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Found this - Buy-to-let Mortgage Arrears: Understanding the factors that influence landlords’ mortgage debt Alison Wallace and Julie Rugg Centre for Housing Policy Spring 2014 I haven't seen a link to it posted already.

There is a hundred pages of it and a whole bunch of stuff, including the analysis of a lender's loan book. The identity of the lender is not disclosed, but the report was commissioned by Lloyds and the number of loans in the analysed book is 338,908, being loans made after 2001. Coincidentally there are about 11 million mortgages, Lloyds are about 20% of the market and BTL is about 15% of the market, and yes, 20% of 15% of 11 million is about 300k.

Just a couple of graphs

lender+loan+book+btl+analysis+originatio

lender+loan+book+ltv.png

Again, watch out for the old volume/value joker. In the first graph you see a fall in volumes in the post crash period, but looking at Lloyds book (which this may or may not be) BTL has increased from £44.2bn (12.7% of all mortgage lending) in 2009 to £52.8bn (16.3%) in 2013 on a value basis. Apropos of nothing in particular The Coventry Building Society (TLC not Plc, supposedly) wrote 30% of their new lending (value basis) in 2013 in BTL. "BTL, so hot right now, BTL"

A fairly tame correction in London and the South East would tip a fair chunk of the 66-75% and 76-85% LTV tranches the wrong side of 85% which would make it very difficult for them to re-mortgage onto cheap fixed rate when current cheap fixes reset.

[Edit - the way this was originally written indicated (incorrectly) that Lloyds lent £52.8bn to BTLers in 2013. £52.8bn is the total value of BTL loans at the balance sheet date. It is not possible to ascertain from the accounts how much new BTL lending there was, see post below]

Edited by bland unsight

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Here is the argument

  • There is already lots of BTL around
  • Since the crisis quite a lot more money has been heading into BTL
  • In the past BTL 'worked' as a capital appreciation game. It was never about the income.
  • Late entrants (i.e. post 2008) will not see the capital gains early boom (1997-2004) entrants saw because BTL mortgage rates will either be static at best, and most likely rise so later entrants will not be able to borrow more in order to buy out earlier entrants and allow them to realise their gains, (this is on the assumption that the facilitating driver of HPI is invariably a lending phenomenon - falling rates and/or weakening of credit underwriting standards). During the late boom phase (2003-2008) owner-occupiers using high-LTV interest only mortgages (possibly also self-certified) could 'afford' to match BTLers on price, hence they were also a source of 'greater fools' for the 'canny' BTLer. Changes in lending practices mean that presently this is no longer the case and there is little sign of these irresponsible lending practices returning. Hence the only source of greater fools for the late entrant BTLer is other late entrant BTLer.
  • Rents will rise at the rate earnings rise. An increasing number of BTLers weakens the position of any individual BTLer to determine rents and the least leveraged BTLer sets the market clearing price.
  • If rates move by a small amount from a low base (e.g. 0.5% from 4%) you get a corresponding percentage change in the interest only mortgage cost (i.e. 4% to 4.5% is a 12.5% increase). Large increases in earnings are needed to accommodate small increases in mortgage rates without essentially eliminating mortgage covers and dramatically increasing the proportion of incomes that households allocate to paying rent, (for the beginnings of a naive mathematical treatment look at this, rents and incomes.pdf)
  • Late entrant BTL driven HPI is a self-limiting process. As purchasers buy into frothy markets they move prices but not rents. Hence their purchases reduce the rent as a percentage of the outstanding mortgage for each successive wave of BTLers. This process terminates when the rents can no longer cover the mortgage and related expenses (e.g. letting agent fees, maintenance costs etc). This is, to some extent, wired in by lenders' rental cover requirements.

The question is how long does this process take?

rents and incomes.pdf

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If rates move by a small amount from a low base (e.g. 0.5% from 4%) you get a corresponding percentage change in the interest only mortgage cost (i.e. 4% to 4.5% is a 12.5% increase). Large increases in earnings are needed to accommodate small increases in mortgage rates without essentially eliminating mortgage covers and dramatically increasing the proportion of incomes that households allocate to paying rent,

...

The question is how long does this process take?

They don't have to sell for as long as rents can be paid at a level at which a landlord can afford to subsidise their losses month to month whilst they pray for capital appreciation.

