UK buy-to-let housing fears seen overdone

LONDON (Reuters) - British buy-to-let property investors could exacerbate a housing slowdown if the country's fading decade-old property boom tempts them to sell up and take their cash, but widespread forced sales seem unlikely.

The UK housing market has lost its sheen following a crisis in the U.S. where holders of subprime mortgages - home loans to people with weak credit histories - have defaulted on repayments. This has raised the specter in the UK of a 1990s-style housing crash which led to thousands of repossessions and years of negative equity for homeowners.

However, UK interest rates are not expected to rise to a point where the country's 940,000 outstanding buy-to-let mortgages cannot be serviced from rental income.

In addition, the economy is expected to slow, but avoid a recession, and demand for rented accommodation is not expected to fall, least of all in London and southeast England where there is an acute shortage of affordable housing.

Buy-to-let investors account for 9.5 percent of all UK mortgage debt, according to the Council of Mortgage Lenders. They also took up 12 percent of new mortgage lending in the first half of 2007 -- most likely on properties bought near the top of the market.

A survey of 100 private British landlords conducted at the end of August by lettings advertiser www.ezylet.co.uk showed 4 in 10 would see their profit margins disappear if the Bank of England hiked interest rates above 6 percent.

In those circumstances, one in five respondents said they would consider selling one or more of their properties while 8 percent said they would get out of the buy-to-let market.

Interest rates are currently 5.75 percent, having risen from a near-50 year low of 3.5 percent in 2003. But the fallout from the U.S. subprime mortgage crisis and a run on deposits at troubled UK mortgage lender Northern Rock mean a rise above 6 percent is no longer on the cards.

A Reuters poll of 52 economists on Wednesday showed almost 80 percent expected the Bank of England base rate to stay unchanged for the rest of this year. Some have since pared their expectations further, raising the prospect of rate cuts.

MIXED MORTGAGES

And what of UK mortgage rates? Here the evidence is mixed. The subprime worries have pushed up short-term interbank rates which have been passed on to the consumer in higher standard variable-rate mortgages.

According to Simon Lambert of www.thisismoney.co.uk -- a personal finance product comparison site -- one market barometer is ING Direct's fee-free standard variable mortgage rate, which is typically about half a percentage point above the best value discount and tracker rate mortgages. That now stood at 6.24 percent up from 5.64 percent in June, Lambert said.

Borrowers with less than perfect credit histories were also finding it tougher to secure deals, he said.

But fixed-rate mortgages have got cheaper because long-term wholesale lending rates have fallen and some banks have also eased the relatively tougher criteria on buy-to-let mortgages in return for higher upfront arrangement fees, Lambert said.

CASHING IN

The chances of a 1990s-style crash remain small -- about 1 in 10, according to the Royal Institution of Chartered Surveyors (RICS), which last week published data showing UK house prices falling for the first time in nearly two years as steady interest rate hikes finally began to bite.

Ed Stansfield, property economist at research firm Capital Economics, said there was evidence to suggest that the number of buy-to-let landlords selling up had started to rise, especially in London and southeast England.

These areas have seen the biggest house price rises, fuelled by large bonuses earned by financial professionals -- 5.5 billion pounds ($11 billion) last year alone, according to property services firm Savills.

Stansfield said selling by buy-to-let investors who want to lock-in profit is likely to rise if they think property prices are going to be flat for the next two/three years, or even fall.

"At that point, a sharper rise in buy-to-let sales as people try to lock in the gains they have already made could intensify any downturn," he told Reuters.

Given bad newspaper headlines about Northern Rock and the state of the housing market in recent weeks, that point might be now.

However, fewer house buyers will also mean more potential tenants, which would enable buy-to-let investors to raise rents.

"This should go someway to offsetting the rise in borrowing costs landlords have seen and I can't make a strong case that forced sales among landlords will be more marked than in the owner occupier market," Stansfield said.

(See www.reutersrealestate.com for the global service for real estate professionals from Reuters).