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Wolfie84

How far would prices have to fall for BTL to be worth it?

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I’ve been thinking about how the BTL market will change and how this then feeds back into overall house prices, but struggling with the maths.  Perhaps someone one here could lay things out to help my thinking.

 

The overall hypothesis is that prior to “BTL changes” (see below) a BTLer could borrow £x and make a certain yield, but after the changes they could only borrow £x-£y to make the same yield.  Following on from this, crucially, I’m wondering whether £x is more than an OO could afford and £x-£y is less :-)

 

The key BTL changes I’m thinking of are:

 

Changes to tax relief (no more offsetting of mortgage interest against rent)

Changes to bank lending (rent must (I think) cover 145% of repayments vs 125%)

 

 

To get towards this, I think I need to have a few fixed factors to start to get a feel for what might happen.

 

So my first question is:

 

For a fixed rental income of £1,500 pcm, how much would I be able to pay to get a, say, 5% yield on a BTL property from this rent.

 

I imagine that I need to assume a fixed LTV (say 75%?).  I also want to assume that the BTLer is a higher rate tax payer, so they get the full clobbering from the tax changes :-)

 

The next question is:

 

Same scenario as above, but with 2% added to the mortgage interest payments.

 

 

I appreciate that this might be a little too simplistic (particularly with rent being fixed), but I’m really interested in knowing how I could go about working out these kind of scenarios, ultimately to see how far prices might fall as BTL landlords leave the market.

 

Thanks in advance for any help on this!

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Don't forget that a yield of 5% is historically very low. If you are going to factor in an interest rate rise of 2%, you also need to assume that the required yield should rise to (say) 7% 

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Old metric used to be pay 100 x monthly gross rent. Probably way back in 70's 80's though.

Even that would fall apart if the expectation and reality were for capital losses rather than capital gains. 

 

 

 

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From the context of society, BTL will never be worth it.

it is causing a big division in society.

Council houses should never have been sold off.

I suspect this was a big 40 year plan by the bankers.

Perhaps society needs to be saved from itself.  Not everything is about profit/money.

C3qkCatWYAAW_Ne.jpg

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The money from council house sales was meant to be used by councils to build new ones.

It wasn't such a bad policy, it was the implementation or failure by councils that made it a bad idea in the end.

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7 minutes ago, TheCountOfNowhere said:

From the context of society, BTL will never be worth it.

it is causing a big division in society.

Council houses should never have been sold off.

I suspect this was a big 40 year plan by the bankers.

Perhaps society needs to be saved from itself.  Not everything is about profit/money.

C3qkCatWYAAW_Ne.jpg

I don't think that the selling of council houses per se was the error. Not allowing the funds to be used to replace the stock was the great swindle.

Had the funds generated been used to replace the houses on a 1:1 basis, the selling of the house at a discount would be the equivalent of gifting the land to the recipient. Given that the Gov't controls the cost of land with planning consent, government could acquire land for very little. It would be much easier to say to a landowner that if you have a 20 acre plot, we will give you consent on 10 acres if you give us the other 10 for us to build on. Would remove all the shenanigans about 'affordable' housing percentage and maintain a balanced neighbourhood.

There could be an ideal situation where young people get to rent a council house at below market rent for a few years whilst saving for a deposit, and then buy it at buildl cost. Rinse and repeat.

Not a lot of profit in that for the big builders though.

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We are where we are though and clearly future policy changes can deter BTL more.

Going back to my original point though, around where I live we got to a stage (at least pre-stamp duty going up on 2nd homes) where BTLers were happy chucking £500k at properties which would generate £1,500 pcm.  I'm sure some of this is based on an HPI forever mantra, but there is also the question of what it returns each year.

The changes that are coming are going to change the way these annual returns play out, so judge the size of a potential HPC it seems relevant to ask how much a BTLer might chuck at a property generating the same rent, after the tax/regulations have changed.