As soon as the cost of borrowing rises, and it won't take much as demonstrated by the above, the late entrants will have to start selling. As the cost of borrowing rises over time the landlords that have to sell will increase based on when they bought. So 0.5% increase, all those that bought since 2010, 1%, all those since 2008, and so on. Those years are a guess to demonstrate what I mean,something like that.

i expect a drip drip followed by a stampede once the cost of borrowing rises. That can occur as a result of the first base rate rise, once their teaser rates are finished. Id expect the first rise within the next 6 months.

I'll stick my neck out and say that by the end of next year I expect the drip drip to be underway.

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From p52 of the report in the OP, emphasis added.

As the majority of loans are granted on an interest only basis (82 per cent) it is expected that the basic capital outstanding will not change, with the slight variation from the original sum possibly
accounted for by slight over- and under-payments over time.

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Most buy-to-let loans are interest only, not repayment. In other words, you pay only the interest each month and clear the capital debt when the property is sold. There are several advantages to an interest-only loan if you are buying a property to let. First, the monthly payments are cheaper than a repayment mortgage. Plus, you can usually offset the mortgage interest against your tax bill.

Of course, the downside is the lack of capital repayments to reduce your outstanding debt. This can be especially tricky if house prices are flat or falling as it raises the possibility that you won't generate enough to clear the mortgage from the proceeds of the sale.

Ive never known of a buy to let mortgage not to be interest only.

I can't quantify 'Most' however.

http://www.moneysupermarket.com/mortgages/buy-to-let/

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How about the number (and value) of those loans that are interest only?

Sorry, didn't read your question carefully enough. I assume the 82% is volume basis. Almost all the analysis in the report of the lender's data is volume basis - i.e. number at a certain LTV, number in geographical area.

Edited by bland unsight

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Ive never known of a buy to let mortgage not to be interest only.

I can't quantify 'Most' however.

http://www.moneysupermarket.com/mortgages/buy-to-let/

Agree with the idea that it's all IO - I'm surprised that the number is as low as 82%. I can see how an inherited property might end up on a repayment basis. You might inherit it owned outright, cash out refinance (MEW) 25% of the equity with a repayment mortgage. The rent will cover that - other scenarios can be imagined.

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Rents track earnings

rents+track+earnings.png

Source: HM Treasury Investment in the UK private rented sector, February 2010

What was true up to 2008 is still true today

English+housing+survey.png

Source: DCLG English Housing Survey Headline Report 2012-13

Rent index and weekly rents in the table above represents how much money is spent on rents by all renters, new and existing. Long term renters pay much less, those renting less a year £175, 5-6 years £154, 20 and more £106. See Annex Table 3 in DCLG English Housing Survey Headline Report 2012-13

New rents (market price for renting accommodation) are increasing much faster. Based on HomeLet data around 25% for UK, 45% London since 2009. Source: June 2010 May 2014

This is also confirmed by asking prices in London. Source: asking prices

HomeLet claims that renters in London pay now 55% of their income after tax.

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Rent index and weekly rents in the table above represents how much money is spent on rents by all renters, new and existing. Long term renters pay much less, those renting less a year £175, 5-6 years £154, 20 and more £106. See Annex Table 3 in DCLG English Housing Survey Headline Report 2012-13

New rents (market price for renting accommodation) are increasing much faster. Based on HomeLet data around 25% for UK, 45% London since 2009. Source: June 2010 May 2014

This is also confirmed by asking prices in London. Source: asking prices

HomeLet claims that renters in London pay now 55% of their income after tax.

Renters with a residence of less than a year are paying slightly over a tenner more than the average (£175 vs £163). The "much less" you're reaching for is 20 year residences - by the Annex Table you quote that is 131/3,767 = 3% of the sample.

For rent trends, well - it's all about the trends. The VI data like the LSL has shown a trend from April 2010 to April 2013 with steadily rising BTL rents. Where is the same trend in EHS data? As fully (1,333+789)/3,767= 56% of the surveyed households have been in the residence for less than 2 years, the trend claimed by the LSL and suggested by the asking price data should have shown up in the EHS data. And if the BTL marketing crew's data hasn't shown up in the EHS data, what you have to ask yourself is which set of data do you trust?

