Jump to content
House Price Crash Forum
Sign in to follow this  
Hopeful FTB

Question About Why Btl Will Crash First

Recommended Posts

I posted a thread about prices dropping in Brighton a few days ago & a lot of the responses mentioned that the BTL market would be the first to collapse if the crash happens- can someone explain to me why this is?

I have friends who are mortgaging up their properties at the moment to the max on interest only to let & then using the equity to get big interest only mortgages on other places- is this a bad idea at the moment?

Thanks :D

Share this post


Link to post
Share on other sites
Is that an answer??!!

I think that means 'yes, of course it is a bad idea'.

As you are clearly new to this site people should give you the benefit of the doubt.

Although to a seasoned HPC'er your post does look a little bit like a wind-up.

Share this post


Link to post
Share on other sites
I have friends who are mortgaging up their properties at the moment to the max on interest only to let & then using the equity to get big interest only mortgages on other places- is this a bad idea at the moment?

Thanks  :D

Interest Only = Renting money to get a house to rent on to someone else.

In Short, Pass the (Rent) Parcel

Umm, then they have to sell it at the end of 25years to pay the capital back. Genius!, just genius!, we'll all be millionaires!

err., were's my house?

:blink::huh:

Share this post


Link to post
Share on other sites
I think that means 'yes, of course it is a bad idea'.

As you are clearly new to this site people should give you the benefit of the doubt.

Although to a seasoned HPC'er your post does look a little bit like a wind-up.

Actually it wasnt a wind up- just wasnt sure why there is such a big deal about BTL-

I am fully aware the site is about house price crashes! I am not trying to sound like a muppet either as it goes!!

Just I have people all around me doing this and I am getting constantly conflicting reports about what is good and what isnt- some people take the advice of their parents in the judgements to buy to let, all of whom have been though previous crashes with BTL properties!

Of course I think they are all completely insane to take out massive interest only mortgages but when you are the only person saying that its idiocy and they are looking at you in pity as some kind of wishful thinker, you do start to doubt your certainty! :unsure:

Share this post


Link to post
Share on other sites
Is that an answer??!!

Sorry.

Basically, it's a bad time to buy somewhere to live. It's a ludricously bad time to by somewhere to invest in. Even the bulls will tell you that.

When people BTL they do for twin income streams of a ) having a tenant pay the bulk or all of the mortgage and b ) the increased equity from house price inflation.

Remove the promise of house price inflation and what are you left with?

You'd be better off investing elsewhere, or being boring and saving the money somewhere.

Share this post


Link to post
Share on other sites
I posted a thread about prices dropping in Brighton a few days ago & a lot of the responses mentioned that the BTL market would be the first to collapse if the crash happens- can someone explain to me why this is?

BTL will crash first because it is the sector of borrowers whose decision was most dependent on sentiment. That is, BTLers are more likely to think "it is worth stretching my borrowing capabilities because the capital appreciation is definite even if the rental yield is low". This is "speculative demand". Speculative demand can disappear rather quickly, which results in a price crash.

FTBs are more likely to think "it is worth stretching my borrowing capabilities because this property is a nice place". This is true housing demand. Obviously many FTBs have an element of speculative demand as well.

BTLs have typically competed for a particular segment of housing: most stereotypically small 2-bed new-build urban flats. Supply of these flats has increased beyond the true housing demand as developers responded to the BTL craze. As potential or current BTLers realise that the capital appreciation upside is fast disappearing, many will stay out or bail out.

BTLer and FTB properties overlap of course so the crash will spread to other sectors of the market.

I have friends who are mortgaging up their properties at the moment to the max on interest only to let & then using the equity to get big interest only mortgages on other places- is this a bad idea at the moment?

Thanks   :D

This anecdote is so extreme that many people on the forum will think you are making it up just to provoke them. However, assuming that you are not I think it is pretty safe to say that this would be a very risky proposition indeed. Your friends are betting their entire financial security on the capital appreciation of property. The most bullish (= pro price inflation) opinion amongst analysts is that prices will stay constant. Even in the event that prices hold up, what are the chances that your friends would be able to sell a property if they had to. It could be stuck on the market for months with no rental income, while interest rates are rising.

I know there has been popular interest in making money from buy-to-let in the past few years, but people who don't know much about finance have got to realise that things change quite quickly. This party is over, and if you get in now you are just bailing out someone else at the top of the spike, and risking your entire financial future.

frugalista

edit: typo

Edited by frugalista

Share this post


Link to post
Share on other sites

Coming from Brighton you should know all about Van Hoogstraten one of the most successfull Landlords in the UK.

He is worth a fortune and owns most of Brighton.

