The British love affair with property is more intense than ever.
For many first-time buyers, sadly, it is a case of unrequited love, as sky-high house prices destroy their dreams.
Buy-to-let investors, however, are free to consummate their passion again and again, using the growth and income from one property to buy the next. And the next.
They will be celebrating the news that buy-to-let has been the most rewarding investment of the last 18 years.
It has delivered average annual returns of more than 16%, beating equities, bonds, cash and commercial property, according to new figures from former economist Rob Thomas.
He reckons buy-to-let is set to outperform in future. I’m not so sure.
Past Perfect
Anybody who has ever invested in stocks and shares will be aware of the phrase ‘past performance is no guarantee of future results’, a disclaimer investment companies are obliged to make.
I’ve never seen this phrase applied to buy-to-let, but it should.
Because there is absolutely no guarantee that buy-to-let will continue to deliver the goods.
In fact, I suspect the glory days may soon be over.
Future Imperfect
First, let’s look at those past performance figures. They are calculated from the final quarter of 1996, when the first buy-to-let mortgages appeared on the market.
That was absolutely the ideal time to invest in property, with house prices only just beginning to recover from the painful crash of the early 1990s.
At the time, the average UK property cost just £66,094, according to Halifax. Today, it costs £177,704, a rise of a mighty 168%.
That increase has largely been driven by plunging base rates, which have fallen from a high of 7% in 1997 to just 0.5% today.
With the UK economy recovering fast, that trend is set to reverse.
From here, rates can only go in one direction, and that’s upwards.
Despite current euphoria, property prices are unlikely to repeat their past performance.
Rates Are Rising
Tenant eviction firm Landlord Assist has just warned that the “inevitable” rise in interest rates will hit profitability.
It said base rates could reach 3% over the next three years, lifting buy-to-let mortgage rates to 7% or more.
Many amateur landlords will struggle to break even as a result. And they won’t be able to pass on the extra costs to tenants, as most can’t afford higher rents.
The buy-to-let bandwagon has rolled on for years, but now could be the worst time to hop on board.
Problems, Problems
Buy-to-let is a high maintenance investment.
You can hire an agent to find tenants and collect the rent, but they will take a hefty slice of your profits. If you do it yourself, brace yourself for plenty of effort and hassle.
You also have to do up and maintain the property, and leave a margin for void periods, when your property lies empty because you can’t find a tenant (but still have to pay your mortgage).
So don’t kick yourself if you’ve missed out on the buy-to-let bonanza. It won’t be the best investment forever.