As to the HomeLet claim - that notable statistical authority, a Landlord Insurance and Referencing firm. No link to the source of your number and no longitudinal series to allow us to evaluate how quickly income share allocated to rents is rising, or even if it is rising at all. And still the point is not what that level has reached to this point but whether it can rise further. If I am a landlord with a big IO mortgage it is no comfort to me that my tenant can pay 55% if it turns out that they can't pay 65% of their net income over to me in rent. I'm pretty sure that once the limit of what can be paid is reached, what my tenant would do is move further out of London. Plenty of us have done it in the past. Can the landlord move his house further out and hence knock off the 0.5% bump in the mortgage that is causing all the problems?

Edited by bland unsight

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You could use rent for "less than a year" and "5-9 years" groups to get a low bound estimation from EHS data how much new rents increased over 7 year. You will get 14% (175/154-1). If you adjust this by a few percent to correct for a fact that a rent at the start of tenancy was lower for "5-9 year" group (landlord likely raised it) you will have a number around 20%. That is around two times what you get if you just take EHS average paid rents for 2009 (153) and 2013 (163), which gives you 7% increase.

I agree that it is difficult to get a good quality data on new rents but we have got a few independent sources that suggest that UK new rents increased around 20% last five years.

1) estimation from EHS data around 20% over 7 years

2) HomeLet 25%

3) LSL - 12% (736/660-1) over 3 years

4) asking prices in London suggests 40-50%

As for 55% number is from HomeLet June report. I think raising mortgages rates will cause a lots pain for the renters, they will be main victims not BTLs. They will have to move to smaller, cheaper properties.

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...

As for 55% number is from HomeLet June report. I think raising mortgages rates will cause a lots pain for the renters, they will be main victims not BTLs. They will have to move to smaller, cheaper properties.

You don't really go in for joined up thinking, do you? Who exactly is renting the larger, more expensive properties if the renters move to the smaller, cheaper properties?

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I think raising mortgages rates will cause a lots pain for the renters, they will be main victims not BTLs. They will have to move to smaller, cheaper properties.

If higher rents could be charged, they would be charged already. Don't forget it won't be the same for every buy to letter, just those that entered most recently, at first. And then those that entered a little earlier than that.

Not all property available to rent was bought on interest only at high LTV at bubble prices. They will take the tenants the late entrants cant afford to, and the late entrants will have to sell. In a hurry.

Its too late to pretend it won't happen, late entry buy to letters collective goose is cooked, they just don't know it yet.

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You could use rent for "less than a year" and "5-9 years" groups to get a low bound estimation from EHS data how much new rents increased over 7 year. You will get 14% (175/154-1). If you adjust this by a few percent to correct for a fact that a rent at the start of tenancy was lower for "5-9 year" group (landlord likely raised it) you will have a number around 20%. That is around two times what you get if you just take EHS average paid rents for 2009 (153) and 2013 (163), which gives you 7% increase.

I agree that it is difficult to get a good quality data on new rents but we have got a few independent sources that suggest that UK new rents increased around 20% last five years.

1) estimation from EHS data around 20% over 7 years

2) HomeLet 25%

3) LSL - 12% (736/660-1) over 3 years

4) asking prices in London suggests 40-50%

As for 55% number is from HomeLet June report. I think raising mortgages rates will cause a lots pain for the renters, they will be main victims not BTLs. They will have to move to smaller, cheaper properties.

OK - this I accept is a masterpiece.

You take, as a starting point, a data set which has moved from £153 to £163 over 4 years (i.e. compounding annually at [(163/153)^(1/4)-1]=0.016 - that is 1.6%.

If you treat the data over the near term, 2 prior years, comes out as [(163/160)^(1/2)-1]=0.009 - being 0.9%.

If you treat it over the very near term it is [(163/164)-1]=-0.006 - OMFG that is MINUS 0.6%

From this, you obtain 14% over 7 years [1.14^(1/7)]-1=2% which by some cunning mathematical legerdemain becomes 20% over 7 years [1.2^(1/7)-1]=0.026, Hey Presto 2.6%.

The crucial question which, in my mind, remains unanswered is "How is it that an average which is 50% weighted to new rental can be falling when new rentals are rising?"