After that, we can have an argument about how much more needs to be done to clobber BTL :-)

Sadly though, I don't know what maths would be involved to work out the answer to my question :-(

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46 minutes ago, pricesmad said:

The money from council house sales was meant to be used by councils to build new ones.

It wasn't such a bad policy, it was the implementation or failure by councils that made it a bad idea in the end.

Do you believe what politicians say ?

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46 minutes ago, CunningPlan said:

I don't think that the selling of council houses per se was the error. Not allowing the funds to be used to replace the stock was the great swindle.

 

I suspect that was never gong to happen.

The whole thing has been a bankers con.

Throughtout the last few hundred years they periodically convince governments to allow them to be de-regulated.

Then all hell breaks loose.

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2 hours ago, Wolfie84 said:

Going back to my original point though, around where I live we got to a stage (at least pre-stamp duty going up on 2nd homes) where BTLers were happy chucking £500k at properties which would generate £1,500 pcm.  I'm sure some of this is based on an HPI forever mantra, but there is also the question of what it returns each year.

If only there was a way for banks to make money from debt junkie mugs that didn't involve housing and affecting everyone else, but it seems there wasn't.

£1,500 in £500,000 is 0.3% before any costs, perhaps the worse possible way to invest half a million, but banks aren't going to give it to that person for anything else.

Edited by Arpeggio

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12 minutes ago, Arpeggio said:

If only there was a way for banks to make money from debt junkie mugs that didn't involve housing and affecting everyone else, but it seems there wasn't.

£1,500 in £500,000 is 0.3% before any costs, perhaps the worse possible way to invest half a million, but banks aren't going to give it to that person for anything else.

The yield as it is usually calculated is much higher than 0.3%. Although, as you suggest, hardly a great investment without HPI.

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5 hours ago, Wolfie84 said:

I’ve been thinking about how the BTL market will change and how this then feeds back into overall house prices, but struggling with the maths.  Perhaps someone one here could lay things out to help my thinking.

 

The overall hypothesis is that prior to “BTL changes” (see below) a BTLer could borrow £x and make a certain yield, but after the changes they could only borrow £x-£y to make the same yield.  Following on from this, crucially, I’m wondering whether £x is more than an OO could afford and £x-£y is less :-)

 

The key BTL changes I’m thinking of are:

 

Changes to tax relief (no more offsetting of mortgage interest against rent)

Changes to bank lending (rent must (I think) cover 145% of repayments vs 125%)

 

 

To get towards this, I think I need to have a few fixed factors to start to get a feel for what might happen.

 

So my first question is:

 

For a fixed rental income of £1,500 pcm, how much would I be able to pay to get a, say, 5% yield on a BTL property from this rent.

 

I imagine that I need to assume a fixed LTV (say 75%?).  I also want to assume that the BTLer is a higher rate tax payer, so they get the full clobbering from the tax changes :-)

 

The next question is:

 

Same scenario as above, but with 2% added to the mortgage interest payments.

 

 

I appreciate that this might be a little too simplistic (particularly with rent being fixed), but I’m really interested in knowing how I could go about working out these kind of scenarios, ultimately to see how far prices might fall as BTL landlords leave the market.

 

Thanks in advance for any help on this!

I know a guy who went all-in on BTL as his only source of income. He quickly worked out that it wouldn't give him sufficient income and he therefore went the HMO route, which he tells me is profitable (and judging by the car he bought would appear to be, but maybe it's just more debt).

This was before the S24 thing so I think BTL in the current climate is very much a sideline vs. a big risk for those looking to give up work and make it their primary "job".

When you have some people in there happy with 2% yield and others in double figures due to HMOs, and the choices (and challenges) around taxation and LTDs to factor in, I think you're going to be disappointed in trying to arrive at HPC figures based on that analysis. Just saying, I would in fact be interested to see what you come up with.

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15 hours ago, pricesmad said:

The money from council house sales was meant to be used by councils to build new ones.

