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Bidin'matime

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Everything posted by Bidin'matime

  1. Hmm - all very basic stuff. Maybe they should be reading the input on this site to broaden their understanding of the subject...
  2. Thanks for the input, but don't misunderstand me - I'm not about to invest in BTL! It's an attempt to gather all the arguments for and against in one place. Keep 'em coming!
  3. Prompted by a question from Denzil on the newsblog, I thought we should debate this in more detail. The question is, are BTLers basically onto a good thing in the long-term? All of us who have owned property over more than 20 years have enjoyed substantial capital gains. So if someone else had been paying us rent as well, we'd have made a killing, wouldn't we? Or would we? And how would that have compared to a similar investment in the stock market? As a kick-start, I'd like to draw attention to the fact that almost all property investments are geared, whilst few stock market investors borrow to fund their investments. Therefore, so long as income from the investment covers interest on the borrowings, someone who borrows 90% of the cost can invest 10x his initial stake and enjoy 10x the profit. If the same were true of stock market investments, then it would make sense to borrow to invest in stocks and shares - but few would, perceiving this to be a high risk strategy. A number of questions are raised by this:- 1. Has the rental yield on a property purchased 20 years ago, with a 10% deposit, been higher than the interest cost in the meantime? 2. If it had been possible to borrow 10 times the cash staked and invest in a typical balanced stock market portfolio 20 years ago, would the net yield (ie dividends) have been higher than the interest cost and how would this have compared to the yield on the rental property? 3. What would £100k invested 20 years ago such a stock market investment be worth now and how would that compare to £100k invested in property over the same period? No doubt we can find these stats somewhere. However, one thought immediately jumps to mind – if we borrow £90k to invest in stocks and shares, we cannot reduce the tax on the income from them by setting against it the interest cost on the borrowing. However, if we borrow the same amount to invest in property, we can offset the interest cost against the rental income. So, if all other factors are the same (or ‘ceteres paribus’, as my old economics professor used to love to say), the property investment has got to be better, because the government takes less tax out of the equation than for stocks and shares. But that’s enough from me for the moment. Anyone else want to take up the debate?
  4. Prices WILL fall. Rent for a few years and you will be able to buy back your old house with your half of the cash...
  5. Thanks Denzil. I think there are basically three factors driving HPI: low interest rates, lax lending and the general belief that prices will continue to rise. A possible fourth is the more tangible demand factors such as migration, divorce and the formation of more households, but I agree that it is difficult to judge the impact of these – I’m not so sure that the true demand for housing really is greater than the expansion of supply. What seems certain, however, is that these factors are all interrelated and will move together. As rates rise, lenders will become more cautious and price rises slow, possibly to a stop. The perception of runaway HPI recedes and the pressure to buy with it. The impact on the other demand factors is more subtle, but my belief is that people choose to ‘form new households’ because of the other factors – if they can't afford to live independently, they simply don’t. I have known married couples who remain living under the same roof because neither can afford to live independently and I know people who have moved in together for primarily financial reasons when they might have remained living independently had they been able to afford it. The same applies to offspring – if they are motivated to move out (by the other factors) then they will do so and ‘form a new household’, but if the other factors do not push them in that direction, they will remain at home. Then if they have moved out and costs rise (maybe the landlord puts up the rent in response to rising interest rates or maybe they have to sell there flat as they can no longer afford the mortgage), they may well return home, thus reversing the trend (I know this from my own offspring..). Or be motivated to move in with girlfriend / boyfriend. So where does this lead us? I suppose it’s to my view that stagnation will lead to an effect equivalent to the ‘bunch of simultaneous smaller shocks’ to which you refer. I think we are agreed that, for HPC to be averted, house prices must remain in the doldrums for a considerable time – it’s the analysis of what happens then that seems central to the question as to whether it really is possible for HPC to be averted. Thanks for your input - I’m off away for a week and a bit, so will pick up on this again when I’m back.