I hardly think he is going to be strapped for cash, so its not for everyone but those who can cut the mustard can do very well.

I can remember V H doing an interview on TV, he said.

"The British Public are Mugs, they buy on the high and sell on the low".

He attributed his success as never being taken for a fool, and only buying on the low, never ever on the up.

Share this post


Link to post
Share on other sites
Actually it wasnt a wind up- just wasnt sure why there is such a big deal about BTL-

I am fully aware the site is about house price crashes! I am not trying to sound like a muppet either as it goes!!

Just I have people all around me doing this and I am getting constantly conflicting reports about what is good and what isnt- some people take the advice of their parents in the judgements to buy to let, all of whom have been though previous crashes with BTL properties!

Of course I think they are all completely insane to take out massive interest only mortgages but when you are the only person saying that its idiocy and they are looking at you in pity as some kind of wishful thinker, you do start to doubt your certainty!  :unsure:

Quote them the story of my younger brother if you like. He bought a BTL in Late 2003 ("you can't go wrong with property") on a 100% interest only mortgage. The rent has never covered his interest payments and now he's getting fed up with subsidising his tenants he's trying to sell it. Shock horror, his estate agent advised him to put it up for about 10% less than he paid for it. He did so, but there's not a bit of interest in it.

So, what started off as a get-rich-quick scheme has turned into a bit of a disaster!

Share this post


Link to post
Share on other sites
I posted a thread about prices dropping in Brighton a few days ago & a lot of the responses mentioned that the BTL market would be the first to collapse if the crash happens- can someone explain to me why this is?

I have friends who are mortgaging up their properties at the moment to the max on interest only to let & then using the equity to get big interest only mortgages on other places- is this a bad idea at the moment?

Thanks  :D

Your post highlights precisely why people here think BTLs (at least newbie/amateur BTLs) will get "carried out" when things turn nasty.

Your friends are taking the maximum mortgage possible, on interest only, so that they can buy other places that are max-mortgaged on interest only...

Essentially, they are taking the maximum possible risk in the housing market. If the market soars ahead they will be laughing about the fortunes they will have made.

However, if it falls all of the risk they have taken on comes back to haunt them. If house prices crash (let say falls of 20% nominal) then these guys will most likely be in negative equity across their entire portfolios and may get repossessed (still leaving them in debt after the dust has settled).

Basically, they had better be right that prices aren't going down!

Share this post


Link to post
Share on other sites
Your post highlights precisely why people here think BTLs (at least newbie/amateur BTLs) will get "carried out" when things turn nasty.

Your friends are taking the maximum mortgage possible, on interest only, so that they can buy other places that are max-mortgaged on interest only...

Essentially, they are taking the maximum possible risk in the housing market. If the market soars ahead they will be laughing about the fortunes they will have made.

However, if it falls all of the risk they have taken on comes back to haunt them. If house prices crash (let say falls of 20% nominal) then these guys will most likely be in negative equity across their entire portfolios and may get repossessed (still leaving them in debt after the dust has settled).

Basically, they had better be right that prices aren't going down!

So what if, and this is the other response that I get all the time, its a "long term investment" for pension purposes that they dont plan to sell for 25 years? Do the same principles apply then?

Most people seem to think that this wont go wrong as you just ride the storm of the ups & downs of the market and hope for a profit in the long term?

(again, this isnt a wind up)

Share this post


Link to post
Share on other sites

"BTL" won't crash first per se, but the people involved will drive it. Namely because BTL investors are just that: investors. They calculate they get return on investment (ROI) based on two factors: Capital Appreciation and Rental Income.

For most BTL investors, rental income only pays for the mortgage, appreciation provides the real ROI. Once property ceases to increase in price, the investor will have maximised their ROI and pull from the market & invest their cash elsewhere.

Why this may drive a crash is that due to the point where ROI on property ceases to be better than other investments being about the same across the market, many investors will sell up at the same time, causing a glut of supply and thus a fall in prices. Then you enter negative ROI and investors will do anything to get out of that, driving a further glut, bigger price falls et voila! A crash.

Bear in mind this applies more to the more practically minded commercial investors to whom property is just another asset class, and not so much individuals who have banked everything they have in a property or two.

Share this post


Link to post
Share on other sites

A professional property investor once told me that he follows the 12/20 rule.

He wouldn't pay more than 12 times the annual rental income, and he would sell once the property's value rose to 20 times.

I'm not sure whether this is still a valid rule or not.

Share this post


Link to post
Share on other sites
So what if, and this is the other response that I get all the time, its a "long term investment" for pension purposes that they dont plan to sell for 25 years? Do the same principles apply then?

