Sell-to-rent has rewards... but beware of cul-de-sacs

It can be a wise move to bide your time in-between houses, but any guesswork is risky, says Helen Monks

It's what every homeowner dreams of: the chance to stash away thousands of pounds without having to downgrade to a smaller property.

It's what every homeowner dreams of: the chance to stash away thousands of pounds without having to downgrade to a smaller property.

With selling to rent, the thinking goes that owners who dispose of their property at the height of the market can put the cash to one side, bide their time renting in the hope that the housing market bubble will burst and prices fall back dramatically. Should this happen, these canny souls - and the number of British sellers-to-buy is ever increasing - will be well-placed to buy something as good as or better than their last property at a knockdown price, as well as walk away with a tax-free nest egg.

Tim Hyatt, head of lettings at estate agent Knight Frank, says: "Our lettings division is about 25 per cent busier over the last six months - people just are not re-buying at the same levels and lots of people are sitting on the fence."

Matthew Hobbs, head of lettings at the Kensington office of estate agent FPDSavills is also seeing increasing numbers of home-sellers taking time-out in the rental market before buying again: "Because house price inflation has slowed, there is a lot less pressure these days to re-invest in the property market straight away; buying immediately is not the automatic decision it once was."

As pundits predict the end of the housing boom and homeowners take stock both of how much they sacrificed in terms of their savings to buy their properties, as well as how much cash is locked in their home's wealth, selling to rent can seem all too tempting a punt.

But with high potential rewards come very high risks. If the market goes against those who speculatively sell to rent - by either failing to crash or merely if price growth falls off slowly - the damage to their finances could be profound.

If prices continue to creep up slowly while they rent, sellers to rent could find themselves eventually priced out of the market or forced to downgrade. If prices level or fall modestly, this is still unlikely to be enough to cover the high costs of renting (dead money which can quickly run into the thousands) and of re-entering the housing market (including stamp duty, legal fees, local searches and mortgage arrangement fees, plus moving costs).

But despite the risks, many homeowners continue to wrestle with the dilemma of whether to risk the roof over their heads in order to some greater financial security.

Their decision can be clouded by the myriad expert verdicts on what is likely to happen to house prices. Many economists and estate agents indicate speculative selling to rent might only be a justified risk in few cases: prices will not fall far enough and quickly enough to justify the move for many.

However, some economists suggest prices are due to tumble. In July, a report by think-tank the National Institute of Economic and Social Research predicted house prices in the UK are 30 per cent above their long-term sustainable level.

The report also predicted price growth will slow to single digits rather than suffering an early 1990s-style crash, with house price inflation of 9 per cent during 2004 and 1.5 per cent in 2005. Other economists expect prices to fall by dramatic amounts over a prolonged period, others that values will hold steady or at best experience marginal price increases.

The mortgage lender Bradford & Bingley recently warned that while there were early signs the housing market may be starting to cool, there would not be a sudden correction. Halifax's economists expect house price growth to moderate over the remainder of 2004 and into 2005. They also pointed out that the economic fundamentals of a strong labour market, below average interest rates, along with longer term housing supply shortages, are likely to underpin prices at current levels.

Nationwide, meanwhile, says it expects a drawn-out cycle of lower house price inflation and low market activity rather than a slump in prices. It warns homeowners expecting 5 to 10 per cent annual growth over the coming years are likely to be disappointed and that some areas of the country might see periods where there is no growth at all.

All said, the Bank of England governor Mervyn King may have fired sell to renters' confidence with his recent comments. When asked about the sustainability of house prices by the Treasury Select Committee, Mr King said he thought it likely house prices were above their sustainable level and warned people not to assume the value of their house would only ever rise.

Evidence has also begun to emerge that prices have already started to fall. Property website www.rightmove.co.uk says the asking prices of houses in England and Wales have fallen by an average of almost £4,000 in recent weeks. The website shows prices fell 2 per cent in the five weeks to August 14.

Looking at the regional picture, Wales recorded the biggest drop, with a 6.8 per cent fall, followed by Greater London at 4.3 per cent and the East Midlands at 2.8 per cent. There had been a 2.4 per cent drop in the South East and a 2.1 per cent fall in the South West, with homes in East Anglia and the West Midlands shedding less than 1 per cent of their asking prices, according to the group. However, prices rose by 1.3 per cent in Yorkshire and Humberside, after a 3 per cent rise the previous month, while homes in the north added 0.4 per cent on average, down from 2.3 per cent.

Rightmove blamed the drop in asking prices on the market responding to interest rate rises (the Bank of England has lifted official interest rates on five occasions since November), but the website says the market was not at the start of a long-term drop in prices. While relinquishing your owner-occupier status is deemed extremely risky for speculators, it may prove a safer bet for certain so-called in-betweeners who were planning to sell up anyway.