Possible answers

  • The 50% that are not new are falling (Really?)
  • The profile is not changing (i.e. if you go back 2 years the average was still £160 and new rentals were still on average £170 because RENTS ARE NOT GOING UP BECAUSE PEOPLE PAY RENT WITH EARNINGS AND REAL EARNINGS ARE FALLING!!!!!!!!!!!!!!)

Let's review the data so far

Your 'calculation' - "20% over 7 years"

Actual move in the index, (by your own calculation!) 14% over 7 years.

What is 14% over 7 years annualised? 1.6%

What is the actual rate at which rents as per the EHS are compounding?

2 year horizon is +0.9%

1 year horizon is -0.6%

Now, I suspect you must have an A level in Statistics, because you have absolutely no feel for numbers and you've taken a data set which says one thing clearly and obtained from it the opposite, (there's nothing wrong with statistics, it's just that the bonkers integrals that underpin understanding are not for the the faint-hearted). Why do I bring this up here? Because you now suppose that the data sets are "independent". My opinion is (I think, OK I'm sure...) independent of yours - but that is no guarantee that either of them reflect the underlying reality. If we are judging the four data sets that you want to capture we need to think about their size and any possibility of selection bias. Need I go on?

You want to give some nonsense website (London Property Watch - notice the lack of hyperlink - I feel soiled having clicked it and discourage others from doing so) the same weighting as as ONS survey with a sample of 3 million households. I've recently been moderated for an ad hominem attack, so I will limit my comment to - "Are you sure?".

The defence rests.

Well, almost...

...

I think raising mortgages rates will cause a lots pain for the renters, they will be main victims not BTLs. They will have to move to smaller, cheaper properties.

Nobody is going to raise rates - well maybe Carney might give us 0.5% before the election, but that'll be a bonus - we'll get rises on mortgage rates anyway. They are going to rise because a host of extraordinary measures are being withdrawn. If you think that the government is going to stiff roughly 20% households so that the weakest cohort of idiot BTLers (far less than 1% of households?) don't have to wear the loss on their deposit as they hand the same losing proposition onto the next bunch then IMO you haven't really been keeping up. All the real numbers tell the same story. If the truth as you understand it is LSL, HomeLet and London Property Watch then you probably need a new truth - it's coming your way regardless of where you get your numbers from.

#btlbailout

[Edit: the EHS is not prepared by the ONS. United Kingdom Statistics Authority has designates the EHS statistics as National Statistics For details of who prepares the survey see the survey itself]

Edited by bland unsight

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I agree that it is difficult to get a good quality data on new rents but we have got a few independent sources that suggest that UK new rents increased around 20% last five years.

1) estimation from EHS data around 20% over 7 years

2) HomeLet 25%

3) LSL - 12% (736/660-1) over 3 years

4) asking prices in London suggests 40-50%

As for 55% number is from HomeLet June report. I think raising mortgages rates will cause a lots pain for the renters, they will be main victims not BTLs. They will have to move to smaller, cheaper properties.

Yes and what is this thread about anyway? Landlords don't lose out, and if they do, they get replaced by new landlords. Well that's because we lost / happily surrendered, when houses were at silly high prices, after they calmed just a little in 2008/09, to lobby for more HPI. At the critical moment it was "They didn't know what they were doing / Media / Parents and every other excuses." Did you get what you wanted, softies? To me you are the main enemy above central bankers, landlords/investors. Mobfants and Posh Bristol FTB Jonathans now pushing and falling over themselves to pay 35% above 2007 top prices. I just feel sorry for tens of millions of younger generations who have to come through, other than children of landlords. Let them read you excuse riddled posts in the future for people who made their own decisions to outbid others.

Times - Money 27.07.2014 (front page headline article)

Generation rent means landlords can cash in

Cheap buy-to-let deals and a growth in home renters are making propery more tempting for investors

Experts predict greater returns for landlords as a result of cheap mortgages and a growing number of renters in the coming years.

.. Christopher Evans of the CEBR said: "The increased difficulties and costs of gaining a mortgage benefits landlords. As they become less affordable, more people considering owning a house will be pushed into renting - and some existing home-owners will find it more viable to sell their houses and rent." The Intermediary Mortgage Lenders Association (IMLA) expects more than half of all Britain's homes to be rented by 2032.

