Dad" fame, suggested that no-one really needs any hard cash - just borrow it and provided you invest it in the right way you should make a profit and come up smelling of roses. The reality for most however, is entirely different.
Now that getting a bank to overvalue a property to allow you to use OPM effectively is getting harder, the whole concept begins to fall apart. Rents may well be rising as the volume of property sales falls and at the moment, that's positive. Positive until inflation starts to get out of control and interest rates rise once again - leading back to an even worse version of what we already have. It's a bit like taking a bucket of porridge, putting your finger in and turning it, and then expecting some kind of life-changing revelation. We all know it won't happen - but it might be nice if it did.
The mortgage companies are playing on this, even though they are only just short of a melt down themselves. The mortgage market right now is in a state similar to the Starship Enterprise on Star Trek - serious peril is on the screen, with Scotty in the background shouting "she cannie take no more Captain". Fortunately, in Star Trek - the outcome was always good. The mortgage market however could well have a very different ending.
Mortgages and regulation
Much as it might seem, I don't lay the entirety of the housing market crash at the foot of the bankers and mortgage providers - more of a "what have the Romans ever done for us?" type situation. Banks and their mortgage products work very well indeed when the market and financial situations are well balanced. The issue is that right now, they are not. House prices are too high - and people need to borrow more to get on the housing ladder. Lending people more money is not the way out - the failure of quantitative easing shows that.
The mortgage industry needs tighter controls on how much it is allowed to lend against an asset, and be forced to factor in possible depreciation of an asset if the market starts to fall, so as to limit their risk exposure and avoid the need for future government bail-outs.
On the whole - as the 80s retro song title would suggest, Relax - don't Do It: When it comes to Buy to Let. There are far safer ways to invest in property without needing to expose yourself to inflation and rising interest rates.
- Thursday 07 April 2011