Philippa Gee, investments director at the independent financial adviser Torquil Clark, says: "In principle, selling to rent for no other reason than to time the market can be a good idea, particularly if you live in an area that has been most affected by the so-called property bubble. However, it is more a plan for the person who is looking to sell at some point over the next 12 months and can simply bring that date forward. Typically, they would not be looking to subsequently purchase another home as they may be moving overseas or moving in with another property owner. We are seeing a lot more of these in-betweeners."

Judienne Wood, national lettings director at Bradford & Bingley Estate Agents, also says there have been more in- betweeners coming into the rental market and they fall into two distinct categories: homeowners thinking "let's make a killing" and those who have a reason not to want to buy again straight away, either because of relocation or because their job outlook is uncertain.

The message from the experts seems to be, if your job or some other factor means that you may have to sell up soon, then the market might afford you some extra time before making your next purchase decision. But those looking to take a gamble with the roof over their heads, however tempting the rewards might be, should only do so in relatively narrow circumstances.

'Jumping off the property ladder has to be worth it'

Sue Collins is seriously considering selling to rent at the moment: "I had to sap all of my other savings and investments to afford this place three years ago, now I'm wondering whether I can repair some of that damage," says the marketing communications manager from Wolverhampton

Ms Collins, 42, has seen her two-bedroom flat almost double in price since she first purchased it and while she has high equity levels tied up in the house, she says she still feels financially exposed.

"I'm looking for an opportunity to re-base my finances: my flat would be ideal for first-time buyers and I'm wondering whether to get out while the going's good."

To justify her decision, the market will need to fall by at least 15 per cent and in her best scenario about 30 per cent.

Three and a half years ago, Ms Collins bought her home for £57,500; it has recently been valued at £95,000. Ideally she would like to clear her existing mortgage which stands at £35,000, and so buy without downgrading at around the £60,000 level.

She says she would be happy to pay around £350 a month rent in a modest property while she waits out the market.

If the market were to fall far enough to bring her mortgage down on her next potential property to just £20,000, then she says the risk of selling to rent will be justified.

Ms Collins says she has given herself until the end of the year to make her decision and does not underestimate the risks: "It's a frightening thing to consider and a huge gamble. There has to be enough in it for me to justify jumping off the property ladder, albeit temporarily."

FACT FILE: THE HOUSING MARKET

* Think about all the costs involved in moving home and re-purchasing - how much would prices need to come down before even these were covered?

* If you don't live in a marginal area - say, one with poor transport links - which has only seen prices rise because of a ripple effect originating from more desirable areas, then it will probably be better to stay put.

* Most economists are still expecting a soft landing, not the crash some sellers to rent are pinning their hopes on.

* Selling and then renting might be most appropriate not for those looking to play the market for big gains, but it might be for those who need to move anyway and want to take their time before deciding where to buy.

THE EXPERTS' OUTLOOK

* ROGER BOOTLE, CAPITAL ECONOMICS

"From peak to trough, we expect the market to fall about 20 per cent. We still suspect that prices will continue to rise over the next four to five months. And then, over the following six months, prices will slowdown. In some areas this has already started."

But Mr Bootle expects that when prices do fall, it will take up to three years for them to come down to levels that reflect the underlying value of properties. He says that the price come-down will be slow and steady.

* JOHN WRIGLESWORTH, HOMETRACK

"Selling in order to rent on the basis that you think you might make money is madness - it is a shot in the dark," he says.

He warns homeowners who are focused on the huge capital appreciation of the last three years - to think about property as a long-term investment.

He says: "Don't forget the entire transaction of buying and then selling again would set typical homeowners back around £20,000, which is quite a large stake to place on a bet on the market."

Mr Wriglesworth expects no crash in the market, but that values are currently "bumping along a plateau" and that there is a new equilibrium for prices being established at present.

He expects this new pattern will reduce pressure on the Bank of England to continue to raise interest rates.

* ALEX BANNISTER, NATIONWIDE

"The general market outlook is that we expect a significant slowdown, but we do not expect there to be a crash and generally prices will be stagnant over the next few years."

Mr Bannister says prices will need to fall significantly to justify the high costs of buying and selling property, but that this does not fit in with his expectations of the market. Even if some models predict dramatic falls, sellers need to be aware that the outlook for prices should be addressed on a postcode basis.

"It is hard enough to second-guess the market on a national level, but people selling to rent will need to think about what prices are likely to do in their immediate locality, which can prove even harder," he says.

Mr Bannister also reminds market watchers that about two years ago, certain academics were recommending homeowners to sell to rent and were left somewhat red-faced when prices soared.

* STEPHEN LEWIS, MONUMENT SECURITIES

"People selling in order to rent have an extremely risky strategy - getting it right will be a matter of luck.

"We will probably see a slowdown, but we don't expect a crash. The only thing I think might cause that would be is that if sterling becomes very weak, then the MPC might let the housing market suffer for the sake of keeping inflation under control."