.. Figures released from the estate agents Savills, to be published tomorrow, show prime central London rents have increased 2.9% in the past year. Lucian Cook of Savills said: "Growth has been driven by the family housing market, rising corporate relocation budgets and demand from single people and sharers." The estate agent Knight Frank said there has also been a 50% year-on-year rise in tenancies agreed in the home counties.

.. Peter Williams of the IMLA said: "There has been a swathe of activity among property investors recently, expemplified by the sharp pick-up in buy-to-let lending." The number of buy-to-let loans taken out in May was 14% higher than a year before.

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You don't really go in for joined up thinking, do you? Who exactly is renting the larger, more expensive properties if the renters move to the smaller, cheaper properties?

You misunderstood me. I am not saying that BTL will be fine. My point was that migration of properties from BTL back to homeowners won't be a walk in a park for renters. They won't just seat and watch prices falling to buy them 50% cheaper. It will be a long process, full of pain for them. Most BTL will lose deposits and imaginary capital gains. Renters, poorer a part of society than BTL, will be squeezed more and face loosing a roof over their head.

I am not saying either that this process shouldn't happen. BTL pain will spread and the most vulnerable will suffer most, as always.

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OK - this I accept is a masterpiece.

You take, as a starting point, a data set which has moved from £153 to £163 over 4 years (i.e. compounding annually at [(163/153)^(1/4)-1]=0.016 - that is 1.6%.

If you treat the data over the near term, 2 prior years, comes out as [(163/160)^(1/2)-1]=0.009 - being 0.9%.

If you treat it over the very near term it is [(163/164)-1]=-0.006 - OMFG that is MINUS 0.6%

From this, you obtain 14% over 7 years [1.14^(1/7)]-1=2% which by some cunning mathematical legerdemain becomes 20% over 7 years [1.2^(1/7)-1]=0.026, Hey Presto 2.6%.

The crucial question which, in my mind, remains unanswered is "How is it that an average which is 50% weighted to new rental can be falling when new rentals are rising?"

Possible answers

  • The 50% that are not new are falling (Really?)
  • The profile is not changing (i.e. if you go back 2 years the average was still £160 and new rentals were still on average £170 because RENTS ARE NOT GOING UP BECAUSE PEOPLE PAY RENT WITH EARNINGS AND REAL EARNINGS ARE FALLING!!!!!!!!!!!!!!)

Let's review the data so far

Your 'calculation' - "20% over 7 years"

Actual move in the index, (by your own calculation!) 14% over 7 years.

What is 14% over 7 years annualised? 1.6%

What is the actual rate at which rents as per the EHS are compounding?

2 year horizon is +0.9%

1 year horizon is -0.6%

Now, I suspect you must have an A level in Statistics, because you have absolutely no feel for numbers and you've taken a data set which says one thing clearly and obtained from it the opposite, (there's nothing wrong with statistics, it's just that the bonkers integrals that underpin understanding are not for the the faint-hearted). Why do I bring this up here? Because you now suppose that the data sets are "independent". My opinion is (I think, OK I'm sure...) independent of yours - but that is no guarantee that either of them reflect the underlying reality. If we are judging the four data sets that you want to capture we need to think about their size and any possibility of selection bias. Need I go on?

You want to give some nonsense website (London Property Watch - notice the lack of hyperlink - I feel soiled having clicked it and discourage others from doing so) the same weighting as as ONS survey with a sample of 3 million households. I've recently been moderated for an ad hominem attack, so I will limit my comment to - "Are you sure?".

The defence rests.

Well, almost...

Nobody is going to raise rates - well maybe Carney might give us 0.5% before the election, but that'll be a bonus - we'll get rises on mortgage rates anyway. They are going to rise because a host of extraordinary measures are being withdrawn. If you think that the government is going to stiff roughly 20% households so that the weakest cohort of idiot BTLers (far less than 1% of households?) don't have to wear the loss on their deposit as they hand the same losing proposition onto the next bunch then IMO you haven't really been keeping up. All the real numbers tell the same story. If the truth as you understand it is LSL, HomeLet and London Property Watch then you probably need a new truth - it's coming your way regardless of where you get your numbers from.

#btlbailout

EHS estimation is just an estimation. I've selected 7 years term to match roughly other data sets. As you know using short terms is a less reliable estimation of a trend as it is much more noisy (typically estimation noise drops as 1/sqrt(term) ).

