First published in Press & Journal on 19 February, 2008.
The doomsters have been out in force since last year warning of exceptionally tricky financial markets in 2008, not least for those who have invested in the property buy to let phenomenon. Now, it’s certainly true that a major issue facing many such participants is that properties bought on 3 to 5 years fixed mortgage rates of under 5 per cent are now coming to an end and new variable rate are significantly higher, perhaps as much as fifty per cent greater than previously. This means a huge rise in monthly interest rate payments.
Equally, arrangement fees for new mortgages are much higher and together with higher rates these represent a difficulty for many, especially when rental rises are not taking place. Moreover, there is so much building of one and two bedroom apartments in our main cities that supply exceeds demand and many new-build properties are lying empty.
The challenge for all property owners then is to hope for an early slide in mortgage interest rates while keeping their properties let so that, as far as possible, the costs of borrowing can be covered. Clearly those who are very extended by debt will be nervous. The individual who owns four heavily mortgaged properties, bought in recent times could well be alarmed by current events but the key is to be flexible enough, perhaps through lowering rents, to keep as much as possible of monthly interest and capital costs covered.
On the other hand, those who have been in the buy-to-let market for some time have seen significant capital value increases and these are likely to provide quite a bit of compensation for higher interest rates.
The big question everyone is asking, however, is ‘will property values fall?’ So far at least Scotland has been insulated by the worst of these and indeed average property prices have continued to rise, so there is a reasonable prospect that with interest rates starting to fall this will ease the burden on mortgage holders and encourage more buyers. I don’t see major declines in value coming along, since even though the economy is heavily laden with debt employment remains high and there is no getting away from the fact that a rising demographic of household formation means that people will always need somewhere to live.
Property is still a good place to put money. The attraction of course is that people understand the property market more than the stock market or the pensions market. After all, we are all home owners and many of us have bought and sold, maybe half a dozen properties over the years, so we are reasonably comfortable that we know how it operates. For most, the stock market remains alarmingly volatile and pensions are still not all they used to be. Certainly, Gordon Brown’s last minute u-turn on proposals to permit properties to be incorporated into Self Invested Pension Plans (SIPPS) was a blow for taxpayers but the key thing is to ride out the difficulties how ever one can.
A further upside is that for those with capital behind them the current hiatus in the market could be a good time to buy, especially for the longer term – 20 years or so. A further bit of optimism arises from the very likely change in Capital Gains Tax from a top rate of 40 per cent to a flat rate 18 per cent. That means tax could be more than halved on sales of buy to rent properties from April this year. This alone is a boost about which owners of buy to let properties should be rightly pleased.
John Mason is a partner at French Duncan, Chartered Accountants
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