Time to buy to let?

Apparently the yield on terraced houses is now running around 6-7 percent - the highest of any type of property apart from detached houses. (Flats yield significantly less; so do semis.)

Now that's not at all dusty compared to the Bank of England interest rate at 3%. Could it be time to buy?

Well, possibly not. There are some quite good counter arguments.

• Prices of houses are still dropping and expected to fall further as the economy declines, with low consumer confidence and increasing unemployment. (Compared with cash - inflation is at 5.2% and expected to decline; that's the diminution in the value of your cash, so to compete, property prices would have to fall less than 5% over the next year. Most forecasts are for significantly more.)
• Though the Bank of England rate has been cut to 3%, it hasn't really affected the interest rates being charged in the retail market. You can still get 6% on notice accounts and fixed rate bonds. Equally, you won't get a mortgage anywhere near 3%.

But it does seem that price falls so far in the residential property market have driven yields up to the point that property is once again competitive with better rate bank accounts, rather than - as happened in 2006 - yielding considerably less. Smart purchasing could drive initial yields up to 10%.

But I think before I jump into residential property again, I'm going to wait for yields generally to approach the 10% level. That's the point at which the market represents a real bargain - and though we're on the way, we haven't got there yet.

Portfolio management issues with overseas property

I'm a hard line economist with regard to portfolios. There is a single commandment: diversification.

That's why I worry when I see 'investors' whose total wealth is in residential property. They seem to think they are not running a risk.

With all their assets in a single asset class, they have in fact taken on a massive risk!

Now I'm not advocating that we all have model portfolios. My own portfolio, for instance, has a much higher skew to emerging markets and new technologies than most, including a big chunk in alternative energy stocks. But then I also have quite a bit of cash. And residential property. (I probably should have some commercial property - but not at today's yields.) And a boat.

(Does anybody want the boat by the way? She's a lovely 28' Broads cruising yacht*, all mahogany and gleaming brass, and she's for sale.)

But for all except the very wealthy, or those specialising in cheap-as-chips markets (which in itself implies a lack of diversification, committing too heavy a percentage to high risk areas), diversification in overseas property is unachievable. Simply, each property costs too much. And there is a big overhead in terms of management time and cost.

So I was impressed when I saw what 4:Property Projects has been doing in Eastern Europe - setting up projects with a minimum £10k entry level. Think about it; for a £30k in-cost, you can participate in three different markets - spreading your assets between property types, countries, and locations.

Because 4:Property joint ventures with developers, and is selling a share in the project, it's a hands-off transaction. And investors should get better returns than buying their own property because they'll get a share of the development margin. Even better, there should be a decent exit as the project will last from one to three years, creating a natural exit point.

I haven't seen the prospectuses yet and this *is* defined as a product for sophisticated investors only. But it's a very interesting way forward. I wonder if they might list on the stock market eventually? Then you wouldn't even need £10k to invest - you could just buy shares through your online broker. I wonder if you could put them in your SIPP?

The straw to break the camel's back?

The most interesting statistic I've seen for a while is that buy-to-let landlords now account for 50 percent of repossessions.

To be cynical, perhaps these guys feel they can just walk away - after all they don't actually live in the house. But it suggests that some of the people who have bought into thin yields over the past few years are now doing their sums - and potential capital gains don't justify the gap between the rental yield and the mortgage cost.

I suspect it's the buy-to-let market that might set this housing market off downwards. Last time round, in the late 1980s, it was the removal of MIRAS that seems to have done it - leading to a sudden splurge of buying and an equally sudden absence of activity, and then, as prices started down, repossession of first-time buyers who had been too stretched.

There's always one straw that breaks the camel's back. Could this be it?