The Model Works says the market needs to understand the behaviour of the buy-to-let sector better.
Brian Hall, founder of The Model Works, said that much of the data on which investments are made currently is incomplete, inaccurate and biased.
He added: “There is still too much subjective opinion from those with a vested interest and not enough independent analysis into profitability and risk.”
The Model Works has now upgraded its buy-to-let profitability index, following changes to Bank of England tables previously used. This upgrade includes utilising five dimensional motion charts to track profitability over time.
Over the 30 years analysed, the buy-to-let market was surprisingly volatile and there were periods when profitability was marginal or even negative, Hall noted. “There appears to be a naivety about how stable the market really is. Profitability is falling and it may currently be negative for many landlords when all the costs are taken into account.”
The Model Works’ updated index also found profits in the past have been driven through property price inflation. In a rising market, an investor benefits from increasing equity but there is also a correlation between prices and rent levels. As prices rise so can rents and prior to the Credit Crunch property prices tripled over a 10-year period. Fractionally higher gross rental yields today cannot compensate for the relatively stagnant property prices we are currently experiencing, Hall said.
He added: “Many economists claim that property prices are far too high and so another property price boom is unlikely any time soon, despite Funding for Lending scheme stimulation.
“Reviewing historic figures to secure an insight, one gets the impression that the big profits were made when no one was looking, in circumstances very different from today.”
Worryingly, the index found some landlords are “extraordinarily vulnerable,” particularly highly geared, amateur new-entrants, buying into an overpriced market, with interest only loans.
“They might get an shock if we entered their data into one of our models and invited them to project the possible outcomes’ said Hall. “Even established landlords might find it challenging.”
Hall added that the Model Works will continue to push this work forward. “Understanding volatility and risk is common-place in the investments sector. With so many now choosing buy-to-let, instead of conventional investments, it is vital that these decisions are well founded.”
The Model Works is now looking to work with savings and pensions providers to complete back-to-back comparisons of buy-to-let versus the regulated alternatives.