  6. I still come back to the point that, in order for people to start being able to afford to buy houses again, they must see their wages rise. Their perception of general inflation is neither here nor there – what matters is whether they perceive their wages to be rising faster than house prices. My view is that the market will hit a wall once all those who can afford to buy / move up have done so. Without interest rates falling further, which seems highly unlikely, affordability falls as house prices rise faster than wages. Historically, people have traded up once the real value of their existing mortgage has dwindled with inflation and their higher wages now enable them to borrow more. However, having over-stretched themselves to get where they are (those who moved in the last few years), without rampant wage inflation, they will now be unable to move again for some considerable time. Therefore, stagnation. The BTL brigade are a slightly different case, but they will have to stop buying at some point, presumably once the ‘subsidy’ that they are paying (ie the excess of interest and other costs over rental income) starts to get them wondering if it’s such a good idea after all. Either way, we get stagnation. The only way forward is to have wages rise faster than house prices. But if house prices rise more slowly than wages for any length of time, this will (or should..) further undermine the logic behind BTL and will also encourage others that they no longer have to bust a gut to get on the property ladder or move up. Take away these buying pressures on the property market and what do you get - falling prices. These encourage people to stand even further back and, before long, you have HPC. In the meantime, the government tries to monetize its debt – money supply up 13% or so in the last 12 months. Faster money growth than output growth = inflation. Maybe people will see the benefit of this inflation in their pay packets before it shows in CPI and forces the BoE to raise interest rates further, but my feeling remains that it cannot close the gap between earnings and house prices fast enough to prevent stagnation, without such rapid inflation as to force the BoE’s hand and the raising of rates to levels that would themselves bring about HPI. But I’m open to challenge on this, as it is starting to look like the only argument in town for HPC…
  7. See also this one from May 2004 - http://news.bbc.co.uk/1/hi/business/3744041.stm See if you can find a more recent reference to a property crash in the BBC site. Note also the comments at the end - not sure that they would make it through the sensors these days.
  8. And you dont hear anything like this one from Evan Davis (from Sept 2004) these days: http://news.bbc.co.uk/1/hi/business/3701070.stm
  9. My point is that, unless wages rise dramatically to catch up with house prices (and the long term ratio of 3.5:1, average house:wages), we are faced with stagnation of the market, once people realise that they can't afford to move on. FTB’s who can't afford to get on the bottom of the ‘ladder’ never would, so people wont move up the ‘ladder’ and the whole thing grinds to a halt. Only then is sanity is restored, people stop saying ‘prices are too high but they wont fall’ and prices return to a realistic level. And all this without rates rising. So low wage rises will not help ‘monetization’.
  10. I have the same general experience of being met with incredulity at social gatherings if I mention that we sold our house last year and now live in a rented place. However, I met a cousin at a family ‘do’ on Saturday - he’s approaching 40, that age when people realise that they don’t have enough pension provision and the age bracket who seem most attracted to BTL. Now, this guy does not have a finance or property related background. But when the subject of BTL came up, instead of him telling us how he was about to solve all his pension problems by BTL, as so many do, he started saying that the yields just aren’t there and you’ve got a problem if you have too many void periods. My wife’s jaw hit the ground about the same time as my own. He went on to say that he had read all about it, mainly in the Guardian. He seemed to have picked up some pretty negative vibes, all of which was extremely reassuring, because, even when we see such reports ourselves, the worry is that we are only seeing them because we choose to focus on them (mainly via the Newsblog). The good news is that these reports are starting to get through to the people who matter – those who might otherwise go any buy. It had to come and it wont be long until BTL is just terribly passé and nobody will touch it with a barge pole.
  11. Oops, I must have been half asleep - it was 1995 we sold for £210k. Sorry..
  12. I think it's more complex than that. There are a number of factors. I think the main one is that they are suffering from the same syndrome as most home-owners - head in the sand - they don’t really believe that prices are going to collapse. Only a fool would buy 100 properties now if they thought prices might fall and, if these guys are 'self-made' then they are not complete fools. In fact I think that this is linked to the second factor, which is that they are used to being entrepreneurial and moving forwards and not going back on an earlier decision - they are used to being right and simply don’t believe that things could go wrong for them. They see this further ‘investment’ as building on their earlier successes. In short, they are being pig-headed and throwing their money around. It reminds me of a developer who bought a single building plot near us in early 1989 for £210k (we subsequently sold out house, on a much larger plot, in 2005 for the same figure..) - I remember someone describing it as X talking with his cheque-book. He just enjoyed looking like the big guy. He lost quite a bit on that one...
