Location, location, location

Many people are now getting interested in buy-to-let, because the alternatives don’t look very exciting. Keeping cash in the bank usually produces a return below the rate of inflation that is effectively negative. Added to this, the stock market is looking overpriced, meaning that both of these are less than appetising alternatives.

Buying and letting can be more handson, but it has the attraction that it is an investment form that (unlike a pension) doesn’t require you to buy an annuity on maturity and it also allows you to borrow and then offset interest costs on those borrowings against rental income. More areas are now reporting increases in both rent and house price levels, generating still more interest.

Smart people will know that average figures for house price and rental inflation are hugely distorted by London, especially “prime London.” In this ultra high-end part of the spectrum, homes are the province of an international market that is driven to a large extent by external UK exchange rates and the need for the international wealthy to find a safe (for which read well-hidden) home for assets.

They also know that the UK government would like a bit of inflation (though not too much) to “inflate” the national debt away. Real assets, such as property, usually hold their value better in an inflationary environment than bonds or cash deposits, creating an added incentive to buy property to let.

Sure, the success of schemes like Help to Buy, will lead more first-time buyers to buy instead of rent, which could make rents rise slower than the rate of general inflation, as they have nationally for most Isa subscription allowances in £ per annum 2013-14 2014-15 Individual savings account (ISA) subscription limit Overall limit 11,520 11,880 Of which cash 5,760 5,940 Of which stocks and shares 11,520 11,880 Junior ISA subscription limit 3,720 3,840 Child trust fund subscription limit 3,720 3,840 Annual tax-free ISA savings allowances of the last five years. However, this extra demand from these previously frustrated house buyers will further push up house prices.

Looking at the big picture, it seems evident that the lack of supply of new housing plus the massive and ongoing level of net inward migration (as long as the UK stays in the European Union), will mean that rents and house prices will continue to show a strong upward trajectory in the longer term, though whether rent rises will keep pace with the rate of general inflation is hard to predict. This will depend on the volume of new housing stock that is built and demography, especially future migration levels.

The reality is that to be successful in buying and letting property, one must be very careful where one chooses to buy in order to get a combination of both rising house prices and rents. In the UK, there are a few places where some flats and houses are still selling for less than what they went for in 2003—feel free to calculate the extent of the losses after inflation has been taken into account.

Often the worst performers have been the “me-too flats” in tertiary towns in unemployment black spots which were sold en masse to naive property investors— either singly or in funds—by commissiondriven property syndicates. Due to local oversupply, rents on these kinds of properties have been stagnant, too. Home buyers, whether investors or buying for oneself, must look at the factors that drive local markets because it is often local regeneration initiatives and business investment that creates real jobs, which can in turn lead to house prices and rents going up.

Would-be landlords should take account of and stress test their business to see how their cash flow stands up to rising interest rates.