Most people seem to think that this wont go wrong as you just ride the storm of the ups & downs of the market and hope for a profit in the long term?

(again, this isnt a wind up)

Long term trends have to have a start point, and yes things like property do go up over time. However you have to do your own anaylsis and say if I bought at x how much would I have my investment appreciated by this point of time and then divide this by at least some inflation index to get a realistic return, the avg return over 25 years would be different depending on what point you started at. If you buy at the top of a spike your going to have to wait longer or have to expect above avg returns to any norm than if you bought at a trough or more normal level.

Share this post


Link to post
Share on other sites
Coming from Brighton you should know all about Van Hoogstraten one of the most successfull Landlords in the UK.

I can remember V H doing an interview on TV, he said.

"The British Public are Mugs, they buy on the high and sell on the low".

He attributed his success as never being taken for a fool, and only buying on the low, never ever on the up.

lj,

what a peculiar posting. I thought you a bull, but it seems you would go with NVH's advice. That means you must be a bear.

In the 1980s, as the housing market boomed, he prospered, acquiring more than 2,000 properties.

By the 1990s he had sold 90% of them, making massive profits and investing in other areas, including global mining.

Van Hoogstraten faces life on outside,BBC

I also note a tinge of admiration for NVH.

"Zimbabwe, where he owns 1 million acres and is a financial backer of Robert Mugabe"

He has spoken warmly of Zimbabwean President Robert Mugabe, whom he once described as "100% decent and incorruptible". He holds vast fortunes in the African country and once said: "I don't believe in democracy, I believe in rule by the fittest."

Nicholas van Hoogstraten is no stranger to controversy and his list of previous convictions includes ordering a grenade attack on the home of a business associate, a Jewish clergyman who he claimed owed him money.

For that he spent four years in Wormwood Scrubs in the 1960s, but he says he has done "all sorts of things one shouldn't strictly do".

...

But he also gained a sinister reputation and was accused of using strong-arm tactics against tenants of slum properties which he bought cheaply for redevelopment.

Ten years ago, when a fire broke out at one of his properties in Brighton, he described the five people who died in the blaze as "scum".

To Mr van Hoogstraten his tenants are "filth", while people who live in council houses are "worthless and lazy".

He once said: "The only purpose in creating great wealth like mine is to separate oneself from the riffraff."

He has also said he believes that "the whole purpose of having money is to put yourself on a pedestal".

"I will leave my children a few million so they won't starve. But I have seen people who think the world owes them a living. I believe everyone should do something useful," he said.

Van Hoogstraten faces life on outside,BBC

I wonder whether a deal exists so that he might redevlop the bulldozed houses of poor black Zimbabweans, or is he just after the white farmers agri land?

What a role model!

Edited by Sledgehead

Share this post


Link to post
Share on other sites
Coming from Brighton you should know all about Van Hoogstraten one of the most successfull Landlords in the UK.

He is worth a fortune and owns most of Brighton.

I hardly think he is going to be strapped for cash, so its not for everyone but those who can cut the mustard can do very well.

I can remember V H doing an interview on TV, he said.

"The British Public are Mugs, they buy on the high and sell on the low".

He attributed his success as never being taken for a fool, and only buying on the low, never ever on the up.

'never being taken for a fool', brutalising his tenants, rubbing his own shit in people's faces - literally (with his two bodyguards present in case anyone hit him, of course) - oh, and having the odd business rival murdered. Laurejon, the guy's a psychopathic criminal - please don't say you think he's a winner!! You do ave a larf, don't you?

Share this post


Link to post
Share on other sites

I do admire him for his business savy.

His past is somewhat chequered however when you consider that our Prime Minister and many others have been blasting Iraq with Uranium tipped missiles and cluster bombs then VHS by contrast is a Angel.

At the end of the day he comes across somewhat like Alan Sugar, the old school of tough actions and tough decisions.

It is a tough world we live in, some of us are honest and own up to being mercenary, others hide but just think it and act it out.

I fit inbetween, I know I am the Architect of my own future, but the end does not always justify the means. I also know that come old age, I will have to look after myself the days when 40yrs of paying into the system were enough have long gone.

Our money is being wasted daily, and people are lapping it up with a spoon. I am just pleased to know that those who lap it up today, will be the ones who pay the real price tommorow.

Share this post


Link to post
Share on other sites
I do admire him for his business savy.

Yeah he's right. I personally admire the club promotion skills of the Krays, knew exactly how to run a good club.

Same as Hitler, top bloke he was, sure he gassed a few million people but the crime rate was down while he was around.

Theres a huge difference between being mercenary and a crimial. The fact the bloke is in jail should give you a clue which he was.

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.