Renters less than 1% are a third of all rents so it is possible that overall rent costs increases twice slower than new rents e.g 10% = 0.33 * 20% + 0.66 * 5%, where 10% is overall rent increase over 7y, 20% for rents less 1y over 7y, 5% rents more than 1y over 7y.

I didn't apply any selection to data sets to estimate new rents growth rate, that is all I could find. If you know about any other let me know. HomeLet is probably the best as it is a big sample and represents real transactions. The only concerns I have about it are

1. that they use an average rent which could skewed by high rent tail. It would be better to use a median

2. Income growth cloud be overstated because of selection bias and people lying,

Below income and rates from HomeLet

Gross income Rent 2009 24900 660 2014 29250 840 Growth 17% 27%

My proposition is that new rents are rising twice faster than wages, in London that is even worse close to 3 times.

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One of the main problems of rising rents IMHO is that rents will have to go up at the end of an AST. This means (if LL are to achieve their goals) an increase in the churn of tenants. Any rise in rent will be met with an increase in voids so the overall revenue effect is still problematic until (as mentioned above) there is no one left to pay the top sector rents (or it becomes cheaper to buy and the better off renters buy).

The BTL mob will certainly try to put rent up to cover their IR rise, but this may not be completely possible in the longer term. The collapse is a problem waiting for an opportunity to happen. It will be a slow motion affair though. Property looks to me at the minute to be a risky investment due to the volatility of the global financial system. This is in complete contrast to the popular view that property is a safe investment in times of finanacial crisis. Interesting times.

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You misunderstood me. I am not saying that BTL will be fine. My point was that migration of properties from BTL back to homeowners won't be a walk in a park for renters. They won't just seat and watch prices falling to buy them 50% cheaper. It will be a long process, full of pain for them. Most BTL will lose deposits and imaginary capital gains. Renters, poorer a part of society than BTL, will be squeezed more and face loosing a roof over their head.

I am not saying either that this process shouldn't happen. BTL pain will spread and the most vulnerable will suffer most, as always.

I do not misunderstand you, because there hasn't been anything from you so far that requires any understanding on my part.

You've posted some dubious VI claptrap about rents as a challenge to the data from the ONS. I point out the obvious logical problems with your 'mathematics' and you ignore that and return to stating what you clearly already believe. By the way - I checked my suggestion about the profile of rents against the 2011-2012 EHS. Looks like a victory for logic and reasoning over messing around with numbers till you get the answer you want.

ehs+rents+2011-2012.png

You exaggerate the consequences for renters. It is a pain in the @rse having to move, but it is not, "loosing [sic] the roof" over your head, it is changing the roof. I've been booted out by landlords who were selling up. On one occasion I moved somewhere much cheaper, and on another occasion I moved to somewhere larger and more expensive, (because local rents appeared to have softened between 2007 and 2012 and thus the larger stuff looked like better value ;) ).

Likewise, I think that you exaggerate the pain for BTLers. They take a punt; maybe they win, maybe they lose. If they are taking that punt because they don't see any other investment that will give them the capital gains and investment income that they need to make up for the fact that they don't have a pension, then the heart of their problem is not BTL, it's the fact that they haven't made adequate provision for a retirement income. If they took the what savings they did have and put it all on a horse, we wouldn't (well, I wouldn't) be here posting "Oh, the poor devils, the terrible pain!", I'd just think that it was unfortunate that a fool had made their poor position worse by being foolish. The fact that 'retail investors' believe that there is a difference between leveraging up what little you do have and taking a punt on UK property in 2014 and betting on horses is bizarre to me, especially as we must have a sizeable cohort of 2007/2008 BTLers who got into the wrong markets at the wrong time and had their financial faces ripped off.

Finally, look at the risk reward profile for renters. Let's say rates rise enough to make prices fall. Maybe during that correction they have to move, maybe they get screwed for an extra tenner a week in order to avoid moving. It's not the end of the world. But maybe they gain the opportunity to buy at prices discounted by somewhere between 25%-40%. It won't make a poor man rich, but the truth for me is that I presently regard part of my rent expense as the price that I pay for having somebody else take the balance sheet risk with an illiquid frothy asset that I would rather pay them to take than take myself.

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