There’s no two ways about it, the buy-to-let market has become much more challenging for investors of late for a broad variety of reasons. And landlords need to be braced for conditions becoming even tougher in the months ahead.
One problem I previously touched on is the impact that the Bank of England’s recent interest rate rises have had on driving buy-to-let mortgage costs higher again. And the trend is expected to continue into 2019 and probably beyond.
Andrew Turner, chief executive of dedicated buy-to-let lender Commercial Trust, was bang on the money when he commented this week that the current environment of exceptionally-low mortgage rates “will have to change.”
Turner said that “the bumpy road of Brexit may see the base rate brought down slightly, once things settle, but I think it is unlikely and in any event, there is not too much scope for reduction.” He added that “my view is that the overall picture for the next decade is a gradual upward trend in rates.”
Rates poised to rise
That said, recent commentary from the Old Lady of Threadneedle Street released earlier this month suggests that any reduction in borrowing costs in the short term or beyond to support the economy in the event of a catastrophic no-deal Brexit cannot not be considered a given.
As the Bank of England explained in its most recent minutes, “the economic outlook will depend significantly on the nature of EU withdrawal,” and that therefore “the monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction.” Indeed, should sterling dive in response to the UK’s Brexit strategy, the committee may have no choice but to hike rates in an effort to tame a likely surge in inflation.
A property price crash?
Another clear risk of a disorderly Brexit in the spring is the possibility that house prices in the UK could fall off a cliff.
The property market crash that many had predicted in the event of a Leave campaign victory in June 2016 may not have transpired. But home price growth has slowed to a crawl, the latest home price inflation gauge today showing expansion of 3.5% in September, more than halving from the 7.7% rise posted exactly two years earlier.
The impact that Brexit is having on homebuyer confidence has proved devastating, and the problem was again highlighted by Foxtons this week, the estate agency advising that it had recently closed another six branches in and around London in reflection of the “challenging market.”
Demand from first-time buyers may still be strong, but the uncertain outlook for the UK economy has seen transaction activity from existing homeowners slow to a crawl. And I would expect buying appetite from both of these demographics to sink, at least in the immediate term, should Britain fall out of the EU with a bang.
The buy-to-let sector is becoming more and more of a minefield for investors and for a variety of economic and political factors. In my opinion it’s a sector that is far too high risk and I think that savers should seek other ways of deploying their cash, like stock market investment, to generate solid returns.
Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.