New buy-to-let investors may need more patience to realise good returns…

Lower house price inflation may have especially strong implications for aspiring buy-to-let investors. Landlords who entered the buy-to-let sector near the start of the decade have made enormous returns, but strong house price growth relative to rents has pushed net rental yields well below the current cost of a mortgage.

This implies that without very strong capital gains, a new entrant into the market would make negative total returns in the short term until rents caught up sufficiently to cover operating and mortgage expenses.

Private sector rents ‘robust’

There is now evidence that after several years of weakness, private sector rents are growing more robustly. Even so, rents would have to rise very strongly relative to house prices to make short-term buy-to-let investments profitable at current interest rates.

Nationwide’s Fionnula Earley commented “Investors with long horizons can still make satisfactory returns if long-term historical trends for house prices and rents hold up.

“The government’s latest projections show that the 15-34 year old population will be increasing until the middle of the next decade, and this should be supportive of both tenant demand and rents.

“Even with only modest house price inflation, these conditions would produce relatively healthy returns over a 10-15 year horizon