Impact of the credit crunch

As with any investment market, there are advantages and disadvantages of a rising and a falling market.

When property prices are rising, buy to let investors benefit from increased capital growth as house prices go up and tenant demand tends to grow as fewer tenants can afford to purchase. The downside for buy to let investors is that the cost of buying a property also rises and typically as rents grow more steadily over time than house prices, rent increases rarely keep up with increased investment costs. This results in buy to let returns tending to decrease.

The credit crunch changed the housing market in two main ways. Firstly, those that wanted to buy found they were unable to secure lending at a reasonable interest rate, and more importantly had to put down much larger deposits, such as 15-25% instead of 5-10%. This meant that even if people wanted to buy a home they didn't have the cash, so they had to rent or stay at home.

Secondly, with a fall in demand for residential property, prices started to slip and with all the bad news about banks and a pending recession, those that could still afford to buy decided to hold off. This led to further bad news about falls in property prices, people continued to delay buying and prices continued to fall and are likely to do so, until confidence and more flexible lending comes back into the market.

For the Lettings Market this initially gave the market a boost. From 2006 through to 2007, a slight oversupply in some areas had caused rental returns to fall to 4-6%. Meanwhile rising interest rates meant you could secure a 7-8% return by leaving your money in the bank. With the credit crunch driving down interest rates to 1.5% in December 2008 and now down to an all time low of 1%, even 4-6% returns makes buy to let a more attractive investment!

From the latter part of 2007 to the end of September 2008, rental demand shot through the roof.  People couldn't afford to purchase properties or were too frightened to, so they continued to rent or went into rented accommodation rather than bought. This led to a general rise of 10% in rental income - more in some areas, slightly less in others - providing a great financial boost to buy to let investors and letting agents.

However by October 2008, things started to change again. The volume of properties being let was still higher than the previous year (in most areas), however frustrated sellers, often courted by estate agents who were quickly turning to lettings to boost their flagging income, put their homes up for rent so they could move on.

This, for many areas, tipped them into oversupply again, and although the number of lets were going up, suddenly buy to let landlords were competing with homeowners desperate to rent their property. Rental prices fell back and only the properties in the best areas, with the best value price tag were let.

In 2009, tenant demand is generally up and good value properties in good condition, in good areas are still renting at good prices. Those that hold out for too high a rent or have properties in not such good condition will struggle to let. Another issue that is on the increase as we head into recession is the rise in unemployment which will increase the number of tenants defaulting on their rent, so it is worth considering protecting against this.

The biggest difference in 2009 though, is that those buy to let investors who have the cash to buy property are starting to see the benefits of a falling housing market. Properties that were out of their price range are now becoming extremely good value for money, with reports of desperate sellers selling property at up to 50% below its current (low) market value. This allows investors to snap up bargain properties that when the market turns, will benefit from some great capital growth and help to boost those all important rental returns.