It wasn't such a bad policy, it was the implementation or failure by councils that made it a bad idea in the end.

A daughter recently bought an originally-council house in Oxford.  The previous owners had lived there for 60 years.  

After a good old nose on the Land Reg Mr B found that they had bought the house in 1971 - for something like £3,500. 

However I was very surprised, having thought right to buy only came in after Thatcher. 

I cant imagine it was common, but evidently some councils were selling social housing well before RTB. 

 

 

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13 hours ago, Arpeggio said:

£1,500 in £500,000 is 0.3% before any costs, perhaps the worse possible way to invest half a million, but banks aren't going to give it to that person for anything else.

That's £1500 a month, so the gross yield is actually more like 3.6%. Still pretty crap, but you can kind of understand some peoples' attraction with current savings rates, and peoples' propensity to ignore the (significant) costs and risks that go along with it. Add in a bit of belief in HPI forever and it is not surprising that people do it.

The old average for the pros was something like 10-15%, which tallies with the month x 100 figure. This should give you a working investment that doesn't rely on capital gains (i.e. is an investment, not a speculative gamble). As someone else already mentioned, if expectations swing from gains to losses, then all bets are off - but this might take a bit of time. It didn't seem to happen much at all 2009-11 despite a couple of years of obviously falling prices.

Edited by mattyboy1973

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13 hours ago, Jugador said:

I know a guy who went all-in on BTL as his only source of income. He quickly worked out that it wouldn't give him sufficient income and he therefore went the HMO route, which he tells me is profitable (and judging by the car he bought would appear to be, but maybe it's just more debt).

This was before the S24 thing so I think BTL in the current climate is very much a sideline vs. a big risk for those looking to give up work and make it their primary "job".

When you have some people in there happy with 2% yield and others in double figures due to HMOs, and the choices (and challenges) around taxation and LTDs to factor in, I think you're going to be disappointed in trying to arrive at HPC figures based on that analysis. Just saying, I would in fact be interested to see what you come up with.

Okay, so here's a first stab at this. There's a big block of flats near me which have a load of essentially identical units, so I can see what the current sale and rental prices are.

At the moment, these are going at £270k to buy and £1k pcm rent (conveniently £12k p/a)

Current World

With 75% LTV, we're looking at a £200k mortgage.  A 2% IR on that, means annual mortgage payments of £4k.

Current Tax Bill (if on higher rate) is £12k - £4k = £8k at 40% = £3.2k

So I think(...) we're looking at £12k - £3.2k - £4k = £4.8k per annum to cover maintenance costs and "profit".  

New World

The tax bill becomes £12k at 40% = £4.8k.  This is £1.6k more than before, so my thinking is that a BTLer would have to keep paying the same maintenance costs and would want to keep the same "profit" the thing that has to drop is the mortgage payments.

So mortgage payments drop from £4k to £2.4k.

At 2% Interest Rates, this would imply a mortgage of £120k and total price of £160k.

 

I appreciate the back of the fag packet maths on this, but it would imply these changes would drop house prices by 40% doesn't it?

Obviously there are limitations to this analysis:

At lower prices, a landlord might accept a lower nominal "profit".  With my sums, as prices lower, yield goes up as I'm assuming a fixed amount for "profit".  This would dampen the HPC effect

At lower prices, a landlord might decrease the LTV, reducing the level of interest paid on the mortgage.  Again, this would dampen the HPC effect.

At lower prices, owner occupation becomes more viable for people, reducing rental demand.  This effect would lower rental income on the property, meaning the landlord would have to reduce their mortgage payments even more to maintain the profit.  This would increase the HPC :D

 

(Increasing to Interest Rates to 4%, gives a £60k mortgage and £80k price?)

 

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22 minutes ago, mattyboy1973 said:

That's £1500 a month, so the gross yield is actually more like 3.6%. Still pretty crap, but you can kind of understand some peoples' attraction with current savings rates, and peoples' propensity to ignore the (significant) costs and risks that go along with it. Add in a bit of belief in HPI forever and it is not surprising that people do it.

