Agents nevertheless point towards some improvement in rental market fundamentals in 2010.

According to the FNB Estate Agent Survey for the 2nd quarter of 2010, buy-to-let buying expressed as a percentage of total property buying reached a new low of 7%, down further from the previous quarter's 9%. Along with this decline, agent confidence in the near term prospects for this segment of the property market also deteriorated in the quarter.

Despite the buy-to-let market not setting the world alight, agents nevertheless point towards some improvement in rental market fundamentals in 2010. Noticeable is an increase in estimated average gross yields on rental properties, according to agents surveyed, and thus a rise in the percentage of properties where agents believe that the rental income can cover 100% or more of a 100% bond repayment. This is mildly better news for those buy-to-let buyers that utilize credit, although such properties don't yet constitute the majority. This improvement seems to correlate with Rode data that indicates some renewed flat rental inflation in 2010 after a 2009 slump.

Perhaps ironically, these gradual improvements in the fundamentals that underpin the buy-to-let market are probably partly the result of a lack of new rental stock coming onto the market due to weak buy-to-let buying. Such is the nature of cycles.

So why no significant buy-to-let market improvement yet, if yields are turning for the better? Probably because a significant portion of the household sector is still under financial pressure following the recent recession, and it has high levels of indebtedness to work off. In addition, we believe that many would-be buy-to-let investors focus more on capital growth than on income stream alone, and while the rate of house price increase has shown some recovery in 2010, this improvement has not been fantastic to date.

So, should potential buy-to-let buyers be buying with more enthusiasm? Well, firstly, while the rental market fundamentals appear to have been improving, suggesting an improving environment for the potential buy-to-let investor, the improvement appears mild at best. We are NOT giving advice either way, but do suggest that there are some important factors to consider for the potential buy-to-let buyer:

* With early signs of slower economic growth ahead, salaried individuals should be careful not to rely too heavily on future potential discretionary rewards to fund expenditure commitments, as in many industries these can fall away in tougher times.

* Even should one stumble upon a property where 100% of the bond repayment can be covered by the rental income that the property can or does achieve, remember the additional costs that must be covered, including assessment rates and various maintenance costs to name but two.

* Tenants don't come without risks, and the risk of default on rental payments is as much an issue for a landlord as defaulting on bond repayments is for banks.

Finally, while inflation numbers don't show any major risks to inflation or interest rates in the near term, the future as always is a less than certain place. By historic standards, SA's interest rates appear to be at a relatively low part of the interest rate cycle. When at such low points, we believe it wise to do scenario planning. The past two interest rate hiking phases were by 4 and 5 percentage points respectively. So perhaps, as a rule of thumb, it would be prudent to at least calculate one's bond repayment value should rates be 4-5 percentage points higher. How much of the bond repayment would be covered by the rental income stream under such a scenario? Would a buy-to-let property then be affordable? If not, perhaps re-consider.

* Article courtesy of John Loos - a property strategist at FNB Home Loans