Markets really hate uncertainty and this is especially true in the real estate sector. With uncertainty swirling around the Brexit question, it is no surprise that the Buy to Let market is feeling the effects.
Little is known about what will happen in the event of a Brexit, whether it is a Deal or No Deal versions of events.
Investing in property to let needs to be evaluated very carefully. In this article, we will be looking at some scenarios that experts predict may happen.
Rentals will likely remain in demand
Many renters who otherwise would be looking to purchase a property will continue to rent.
Some will rent because they are reluctant to buy with an uncertain financial future. Others will decide to rent since it seems that rental prices are going to remain level for the foreseeable future. 91% of landlords polled are reporting that they are not planning to raise rents due to Brexit looming. Alan Boswell interviewed many landlords to get their opinion on the buy to let market.
What does this mean for real estate investors?
Even with Brexit being a distinct possibility, it is still a good time to invest in properties to let. There will not be a shortage of renters for the foreseeable future.
There will likely be more renters than buyers with a limited number of properties to let. The rise in Airbnb has also presented some attractive possibilities for property owners. During periods when renters are not moving, there is still the possibility of renting to holidaymakers.
Stricter lending rules
In any economic downturn, banks tighten up their lending rules. Landlords, whether current or prospective, are finding it difficult to obtain mortgages quickly to be able to compete in a fluid market.
Many new requirements are put in place as a “stress test” to measure whether higher interest rates will prove too much of a burden on some. These higher rates and stricter rules will put buying a property to let out of reach for many prospective landlords. In some cases, even if a borrower is able to obtain the mortgage, it may not prove profitable enough to continue due to the higher interest rates.
The bubble may have burst
The buy to let market has slowed down in recent weeks due to Brexit concerns along with other influences.
The stricter lending requirements in combination with regulatory changes are making it difficult for borrowers to feel confident in a quick return on investment.
A 3% stamp duty surcharge initiated in 2016 and the end of mortgage tax relief cuts have impacted the decision making for many.
Combine all of that with the fact that rental rates are stagnant, it stands to reason that people will be reluctant to take on a mortgage.
Opportunities do exist
Up until 2016 when the referendum occurred, the average return on a house was 22.1%. Since that time, housing prices have only risen by 9.2%.
Prospective buyers can take advantage of the stagnation of housing prices now, and can probably do even better if they wait a few months.
Though it is unlikely for prices to drop, they may not grow. This could prove to be very attractive for investors looking to get into the market.
Why it’s still attractive
People still need a place to live in. With new lending rules and a likely drop in income due to Brexit, many are dropping out of the market to purchase a house.
Current landlords are in a good position to buy since they can use their mortgage as the investment. There is not much out of pocket when compared to other types of investments. Only the deposit needs to be covered and the mortgage covers the rest.
There is no shortage of properties that need some severe updating. This is a huge opportunity for investors entering the buy to let market. Adding value to a worn property is an excellent way to increase revenue during lean times.
Even after Brexit, the market will eventually rebound. Then rents can be raised or properties sold off for a tidy profit. It will likely take a few years, but the UK housing market has proven itself remarkably resilient.
The salad days are nearing an end when it comes to big gains in the buy to let sector. That is not to say that one should steer clear of that kind of investment.
It always pays to use some savvy when investing and now it is more important than ever.