Will Rents Cushion The Crash?

[smiley]

OK, so I'm one with those who expect and gleefully await a crash in property prices in the UK. Once speculative demand - the view that prices must keep going up - is turned into reverse, the market should be swamped, and prices fall.

But how far? From the late-80s to the mid-90s they fell by about a third in real terms. This time, it's easier and more common for owners to rent out their properties. And with rents still high (and rising), will this cushion the crash? The 'asset' - property - will still have value, since it's still generating an income.

So - will rents cushion the crash, or will something happen which means they don't?

Views, please, ladies and gentlemen. :-)

[Zzzzzzzzzzzzzzzzzzzzzzzzzz]

I wonder if rising rents will precipitate a crash... sucking spending out of the wider economy, including sectors that add real value. All part of Britain's economic disease.

[Venger]

I wonder if rising rents will precipitate a crash... sucking spending out of the wider economy, including sectors that add real value. All part of Britain's economic disease.

I like your thinking.

Perhaps the attempt to seek higher rents... some BTLers will try. Leading to voids, and individual BTL wipeout, or selling back to market.

Yet even some of the BTLers realise that trying to hike up rents can lead to voids.

And imo, voids batter BTLer financial positions.

We're okay to go. HPC and RPC.

Ros . says:

27/09/2015 at 14:13

Reply to the comment left by “Mark Brown” at “27/09/2015 – 13:25“:

I don’t agree. The reality is that with a few interest rate rises, many landlords will go out of business and they will not be able to just keep increasing rents. When you raise rents you annoy and de-stabilise tenants. The only way I generally get any rises in – and I have definitely started doing this more – is when someone leaves. I can then advertise at an increased rent. But if you increase it too much, you just end up with a void for longer. Yes, Clause 24 will lead to an increase in rents; but no, nothing like the level needed to keep landlords in business. So I’m not comfortable with the term ‘tenant tax.’ I see it more as an attack on landlords than on tenants – although both will suffer.

http://www.property1.../#comment-65272

__________

Mark Alexander - Property118 says:

27/09/2015 at 14:40

50% of landlords have no mortgages, large landlords will incorporate, smaller landlords will sell to FTB’s and BTL will become a less attractive form of investment.

As demand increases rents will rise but that will come after the mayhem, not before.

Only when landlords have their pick of the best tenants on high incomes will rents increase significantly. Before we ever get to that position there will be carnage with hundreds of thousands of tenants being left homeless.

This is an attack on both landlords and tenants but to think the solution is simply to pass on the tax to tenants and that the status quo will remain is naive in my opinion. I also agree with Ros, it’s not just tax that will hurt the PRS, interest rates will rise too. mass homelessness will become a problem well before rental inflation kicks in, especially if demand for homes continues to grow.

It is for these reasons I’m not happy to badge this as a tenant tax. I will sell a large chunk of my portfolio to owner occupiers or cash rich landlords if they want them. I will retain the rest mortgage free. When the market facilitates higher rents from better quality tenants then that’s what I will provide. Meanwhile, like other larger landlords, I will be restructuring my tax affairs to ensure that I am under minimal pressure to divest and and gear down, thus able to do things in my own time.

Those landlords proposing to put rents up by 5% per annum will have a big shock and find they have significant void periods before realising that rents are set by market forces and then have to settle for what the market rate is after having already lost a lot of money due to rental voids.

That’s just my opinion, some will disagree but life would be boring if we all had the same opinion.

Having said all of that, I still haven’t given up on the notion that common sense will prevail at Wedtminster proving we continue with our lobbying efforts.

http://www.property1.../#comment-65274

That is an interesting post. Finchley is in North London. Lots of it is really nice, if you are into that whole leafy suburb thing. Much of it is in Zone 4, and some in Zone 3. Your point is?

Also you're totally missing the point. The thread title is falling rents. fru-gal's anecdotal is consistent with falling rents, because the rental achieved recently is lower than the rental achieved earlier.