The old average for the pros was something like 10-15%, which tallies with the month x 100 figure. This should give you a working investment that doesn't rely on capital gains (i.e. is an investment, not a speculative gamble). As someone else already mentioned, if expectations swing from gains to losses, then all bets are off - but this might take a bit of time. It didn't seem to happen much at all 2009-11 despite a couple of years of obviously falling prices.

 

What year(s)?  Makes me shake my head when I read posts seemingly putting older LLs on pillars of respect.  

What's so professional about them, apart from being alive and in position to buy at better value, before generations of today, and taking another house off the market?

And normally because they were sat on a bit of cash when market turned, into a market where loads of opportunity for owner-occupiers too.   Professional landlords / old pros, and their house buying at much lower prices + high yields?   They've sat on houses.  What brilliant skillsets they have!

The yield was high because house prices had crashed so hard, in majority of instances, imo.

 

On 9/3/2014 at 0:02 AM, Venger said:

James Ferguson, smarter by a long way, recognising the cycle has been overridden (that we didn't have a crash because Govs responsided 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 bought cheap in the early 90s with his property companies, £57,000 yielding 16-18%... "now worth over a million and some"; houses as the investment class. Although he also says house prices never been cheaper against interest rates - but extraordinary policy to make it that way.

I do have a problem with the hpcers claiming buyers of last few years, and tomorrow, are victims. They were saying the same years ago, before house prices doubled again... and they're still saying it now. They wind me up more than all the BTLers/property-VI, combined, and his rosy outlook. It's intolerable madness these excuses for other people's decisions who choose to buy. Give me post-after-post explaining 15 more years HPI over these excuses for buyers choosing to pay £whatever, all of the time.

When on the otherside, other market participants (Phillip J Anderson) feel we're even at a market low, expecting another long wave with massive market gains. Build another train line, and it leads to massive more HPI, according to him, it seems. Claiming the stimulus all built into future, and Govs will be lauded in the future for turning it around. That will be when houses are what, three or four times what they're valued at now, to protect the old VI victims, and those still choosing to buy at these prices.

He may have a point that if/when interest rates raise, it will mean banks will be keeer to do more lending. Hopefully against lower house prices.

People make their own choices and don't need approval or permission of 'know-everything' HPCers to pay ever more extreme prices.   They all know that borrowing money means contract to repay, and not that money was magicked unfairly, with fiat some big trick.   It came into existence on approval for the debt they sought to outbid someone else in the market.

On 7/23/2014 at 9:38 PM, silver surfer said:

I bought my first house in the very early 1980's. It was three bedroomed terraced house in a decent part of Sheffield, it cost about £10,500 and my pay was about £5,750.

After a couple of years my job took me to London, in price terms I virtually swapped my Sheffield house for a one bedroom flat with an SW1 post code, Sloane Square was less than a five minute walk away and the nearest "off licence" was Berry Brothers & Rudd.

A couple of years after that I paid about £22,000 for a two bedroom flat in Fulham, I think at the time my wages had topped £10,000. Property costs can't have been too much of a burden because soon after I bought a Porsche.

Incidentally, I had no student debts and a rock solid final salary pension that subsequently allowed me to retire at 55.

Absolutely none of this is available to my children. They're fortunate in that I can afford to match for them the benefits that I was lucky enough to enjoy, but anyone from my generation who thinks their own hard work and industry were the keys to their good fortune is just taking nonsense. We were the most privileged generation that has ever lived.

Yes Count..... when you are totally blind to the tens of millions of very happy people it (HPI+++) has all worked out for very nicely for, who tend to know 'what it is worth'.

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10 minutes ago, Venger said:

What year(s)?  Makes me shake my head when I read posts seemingly putting older LLs on pillars of respect.  

What's so professional about them, apart from being alive and in position to buy at better value, before generations of today, and taking another house off the market?