  13. As an accountant, I have seen irresponsible lending in the past, but last week I was quite literally in a state of shock, after being asked to sign an accountant’s reference for a client. You will appreciate that I have to be careful not to breach client confidentiality, but I can give you the basic details. He is a self-employed manual worker in his late forties, in a construction related activity. His average earnings from his last 2 years’ accounts are less than £15k per year. The bank originally asked for an estimate of his current year earnings and he gave us some information for 7 months that showed that he was having a better year and that, if it continued at this rate, his earnings will be in the region of £38k this year. We stressed that this was based on part year earnings, as reported to us by the client, with a simple extrapolation to project a full year. As one of my staff deals with this client, I was content for him to write a letter to this effect. At that time I had no idea how much they proposed to lend and did not concern myself unduly with this, as they were not asking if we thought he could afford it. However, the bank has now sent a formal accountant’s reference, which I would have to sign. This states the amount of the loan – and this was when I went into a state of shock. Lloyds TSB are proposing to lend this man £225,000 , which he will be repaying until he is 73 years old. Even if his earnings were to continue at the reported level, this is nearly 6 times the earnings figure that they were supplied with. (His partner is also self-employed and makes about £15k, although they haven’t asked about her. But even if we took the two together, if we used three years’ average earnings, ie the ‘old’ way of doing it, this still works out at over 6 times joint earnings…). Now if this is not irresponsible lending, then what is?? How many 60 year old manual workers do you know who earn close on £40k a year, let alone 70 year olds??? Have Lloyds TSB gone completely mad?? Well presumably they think not – he has a home already so will have a fair sized deposit, so their loan will be (on current valuations) well covered – so presumably they don’t much care whether he can make the repayments. Now, this puts me in a difficult position . Clearly, if I tell the client in no uncertain terms that he should not be borrowing so much, he will tell me to take a running jump – everyone he knows who has borrowed to the limit has made mega-bucks on property, so now it’s his turn and, if the bank will lend, it must be okay and why shouldn’t he jump on the band-wagon with everyone else? Of course he wont still be repaying it when he’s 70 – he will have sold, traded down and retired on the profit long before. And if I’m so stupid as to advise otherwise, then he’ll look for a different adviser. So not much point pressing that one. I shall of course be totally honest with my reply to the bank, as we were with their initial enquiry, but if I suggest that they shouldn’t be lending this much, they will read this as a coded message that the client is in some way not to be trusted (and I have no reason to suppose this) and would back down. This would be a breach of my professional duty to the client and he would probably get to know and I would not only lose the client but probably find myself in front of a disciplinary hearing. He will therefore probably get his loan and his new house. We shall cover ourselves with suitable words to make sure that neither he nor the bank can blame us for the ensuing disaster and life goes on… I am in no doubt who is responsible for the current boom and the forthcoming bust – it is the banks, who can no longer to be trusted with control of the nation’s lending arrangements. :angry:
  14. But it needs wage inflation to restore the ratio. It makes little difference if price inflation alone rises. And it's much harder to disguise wage inflation, especially with so many now employed by the public sector.
  15. Thankfully the BOE didnt sit back and let inflation drift this month, so hopefully my fears were unfounded . My further thoughts on this (copied from my latest post on the newsblog)- But inflation will not prevent HPC, unless it really is runaway inflation, which I can't see the government being able to justify on any grounds. If the ratio of house prices to earnings is to be restored to it’s long term average, a very long period of minimal house price increases and significant wage rises will be required. If prices struggle along on the flat then two important factors come into play – first the 'buy now or miss the boat' element disappears, which must undermine demand, which will further depress the market. Then the 'wait and see' effect steps in and you have a crash in the making. Acceptable levels of inflation can't prevent this. House prices are currently about 6 times average wages. If wages continue to rise at 4%, then it will take 14 years to restore the ratio to 3 ½ :1. People will not continue to believe the hype for that long. If we assume that the public can be duped for say 5 years, it would need 11% wage inflation and zero HPI for this period to restore the ratio. Does anyone really think that the BOE / government would tolerate this level of inflation without significant rises in interest rates?