However, we can add to the anecdotal because one way to square the circle is to propose that the BTLer took all that time because they couldn't at first accept that they were going to have to accept a lower rent in order for the market to clear. Basically, the market stayed irrational* longer than they could stay solvent, so eventually they folded and let at a lower price. Now that suggests that some BTLers are simply unable to believe that rents fall, and you are giving the appearance of being additional anecdotal evidence to that end.

It also suggests two tricky questions for BTLers. How long do you keep a property void in order to wait for a pinch point in the mismatch between supply and demand to allow you to lock in the rent you want, and how many times does 'bad luck' on this score result in BTLers wiping out all their profits? On thin margins even a single month void is bad news. The take home message is - a wise BTLer with any sense wouldn't hold the property void for too long. If that meant pulling the rent down sharply then plenty of BTLers will do just that, with the earlier entrants able to pull further down without turning cash flows negative. In the teeth of the next recession with all these piss weak late entrant BTLers desperate to avoid voids, rents could fall quite sharply. Sweet. Again, combine that with the end of FLS, BCBS RWA revisions and housing element of UC being trimmed and some late entrant BTLers are going to find that a 5% gross yield was just a ticket to an enormous capital loss on an investment with a negative carry. Double sweet.

* Irrational according to the BTLer, natch.

[This time]

You forget that once prices crash the higher earning renters who have been priced out will start buying which will lower the median wage of renters thus lowering the amount of rent that can be charged. This will result in some landlords having to sell which will increase supply and lower prices even more.

[Venger]

In the last real HPC, market sentiment changed.

Sure some bought in on the way down (you need such buyers to set some crash-discovery) but only those in money were in position when bottom of the market was scraped. By some accounts, at that stage, the property madness had all be thrashed out of the forever HPIers. Even when great value there was fear. And joy, given a few people I know who finally had opportunity to upsize at great value.

1992

..this could be about to change, particularly in Central London. Overseas investors are keen to buy up new flats with a good rental potential.

http://www.housepricecrash.co.uk/forum/index.php?/topic/195761-is-prime-london-crashing-merged-threads/page-733#entry1102859238

James Ferguson, smarter by a long way, recognising the cycle has been overridden (that we didn't have a crash because Govs responded with extreme measures)... saying we're at a market top, knowing that very few sellers get out at 90% peak when the market turns --------> but also winding me up, recounting houses he's bought cheap in the early 90s with his property companies, £57,000 yielding 16-18%... "now worth over a million and some".

Also foreign money has been buying up in the frenzy already. Still got to see what happens if and when that money slows/stops, and shock of what happens if foreign owners begin trying to sell. Long way down, imo. And UK banks have good reason to stay in business by writing mortgages, than just offering things up to foreign money all the time.

[zugzwang]

I'll all be managed via the exchange rate. If the uk residents can't afford them we'll crash the currency until someone will. Well, that's exactly what they did last time.

As long as Osborne keeps financing his current spending by selling off capital assets sterling will remain stubbornly high. Besides, it's a global depression. Everybody's trying to win the race to the bottom. Nobody's going to be doing the UK a favour this time.

[Venger]

This caught my eye on Twitter recently. Might all catch up on us.

The more that is sold the more rent, coupons and dividends leave each day. And god help UK if foreigners stop buying let alone start selling.

- Hedge fund manager, commodity futures. Brit now living in Bahamas, Oxford University engineering graduate.

Update: I see the above was in reply to this.

Jan 8
Sustaining economy and current account deficit by selling UK piece by piece to foreigners is greatest folly in British post-war history

Edited January 12, 2016 by Venger

[Frugal Git]

In a sense, when the market crashes there will be a point where it makes financial sense to buy houses to rent out again. I will not be indulging in this socially corrosive activity, but it will happen.

If you look at rent as a 'yield', there's absolutely nothing to stop an asset's nominal transaction value falling well below the price in which it makes sense to buy again. This happens with shares all the time. It will not be an orderly soft thing. In the housing market there are four factors - in order.

1) credit or cash availability. That will collapse soon. Whether it be domestic or foreign buyers.

