Growth of the buy-to-let market may have destabilised the housing market enough to create a housing ‘bubble' suggests a Durlacher report, as a significant number of buy-to-let investments are highly geared against other remortgaged property.
Despite the small number of buy-to-let properties held in the UK, the investment research firm suggests optimism for the future of the housing market is now overinflated, because at least 40% of buy-to-let properties were purchased on the back of remortgages for existing properties.
Moreover, David Parrell, analyst at Durlacher argues the housing market in fact peaked in 2001, but continued to climb as a result of the high gearing of buy-to-let properties and the growth of self-certification mortgages.
As a result of pending FSA mortgage regulation and the tightening of mortgage lender underwriting criteria – to confirm an applicant’s income – the supply of mortgage debt will soon reduce.
Market activity in the housing sector is likely to turn soon and a "correction will take place" if interest rates and unemployment remains at current levels, adds Durlacher, as house price inflation is unlikely to continue and many buy-to-let properties bought in 2003 are now already yielding returns of just 1%, before maintenance.
The firm predicts geared increased will soon reverse, nominal house prices will fall by 30% from their peak, and mortgage lending will fall by 55% over the next three years although equity release is likely to continue to grow.
At the same time, however, property prices are unlikely to suffer negative equity for as long as homeowners experienced in the early 90s, as Durlacher suggests "real prices" will fall for only two years compared with the 1998 five-year property recession.IFAonline
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