  16. Just back from a trip to the Isle of Wight. Looked at some new apartments overlooking the water at Cowes (called ‘Marinus’). All are shrouded in scaffolding and sheeting, except the show apartment, which peers out through all of this. So we went up the stairs (sign saying that it wasn’t yet finished to company standards) and into the apartment. Beautiful sunny morning + river entrance + boats + Solent beyond = gobsmacking view from the lounge, no doubt about it. Balcony above had been left off to make it feel more open and sunny (NE facing), but you get the picture. Smartly presented 3 bed (well 2 bed + small study) apartment, under offer at somewhere in excess of £450k. (She wouldn’t tell us the actual offer price - data protection..) Of the total of 48 apartments, there are 6 with such views (wouldn’t give you tuppence for the rest, which are staggered back from the waterfront, with great views of the car park..), plus the two 3 bed penthouses (not yet released, but prices in the region of £600k - £700k). But then came the interesting bit (thank God for that, I hear you say..). She told us that one of these 6 had become available again during the last week, due to someone dropping out (maybe on the Thursday afternoon?). She said she had called her financial advisor and her hubby to see if they could buy it as a BTL, but the lenders would not lend enough – “The sums just didn’t add up,” she explained, “the rental income meant that we would need to put up £140,000 deposit and we’ve only got £80,000.” She went on to say that, as they would still have their mortgage to pay etc. it was a lot to go through, “just to sell it on after a year or so”. Now, she may have £80k in the building society just waiting to be invested in BTL, but all things considered, I think that this is extremely unlikely. I would be 99% sure that she was referring to the equity in their own home. So point #1 is that BTL buyers are re-mortgaging to get what they see as ‘their’ money out of their homes to put down as deposit. Point #2 is that she was thinking really quite short-term about this – a year or so. Point #3 is that the lenders recognised that the sums just didn’t add up, but the buyers (someone else stepped in and reserved it) still do not . Now, it may be that it sold to someone prepared to pay close on £½ million for a flat to live in, or someone with more money than sense who wanted to be near to Cowes Week once a year, but I would bet that most, if not all, of the apartments that have been ‘snapped up’ are being bought by people who think it’s a good investment. So whilst the lenders know that the value of the properties as homes are only about 2/3 of the asking price, buyers still pile in anyway. Lots of people have £140k of equity in their homes and could get what’s ‘theirs’ by MEWing. As presumably, our helpful (mature) sales assistant would have done if her home had gone up in value enough. All in all a very interesting encounter. The post-script is yet to come, though, as the ‘sales’ are reservations only (many taken during Cowes Week) and could fall through as people go home and review their finances. She said that completion of the project is expected in February, at which point people will be asked to exchange contracts. It may well be that the thought of a small apartment with one outside parking space on the north coast of a little island off the south coast of England might not be quite so attractive in February. Especially if interest rates rise again in the meantime. So I shall be watching the Land Registry reports with interest. And, having said that we really wouldn’t be able to fit into anything smaller than one of the penthouses and our budget was somewhat smaller than the asking price, I shall cherish the moment if we get that call – the answer to which will be a polite but satisfied, “No thank you…”
  17. No one else got any thoughts on this? Or is everyone resigned to inflation propping up house prices??
  18. On the Newsblog the thought has been raised that the government might simply raise their target inflation rate rather than see interest rates rise. This could be attractive to the masses, rather than see their homes fall in value. The main pointer that I see to HPC is the house price:earnings graph, suggesting that prices will fall in real terms by about 50% in due course. But the same effect could be achieved by holding rates steady, allowing prices to hold their nominal levels and inflation to double earnings until the same result is achieved. Any suggestions as to why this couldn’t happen?
  19. On the Newsblog the thought has been raised that the government might simply raise their target inflation rate rather than see interest rates rise. This could be attractive to the masses, rather than see their homes fall in value. The main pointer that I see to HPC is the house price:earnings graph, suggesting that prices will fall in real terms by about 50% in due course. But the same effect could be achieved by holding rates steady, allowing prices to hold their nominal levels and inflation to double earnings until the same result is achieved. Any suggestions as to why this couldn’t happen?
  20. I've just returned from a barge trip 'oop north' and passed through Leeds - I was truly shocked by the rate of development. Never been there before, but seeing it all from the canal gave an impression of a city that's being built around a small town. Now I can understand what is happening in China, as millions flock to the cities from the peasant farmsteads, but is that really happening in Yorkshire?? If not, where are all these people going to come from? Later we passed through Brighouse, where I saw Millroyd Mill, with dozens of north facing balconies looking a bit chilly, even on the baking summer's day we were enjoying. I decided that these would be useful to monitor as a sign-post for the direction of the market, as they look out over a fairly scenic canal basin (not sure what else..), but could soon look a bit miserable in a ‘winter of discontent’. I see from the LR information that they have a wide range of prices and mostly seem to have sold, so this does seem to create a useful database to start from. However, I see from RightMove that the block is square in shape and some appear to have a better outlook (I didn’t notice it as we approached, only as we stopped alongside) - perhaps someone with local knowledge might know which numbers have which aspect, just so I can compare like with like. One other point intrigues me – many have two sales recorded on the LR, often on the same day or within days – these cant be resales, as I believe that the date is completion date, so what’s that all about? Maybe I’m just being a bit thick, but if anyone can enlighten me, it would be much appreciated.
  21. BTL probabaly. Can't think of any reason why anyone would actualy want to live there...
  22. Sorry to be a bit neolithic, but how do you post an article on the blog?
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