Buy-to-let landlords are dipping their toes back into the property market for the first time in two years amid signs of a house price recovery.

The Council of Mortgage Lenders (CML) reported yesterday that buy-to-let lending rose by 10 per cent in the three months to September, compared with the previous three months, after a period of near-hibernation for landlords, who were hit particularly hard by the mortgage drought.

The CML also reduced its forecast for the number of homeowners whom it expects to be repossessed this year from 65,000 to 48,000 — a shift that reflects the beneficial effects for struggling homeowners of low interest rates, lender forbearance and government measures to help keep people in their homes.

Despite the improved outlook, however, the number of possessions continued to rise in the third quarter with 11,700 borrowers losing their homes, against 11,400 in the previous quarter. The figure was 5 per cent higher than for the same period in 2008 but lower than the 12,700 recorded in the first three months of 2009.

The Ministry of Justice will publish a consultation paper by the end of the year outlining plans to close a loophole that has enabled lenders to repossess a property without the need to go through the courts.

It comes after a case last year involving GMAC, the specialist mortgage lender, in which the High Court supported the right of lenders to sell a property if a borrower had missed only two loan repayments.

Michael Coogan, director-general of the CML, said: “Although the economy is not out of the woods yet, we no longer expect a dramatic rise in properties being taken into possession unless interest rates rise from the low levels that most commentators now expect to persist for some time.”

The CML said that it expected to see a modest increase in lending next year, but added that “it is difficult to see the case for a dramatic upturn in the absence of significant improvement in the wider economic picture”.

Mr Coogan commented: “There is a risk public spending cuts could choke off recovery. So although we have become more optimistic, we remain cautious about market prospects.”

The industry body believes the number of property transactions will reach 810,000 this year and 850,000 in 2010. It revised its expectation of the value of net lending this year from -£5 billion to £8 billion after a quicker than expected recovery.

The number of buy-to-let loans granted rose from 21,600 in the second quarter to 23,700 in the three months to September. The CML said that buy-to-let demand for new purchases was “appreciably stronger” than for remortgages, amid continuing lending constraints that force landlords to stay on their existing deals.

The Royal Institution of Chartered Surveyors last month reported an increase in the proportion of purchasers who are buy-to-let landlords, with 2 per cent more estate agents reporting a rise rather than a fall in investors hunting for property in the three months to September.

The CML pointed out that although the slight uptick in buy-to-let lending was welcome, it was from a low base. Mr Coogan said: “At this stage the recovery is modest, but the figures show that buy-to-let is here to stay.

“Buy-to-let lenders are among those facing some of the biggest challenges raising funding.”

The figures coincide with separate data showing that investment returns for landlords have turned positive for the first time since the onset of the credit crunch. LSL Property Services said that after taking rental income and the slight fall in house prices into account, a landlord investing in property a year ago would have made a 2.4 per cent return.

The estate agency and surveyor said that the last time residential property provided a positive return was in the year to July 2008 on property bought in July 2007, before the start of the credit crunch.

The worst time to invest was in February 2008. Anyone who bought a rental property then can expect to have lost more than 11 per cent by February this year, as rents declined and property prices dropped.

James Moss, from Curzon Investment Property, a boutique buy-to-let specialist, said: “It’s a positive sign but we shouldn’t get too excited just yet. The belief that everyone could be a property tycoon got us into this mess in the first place, so banks will understandably be more picky about who they lend to now.”

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