Buy to let - a problem of over-supply?

The Financial Times carried a super short piece on the buy to let market today - ideal for students preparing for AQA Unit 3 - Markets at Work. According to the piece

“Rents are tumbling on some city centre flats (in cities such as Liverpool and Nottingham) as buy-to-let investors pay the price for oversupply.....The news will make uncomfortable reading for investors who bought into the boom in development of buy-to-let flats in these city centres, only to find that capital values and now rental income are falling......The cost of renting compared with the cost of servicing a mortgage on an equivalent flat or house has narrowed significantly over the year to the end of March, with both increasing. Rental costs were 75 per cent of mortgage costs in the first quarter of 2007, rising to almost 81 per cent in the first quarter of 2008.”

Have a read of the article and think about the position from the point of view of the buy to let landlord - what are the costs and benefits of their investment in the property market - and also from the point of view of tenants looking for somewhere to live.

(i) Using a supply and demand diagram, explain how a situation of over-supply can occur and what happens to prices as a result

(ii) What might happen to the property market in Nottingham if some buy-to-ler investors decide to sell some of their stock of properties?

The rest of the article can be found here

Buy to let - the party is over

Is the end game in sight for the buy-to-let boom - a period which has spawned a new generation of private landlords? Fuelled by cheap mortgages, rising demand for rented properties from people priced out of the owner-occupied sector and expectations of large real capital gains from soaring house prices, the number of buy to let mortgages has grown year on year to reach over 1 million by the end of 2007. But the landscape the new rentier class is darkening by the week.