Buy-to-let was a boom sector in the years before 2007 but suffered when the credit crunch hit and mortgage finance dwindled. Which way is the market going now?

Buy-to-let is a sector that has bounced back strongly in recent months, alongside the overall property market. However, just like the wider property sector, questions are now being asked about whether a new bubble is emerging that will inevitably burst.

From boom to bust to boom again?

The period before 2007 was certainly one boom period for buy-to-let, but mortgage finance for this purpose all but vanished when the credit crunch took effect. Naturally, the market took a nosedive, along with the wider property sector.

However, with mortgage lending having persistently risen in both the owner-occupier and investment sectors over the course of 2013 and the wider economy appearing to be set on a more promising trajectory towards lasting growth, there is plenty of optimism, although tempered with fears that history will repeat itself.

Indeed, there are those who are already talking about a new housing bubble, although that may be a somewhat Metropolitan concern, as prices surge in London but are only increasing very gradually elsewhere.

Signs of boom

There are certainly some indications that the buy-to-let market is doing well. The LSL Property Services’ Buy-to-Let Index for September revealed average monthly rents were up to £757, 2.1 per cent up on a year before. At the same time, lettings are also up, with a 9.2 per cent increase in tenancies in England and Wales. The average gain per landlord was £12,129, of which £8,164 came from rents and the rest from capital gains.

A perfect opportunity

With the Bank of England signalling that interest rates are likely to stay at 0.5 per cent until unemployment drops to seven per cent, now may be a particularly advantageous time to invest.

This is the view of managing director of broker Mortgages for Business David Whitaker, who said: “Rates remain low, and yields are consistently high, which is encouraging landlords to increase activity. Confidence is generally high – among both lenders and investors – which is sparking even more growth in the sector.

“Yields are higher just as landlords are starting to see prices rise more seriously too, so we’re expecting this surge of interest to continue.”

The fear of bust

Is all this unsustainable? Some have suggested other factors boosting the overall property market could start to bear down on rents. Speaking to the Daily Express, estate agents Chesterton Humbert have said the government’s Help To Buy scheme could help enough people to get on the housing ladder to reduce London rents by up to five per cent.

The firm’s Residential operations director Richard Davies said: “Landlords may find their tenants giving notice as they move away from the private rented sector and into home ownership. As more properties come to the market for re-letting, rental levels could fall.” He predicted that this would gradually happen in the rest of the country as well.

Bust is not inevitable

However, this does not mean buy-to-let investors will be bound to find everything comes crashing down. The key, according to managing director of First Mortgage Ian McGrail, is not to budget for an endless boom. That means being price competitive to ensure an investment is not dependent on unrealistic assumptions.

He said: “As the rental market turns in favour of tenants, don’t push for the highest rent you can get, but set it at a level that will attract long-term tenants.”

So the lesson remains the same: plan for the long-term, not for a boom that cannot last.