2) rental floors - housing benefit. That too will collapse as the government can't pay it out of declining tax receipts.

3) Sentiment. Once houses are seen as a toxic asset, they will be giving them away.

4) Demand. This is what most people feel is the main driver. Those people are i feel very wrong.

So short answer - no IMHO.

Edited January 12, 2016 by Frugal Git

[Digsby]

One thing is for sure re HPC and rents - when monthly price falls exceed rents, those renting will continue to do so.

At that point, they'd effectively be making a profit from renting (assuming they subsequently bought at the bottom).

I can imagine the news articles: "Has Your Lease Earnt More Than You This Year?".

[eric pebble]

You forget that once prices crash the higher earning renters who have been priced out will start buying which will lower the median wage of renters thus lowering the amount of rent that can be charged. This will result in some landlords having to sell which will increase supply and lower prices even more.

Dominoes.....

[stuckmojo]

I don't but the rising rents thing. I can see some high quality flats in top towns still demanding silly rents, but the rest? It still baffles me that people are able to spend huge amounts of money on rent whilst on minimum wage. Is this due to housing benefits?

[Venger]

In a sense, when the market crashes there will be a point where it makes financial sense to buy houses to rent out again. I will not be indulging in this socially corrosive activity, but it will happen.

If you look at rent as a 'yield', there's absolutely nothing to stop an asset's nominal transaction value falling well below the price in which it makes sense to buy again. This happens with shares all the time. It will not be an orderly soft thing. In the housing market there are four factors - in order.

1) credit or cash availability. That will collapse soon. Whether it be domestic or foreign buyers.

2) rental floors - housing benefit. That too will collapse as the government can't pay it out of declining tax receipts.

3) Sentiment. Once houses are seen as a toxic asset, they will be giving them away.

4) Demand. This is what most people feel is the main driver. Those people are i feel very wrong.

So short answer - no IMHO.

You list a good few reasons why - into a deep and prolonged hpc - there might not be such a rush into property-investment.

See-saw; bring the HPI Obsessed and Complacent Fantasy Owners back to reality with a hard HPC, wipe-out of the BTLers, and then burst of more home-ownership at much much better value. Then more transactions between home-owners at level prices for decades to come.

I'm hoping to see whatever money that remains, put to more productive use. Also want decades of low stable prices. The HPI of the last 60 years is just ridiculous in parts of the country. The tripling from 97 to 2007 utterly insane. And my area has seen a reflation boost to 25% above 2007*.

*Except for upper end £1m-£2m+ mansions, which were the preferred build in the boom, where there has been some cooling in prices here and there - although most priced up above peak. They're still building mansions on plots today. Plots which could take a few smaller but perfectly good homes. Needs to be a shakeup in the planning dept.

Real estate runs on money, not on anything like 'population growth'.

Hoping tenants rights improve further. Recent changes to S21 made me happier - and those BTLers who understand it are not happy. Even if many property-heads on the letting side, and even general observers including some on hpc it seems, still have no respect for tenants, and the laws, whatsoever. Landlord can doorstep a tenant (with young child) with the media and thug looking reporter in tow, put tenant's name all over the media as a 'squatter' in arrears, and hardly a murmur. Just reaction of 'get the nasty squatter out' - 'send around the boys'. So many comments like that in a Daily Mail September 2015 article. They still think it's the late 1970s, or not far from it anyway (if the Life on Mars representation was accurate - I would have thought more secure tenancies.)

Life on Mars - S1, Ep 4. (Late 1970s tv drama)

* * * * *

Sitting on the sofa, drinking tea.

SAM: What does your husband do, Mrs Tyler?

RUTH: He's a salesman. And a not very good one at the moment, so, um, if anyone does try and burgle us, they'll be very disappointed.

Ivanhoe comes in, comes to SAM, lets him stroke him.

RUTH: That's funny. He normally only likes me and Sammy.

The cat departs.

RUTH: I wonder if I should wake Sam up? He'll be really disappointed to have missed you.

SAM: No, don't wake him up.

