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Rate rise knocks buy-to-let

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The climate of rising interest rates may finally be beginning to bite landlords' pockets as new research shows that instructions to let property rose at its slowest pace since the second quarter of last year.

The slowdown in the sector, which has piggy-backed on the housing boom in the last three months, was shown to be primarily focused on flats, according to the Royal Institution of Chartered Surveyors (Rics).

This, the Rics residential lettings survey from August to October said, was because investors had expressed caution in the market as landlords' pockets were hit by the interest rate rise in August, the first for two years. Since then, the Bank of England's monetary policy committee has raised rates further – they now stand at five per cent, the highest level for five years.

Only six per cent more chartered surveyors reported a rise rather than a fall in instructions to let property, compared to 13 per cent in the previous quarter, as fears of falling gross yields have made investors more nervous.

Coupled with the finding that just nine per cent more chartered surveyors reported a rise in instructions to let flats, compared to 19 per cent in the last three months, this shows that, however marginal, the buy-to-let boom is beginning to tail off for UK investors. .

Rics spokesperson Jeremy Leaf commented: "The recent interest rate increases have painted the buy-to-let market as a less than favourable investment. With profit margins potentially reduced, affordability conditions could bite hard into investor's pockets and push up rents if interest rates rise further in 2007."

Mr Leaf continued: "Investors continue to express a high level of confidence in the longer-term buy-to-let market as selling activity remains low.

"With interest rates still relatively low and the economy gaining steam, first time buyers are again placing a tentative toe in the property market."

However, the good news for landlords is that tenant demand for rental property continued to remain strong, owing to the high levels of migration from Eastern Europe.

Rics reports that the demand side of the market remained ahead of supply for the tenth consecutive quarter and this should help to fuel the relentless property price increases that we have seen over the past three months.

Earlier this month Stuart Law of Assetz commented that immigration has increased demand to such an extent that this has becoming the determining factor in prices above interest rates.

If this is continues to be the case of the coming months, then investors will at least be gaining in terms of real capital value, even if the interest rate rises create a cautious climate.

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