Brickonomics

Is there a buy-to-let bubble? We already know what these guys think, and now here’s Ashley Seager of the Guardian joining in:

If something looks like a bubble and smells like a bubble, there’s a good chance it may be a bubble. Figures out last week showed a renewed frenzy of buying in the buy-to-let market, an area of the economy that is flashing warning signs as never before.

The new figures from the Council of Mortgage Lenders were a shock. In the first half of the year, they showed that buy-to-let mortgages jumped by a fifth in value, or a record £17.5bn, a figure that almost matches the amounts paid in City bonuses in the same period. Buy-to-let mortgages now account for 8% of the total, having grown from zero just a few years ago. Were it to go pop, that is a big enough chunk to drag down the whole housing market.

The surge in borrowing, along with the Bank of England’s interest rate cut in August last year, helps to explain why the housing market has been robust so far this year in spite of relatively low numbers of first-time buyers, who are at the limits of affordability and are being squeezed out by prospective landlords.

Buy-to-let investors have apparently responded to rising rents, in turn caused by large-scale migration from eastern European countries. Poles and the like are the new tenant class, especially in London and the south-east.

But a small rise in rents does not alter the fact that the economics of buy-to-let are now very unfavourable, as they have been for some time…

Basically speaking, your monthly rent is now very unlikely to cover your mortgage, even on an interest-only basis. What worries me, though, is that people are not doing these basic sums. You hear people saying: “I am getting a buy-to-let because everyone else is and property always goes up in value.” What the average yields show is that many investors are making no income from their property investment, and are relying exclusively on capital growth to provide a return. It is the same as a gamble on a share in a dotcom company that is not making any money but which investors hope will nevertheless rise in price. And this at the end of a 10-year period in which property prices in this country have tripled. Betting on further large capital gains to compensate for low yields is brave as well as risky…

Other figures released last week illustrate a key reason why property prices are high in Britain: supply is limited.

The government said 165,000 houses were completed in the year to June – up 28% from the post-war trough of five years ago but still far below the 210,000 that it is estimated will be needed each year over the next 15 years to keep up with growth in the number of households.

Yeah, supply is limited, but there is a lot in the pipeline: there were 90,000 permissions in the last two years in London, of which about 80% will have been 1 and 2 bed flats, many if not most for the buy-to-let market. How big can this bubble get?