IS THE buy-to-let market in crisis? Are headlines from England about new flat prices falling by 40 per cent to be taken as a warning siren? Are we reaching the stage where the buy-to-let equation just doesn't add up?
My instinct is that talk of a crisis is exaggerated. The appetite for rental properties in Scotland is still healthy and investors are as keen as ever to spot opportunity.
Certainly, investors are still piling in – the Association of Residential
Letting Agents (ARLA) reckoned that some 170,000 buy-to-let mortgages were taken out in the first half of 2007 – but things are likely to become increasingly difficult for new entrants to the sector unless they have capital behind them.
The international credit squeeze is hurting financial institutions across the board and, with banks reluctant to lend to each other, it is understandable that they are equally reticent about lending to investors.
One of the biggest pressures on surveyors currently is on rental value. We get hundreds of calls a week from buy-to-let investors who want to push rental figures as high as they will go. But surveyors have a responsibility and a duty to the lender to give realistic advice.
In fact, lenders are emphasising that the surveyors' opinion is a crucial part of the decision on whether the mortgage is granted. Some are even asking for figures for comparable properties which are let.
But, while new entrants, whose equations are squeezed by rising capital values and flat-lining rents, need to find substantial capital up front, according to ARLA figures, the average loan-to-value ratio (LTV) for buy-to-let investors was 59 per cent in the last quarter and only 1.3 per cent have LTV ratios above 90 per cent.
So what about reports of new flatted developments in England which are selling at 60 per cent of what investors paid for them? Could this happen here? I suspect that some ingredients are in place for a similar upset.
What would cause the perfect storm would be if legislation were to affect the current facility for investors to offset interest payments on a loan against tax. This could bring the house down. In an ARLA survey, some 10 per cent said they would abandon the market altogether and more than a quarter would offload significant parts of their portfolios.
The consequences for the wider housing market would be catastrophic and any such proposal must be resisted by politicians.
The market is likely to continue in good health and serve an important role in housing supply. But government must realise that in some respects, it is still a fragile flower.
• Alasdair Seaton is a partner in the Dunfermline office of DM Hall, chartered surveyors