One doesn't have to respect someone just because they are "pro", but in the era before rampant HPI you can certainly make the case that buying at these yields made sense. It wasn't financially stupid in the way that the current BTL brigade are. That's the only point of interest. There have always been plenty of people doing lots of different "financially sensible" things that are morally repugnant, after all.

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2 minutes ago, mattyboy1973 said:

One doesn't have to respect someone just because they are "pro", but in the era before rampant HPI you can certainly make the case that buying at these yields made sense. It wasn't financially stupid in the way that the current BTL brigade are. That's the only point of interest. There have always been plenty of people doing lots of different "financially sensible" things that are morally repugnant, after all.

Ok mattyboy; got it and you're right, sadly.

All apart from it's yet to be proven whether BTLers of financially 'stupid' (greedy imo).   If it's HPC ahead, all I want to read/hear about is the joys of younger people renter-savers able to buy homes, and those BTLers will have to take what is coming to them.

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7 hours ago, mattyboy1973 said:

That's £1500 a month, so the gross yield is actually more like 3.6%. Still pretty crap, but you can kind of understand some peoples' attraction with current savings rates, and peoples' propensity to ignore the (significant) costs and risks that go along with it. Add in a bit of belief in HPI forever and it is not surprising that people do it.

Yes. Ironic that savings rates are due to the same reasons behind HPI, namely banks creating money from thin air so no need for saver's deposits.

At the time I was thinking in terms of 1 month on the stock market can get far better results. For Borrow To Leach yield that's 3.6% minus various expenses so perhaps more like 1.6% I think. I could do a hell of a lot more with £500k and all without f***ing someone else out of an affordable roof over their head and making the UK a massive slow falling economic sitting duck at the whim of any country who fancies simply creating a production / work based economy.

 

7 hours ago, mattyboy1973 said:

The old average for the pros was something like 10-15%, which tallies with the month x 100 figure. This should give you a working investment that doesn't rely on capital gains (i.e. is an investment, not a speculative gamble). As someone else already mentioned, if expectations swing from gains to losses, then all bets are off - but this might take a bit of time. It didn't seem to happen much at all 2009-11 despite a couple of years of obviously falling prices.

Probably more pros in Germany where renting is more common. Their yields are similar and based on lower average rents and lower house prices. UK is just a load of BS in comparison.

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On 02/02/2017 at 2:37 PM, Wolfie84 said:

I’ve been thinking about how the BTL market will change and how this then feeds back into overall house prices, but struggling with the maths.  Perhaps someone one here could lay things out to help my thinking.

 

The overall hypothesis is that prior to “BTL changes” (see below) a BTLer could borrow £x and make a certain yield, but after the changes they could only borrow £x-£y to make the same yield.  Following on from this, crucially, I’m wondering whether £x is more than an OO could afford and £x-£y is less :-)

 

The key BTL changes I’m thinking of are:

 

Changes to tax relief (no more offsetting of mortgage interest against rent)

Changes to bank lending (rent must (I think) cover 145% of repayments vs 125%)

 

 

To get towards this, I think I need to have a few fixed factors to start to get a feel for what might happen.

 

So my first question is:

 

For a fixed rental income of £1,500 pcm, how much would I be able to pay to get a, say, 5% yield on a BTL property from this rent.

 

I imagine that I need to assume a fixed LTV (say 75%?).  I also want to assume that the BTLer is a higher rate tax payer, so they get the full clobbering from the tax changes :-)

 

The next question is:

 

Same scenario as above, but with 2% added to the mortgage interest payments.

 

 

I appreciate that this might be a little too simplistic (particularly with rent being fixed), but I’m really interested in knowing how I could go about working out these kind of scenarios, ultimately to see how far prices might fall as BTL landlords leave the market.

 

Thanks in advance for any help on this!

If rents are dropping, then capital values would have to fall further to stand still in terms of yield :)

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