RUTH: He wants to be a policeman one day. So he says.

SAM: He will be.

The door opens. RUTH puts her tea aside.

SAM: Your husband?

She stands up, as a balding man with a grey beard comes in.

RUTH: Mr Carroway, I'd really prefer it if you didn't just let yourself in. My husband's away on business, and as soon as he gets back, I'll make sure—

SAM stands up.

SAM: Is there a problem, Mrs Tyler?

CARROWAY: The mouse do play, I see.

RUTH: Mr Carroway, this is Detective Inspector Bolan. Look, as soon as my husband gets back, he'll pay you this month's rent.

CARROWAY: Not to mention the two months before that.

SAM: You know there's a law against landlords letting themselves in to tenanted property.

CARROWAY: No there's not.

SAM: You can leave now, Mr Carroway, or we can discuss this further down the station.

CARROWAY: I answer to Mr Warren.

SAM: Yeah?

SAM: takes the landlord by the lapels and removes him from the house.

CARROWAY: He won't like it, he won't like it at all! I'll be back to get your money later, Mrs Tyler, when your friend has gone.

SAM returns to the living room to find RUTH crying.

SAM: Hey, hey...

RUTH: I'm sorry.

SAM: How much do you owe?

RUTH: Lots.

A PropertyTribes landlord...

gLord

The Boss

01-10-2015,12:06 PM

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RE: New legislation comes into effect TODAY - Smoke alarms and Section 21

The changes apply to all new tenancies from 1st October 2015.

so basically if you cannot serve a section 21 within the first 4 months. A tenant could legally rent my house for 4 months for free. AND ONLY THEN could I issue the section 21 which (with court proceedings) takes another 6 months to get them out.

Meaning all tenants are entitled to 9 months free rent basically. How generous.

In fact...

I might do this myself!

I could just live rent free for most of the year then go somewhere else after every 9 months, look out landlords, i'm sure i'm not the only one who has thought of this.

In fact, I think it should be law for landlords to take the shirt from their back and give it to the tenant. They should also be entitled to my phone and shoes because i'm a landlord .

Infact, i think if we don't give all tenants a back massage once a week we should be locked up, they have a right to back massages.

[spyguy]

In the last real HPC, market sentiment changed.

Sure some bought in on the way down (you need such buyers to set some crash-discovery) but only those in money were in position when bottom of the market was scraped. By some accounts, at that stage, the property madness had all be thrashed out of the forever HPIers. Even when great value there was fear. And joy, given a few people I know who finally had opportunity to upsize at great value.

Also foreign money has been buying up in the frenzy already. Still got to see what happens if and when that money slows/stops, and shock of what happens if foreign owners begin trying to sell. Long way down, imo. And UK banks have good reason to stay in business by writing mortgages, than just offering things up to foreign money all the time.

In the 90s HPC the HP/ earing ratio was half what it is now! And there was virtually no hot, foriegn money.

Markets have their normal cycles. Then there are hugely overly leveraged cycles, which result in the eventual destruction of the the price of the underlying asset.

Edited January 13, 2016 by spyguy

[spyguy]

I like your thinking.

Perhaps the attempt to seek higher rents... some BTLers will try. Leading to voids, and individual BTL wipeout, or selling back to market.

Yet even some of the BTLers realise that trying to hike up rents can lead to voids.

And imo, voids batter BTLer financial positions.

We're okay to go. HPC and RPC.

Voids will ruin a leveraged BTLer. Not tghat they relaise that with their 'board it up and no one can have it' comments.

They do know that the bank wants its mortgafe wether the place is rented or not.

I gues they can lobby government ot make the mortgage only payable if the place is occupied.

The wild card on rents and voids is Brexit. I think its more likely than not.

Then all the EE and EU nationals claiming housing benefit will go 'poof!' or rather their housing benefit will stop. The LL will still have to evict them.

Anothger poibnt struck as I walked by some places that have been empty for over 2 months.

If an OO leaves a house unoccupied for 2months then the housing insurance is voided.

Does the same thing happen with BTL?