SIKI MGABADELI: We are looking now at the buy-to-let market which, during the property price boom, looked like a great investment idea. The last residential property boom lasted roughly from 2002 to 2008. At that time we saw a rise in rentals, which helped some generate extra cash. But is that party over? Remember those heady days when they told you to go and buy yourself a place to let, rentals were going up, and you could get mortgage lending from the banks and so on? So we are going to talk about whether that party is over or not.
Let’s ask Magnus Heystek, who is head of research at Brenthurst Wealth. Magnus, thanks for your time today. I’m sure you’ll remember how everyone and anyone was telling you to go and get a second bond, go and buy a second place, go and get someone to rent and you can print money.
MAGNUS HEYSTEK: Good evening, Siki. It was a festival of credit. Banks were throwing money and bonds and credit cards around like confetti and that was pre the National Credit Act. A lot of people took advantage of that – property developers, bond originators, the consumers. You felt left out if you were not participating in this incredible buffet of money that was available. And you went and bought one, two or three properties because the theory said you were going to become a very wealthy landlord over time.
SIKI MGABADELI: And then what happened?
MAGNUS HEYSTEK: And then you had the National Credit Act, which came into being in 2007, we had the commodity cycle crashing, great financial crisis happening.
And since then it’s been a fairly dismal, dismal story for those buy-to-let investors. That’s why I said buy-to-let has turned to buy-to-regret. And now a lot of people are over-indebted. They are sitting with properties that are non-performing. You’ve got the economy under pressure. And the bottom line is that the average consumers are under so much financial pressure that they simply cannot afford these escalations. They simply say I can’t afford it.
SIKI MGABADELI: Let’s talk a bit about those escalations, because one thing is just around interest rates. But when you are actually a landlord there’s myriad things to worry about, and they’ve all gone up.
MAGNUS HEYSTEK: As a landlord you pay for the rates and taxes, you pay the maintenance, and you pay the bond if you have a bond, which has gone up 200 basis points in the last couple of months.
But your tenant is the key to this whole exercise. That person needs to pay money on time and in line with the escalations. Both of those things are having a major effect. I looked at some statistics and 31% of people currently are not paying, paying late, or are paying less than they should be paying. That’s a very, very substantial number.
But in the meantime the poor landlord has to pay on time, he has to pay the rates and taxes, he has to pay the maintenance and everything that comes with being an owner. So the equation currently is very much against the owner and very much in favour of the tenant.
SIKI MGABADELI: In terms of banks extending mortgages to this market, just how much has that dropped since the boom times?
MAGNUS HEYSTEK: Boom times – up to 25% of all new bonds were for buy-to-let purposes. So one in four was for buy-to-let. That has dropped down to about 6% and I imagine the latest statistic would be down to about 5%, maybe even 4%. So the banks have very quietly withdrawn from this market and, unless you are a super, AAA client that doesn’t actually need the bond, you are not going to get a bond for buy-to-let. The banks will just say no, we are not in that market.
SIKI MGABADELI: Thanks, Magnus.