The buy-to-let boom goes bust

The first signs of a collapse in Britain's buy-to-let property market emerged yesterday as Bradford & Bingley, the UK's largest lender to private landlords, revealed a 50 per cent jump in arrears on its mortgage book over the first four months of the year.

B&B, which represents 20 per cent of lending across the British buy-to-let sector, said the number of landlords who were three or more months behind on their mortgage payments had leapt by more than 52 per cent between January and the end of April, to more than 1.5 per cent of its total buy-to-let customer base.

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The picture was much worse within one of its books of business – which it acquired from the US lender GMAC-RFC in 2005 – where buy-to-let arrears were up almost 80 per cent to 3.5 per cent of the total.

In stark contrast to a relatively upbeat trading statement from the bank only six weeks ago – where it claimed the outlook for the buy-to-let sector was robust – yesterday's announcement from B&B was gloomy, predicting that the current difficult market conditions would prevail for the rest of the year.

Although the buy-to-let market has historically been relatively robust in a depressed housing market – as demand for rental properties has increased – analysts and economists in recent months have warned that the British market now looks vulnerable. The number of buy-to-let mortgages has more than doubled over the past four years, as thousands of new amateur landlords looked to cash in on the meteoric rise in residential property prices.

However, rents failed to keep up with the rise in prices, leaving many landlords committed to monthly mortgage payments which were greater than their regular rental income. As economic conditions have worsened in recent months, and the cost of borrowing has risen, many of these landlords have been left struggling.

John Postlethwaite, of Punter Southall Financial Management, the financial consultants, said: "In the past three to four years we have experienced a buy-to-let boom, mainly fuelled by private landlords purchasing a second or third property, putting down a minimum deposit and borrowing the maximum available. At the time this was not a problem, as money was plentiful and cheap. Unfortunately, that happy scenario does not exist any more."

Mr Postlethwaite added that many landlords could now see their mortgage rates jump by as much as 2 percentage points as they come to the end of their current deals, putting them under further pressure. "The worry is, if we get a situation where large numbers of private landlords are trying to offload properties at the same time and needing to do it quickly because they cannot afford the new mortgage payments, property prices will fall even further and faster than they are now," he said.

B&B followed its downbeat trading statement with news that it would be reducing the price at which it will issue new shares in its rights issue this month. It will now raise just £258m from the exercise. However, it also announced that the American private equity group Texas Pacific had agreed to take a 23 per cent stake in the business, and would be investing £179m to help shore-up the company's financial position.

Nevertheless, shares in B&B fell by as much as 32 per cent on the back of the day's news, hitting a record low of 60p. By the market's close, they had recovered slightly to 67p, but are still down more than 87 per cent from the highs they hit just two years ago. At the weekend, the group announced that its chief executive, Steven Crawshaw, was stepping down with immediate effect due to a serious cardiovascular health problem.

Shares in HBOS, the UK's second largest buy-to-let lender, also slumped on the back of B&B's bleak announcement yesterday. The shares ended the day down 10 per cent in spite of an announcement from HBOS management reassuring investors that they were trading as normal. Shares in Alliance & Leicester fell more than 5 per cent.

Sue Anderson, a spokeswoman for the Council of Mortgage Lenders, also moved to calm speculation over a collapse in the buy-to-let sector. "Arrears in buy-to-let have tended to be lower than in the market as a whole, and while they are increasing, some of that has to do with it becoming a more mature market," she said. "We see buy-to-let as likely to perform strongly relative to the mainstream market, as it is a counter-cyclical market."

Ms Anderson added that new figures from the Bank of England, which showed that mortgage approvals in the overall market have fallen to a 15-year low, also played into the hands of the buy-to-let sector. "If people aren't buying, they still need somewhere to live," she said. "There are signs of an uplift in demand for rental properties. We don't have any great concerns about buy-to-let as a sector."