The relationship between rental and London house prices

[simvastatin]

A lot of EE are moving out of London, also asylum seekers are being shipped out of London to areas oop north, also S24, rents are starting to stagnate, so prices for rental properties will go down.

What other factors are at work

[Locke]

House prices are set by the amount of credit in the economy.

Rents are set by what workers in the area can afford.

Low yields put pressure on prices, but prices could dislocate further from rents.

[Wayward]

1 hour ago, Locke said:

Rents are set by what workers in the area can afford.

I don't think so.  Rents per square foot are not set on this basis at all.  Where supply is restricted and demand high the population density will increase.  Are you saying rents are set by what workers can afford for a house, flat, bedsit, room or bed?? 

[Locke]

3 minutes ago, Wayward said:

I don't think so.  Rents per square foot are not set on this basis at all.  Where supply is restricted and demand high the population density will increase.  Are you saying rents are set by what workers can afford for a house, flat, bedsit, room or bed?? 

Good point. 

What I mean is, if workers are paid £1000 per month and require an absolute minimum of let's say 300 sqft, then the most you could rent out a 900sqft living space is £3000 per month minus living costs. If you tried to charge more, you would simply have voids, because the revenue simply isn't there to support that.

Obviously those numbers depend on what the population will accept, for example Chinese will accept dog cages, while Westerners won't.

Worker compensation is driven by local economic productivity, and is a proxy for demand. This is why you can charge more rent per sqft in cities and boom towns than some farmhouse out in the sticks.

Higher rents support higher house prices, because it supports the illusion (in the current environment) that the value which the asset is producing is driving the price, while in reality, it is the government's housing props.

 

My broad point is that house prices and rent are driven primarily by two separate factors, which means they can diverge.

I'll analogise to stockmarkets: some investors buy shares, because they are interested in dividend yield. Other investors buy shares, because they are interested in selling the stock for a higher price later.

The dividend yield (earnings per share, or rent in the housing market) has some impact on whether they are likely to achieve a profit on sale, but in the current environment, is far from the major factor, which is how much credit the various governments are willing/able to pump into the economy.

[iamnumerate]

10 minutes ago, Locke said:

Good point. 

What I mean is, if workers are paid £1000 per month and require an absolute minimum of let's say 300 sqft, then the most you could rent out a 900sqft living space is £3000 per month minus living costs. If you tried to charge more, you would simply have voids, because the revenue simply isn't there to support that.

Obviously those numbers depend on what the population will accept, for example Chinese will accept dog cages, while Westerners won't.

Worker compensation is driven by local economic productivity, and is a proxy for demand. This is why you can charge more rent per sqft in cities and boom towns than some farmhouse out in the sticks.

Higher rents support higher house prices, because it supports the illusion (in the current environment) that the value which the asset is producing is driving the price, while in reality, it is the government's housing props.

 

My broad point is that house prices and rent are driven primarily by two separate factors, which means they can diverge.

I'll analogise to stockmarkets: some investors buy shares, because they are interested in dividend yield. Other investors buy shares, because they are interested in selling the stock for a higher price later.

The dividend yield (earnings per share, or rent in the housing market) has some impact on whether they are likely to achieve a profit on sale, but in the current environment, is far from the major factor, which is how much credit the various governments are willing/able to pump into the economy.

But surely rents must have some relation to prices?  If I am a cash BTL (and I know some but I am not ok).

If I can buy a £100k house and get £11k rent per year, then it is a lot better investment than if I have get £4k a year.  (Of course what I can get for other investments is also a factor).

 

 

[Locke]

6 minutes ago, iamnumerate said:

But surely rents must have some relation to prices?  If I am a cash BTL (and I know some but I am not ok).

Out of curiosity, did you not read this part of what you quoted?

6 minutes ago, iamnumerate said:

Higher rents support higher house prices

PWOPADEE is seen as easy and risk free return on and of capital, even when there is huge downside risk.

8 minutes ago, iamnumerate said:

If I can buy a £100k house and get £11k rent per year, then it is a lot better investment than if I have get £4k a year.  (Of course what I can get for other investments is also a factor).

Yes, but so what? If you expect the price to double in 5 years, then you have £55k vs £20k of rental income and £100k of capital appreciation. On top of this, you pay tax on the rent, but not on the capital gains.

For boomer scum, PWOPERDEA is less scary than investing in the stock market or buying treasuries.

[iamnumerate]

2 hours ago, Locke said:

Out of curiosity, did you not read this part of what you quoted?

PWOPADEE is seen as easy and risk free return on and of capital, even when there is huge downside risk.

Yes, but so what? If you expect the price to double in 5 years, then you have £55k vs £20k of rental income and £100k of capital appreciation. On top of this, you pay tax on the rent, but not on the capital gains.

For boomer scum, PWOPERDEA is less scary than investing in the stock market or buying treasuries.

I don't think that is entirely true, some people do invest in property to get a steady return.

(Whether it is it a good thing to do or otherwise).  Also of course BTL with mortgage need a certain rent cover to be able to get the mortgage*.  If the rent goes down then new entrants (who are part of the market) can no longer buy with the same deposit but need a larger deposit, making it harder for them to do so.

 

*Unless they lie or the bank is crazy, neither of which is unheard of sadly.

[Wayward]

4 hours ago, Locke said:

I'll analogise to stockmarkets: some investors buy shares, because they are interested in dividend yield. Other investors buy shares, because they are interested in selling the stock for a higher price later

Yes I agree with this...the concept of the growth stock v income stock is well understood and does cross over into resi property to a degree.  We are seeing it now or at least up until recently but I would argue that with stocks this is more likely to be rational.  A business may be growing and the promise of income in the future is a reasonable forecast but with resi property it is hard to see the income (ie rent) growing considerably and the capital growth is less rational and I think 'investors' are more likely to be following the 'greater fool' method.  Well, perhaps they are the greatest fool.

[Aidan Ap Word]

Arbitrage specialists (esp: algorithmic trading) "make" money by "predicting" (note the quote marks) market changes that others haven't the data to 'see' as quickly or as cheaply as they do. And these types of trades make up a significant portion of the volume in the market.

So if BTL investments were as "liquid" as stocks then investing based on the equivalent of EPS or dividends (that is 'rent 'in the analogy) is fine ... then the analogy works.

Either:

• The BTL investor is buying the property at a lower price in the expectation that the price will rise (bricks'n'mortar innit/'my property is my pension) OR
• The (leveraged) BTL investor is capturing the property from the market and slicing a cut off the dividends/rent. A leveraged BTLer really just rents the property from the bank for less rent than the tenant pays the BTL investor in 'real' rent. And offsetting this rent with the 'rent' (interest) paid to the bank. The incorporated leveraged BTL investor gets a bigger arbitrage cut because mortgage interest is an expense to the business (but not for much longer).

But a BTL investment is not liquid. Quite the opposite. Selling property takes time and includes variable transactions costs/incl unknown number of voids. And as the knife drops ... "achieving" a specific sale price could even be put off for several years (by which time the BTL investor may have drowned under the 'rent'(interest) payments to the real stock(property) owner and all the gains are lost to inflation.

So the only sensible BTL investor is there for the capital growth (not the dividends) ... and when the capital growth dries up the sensible BTL investor exits the market.

Sorry ... did I just say "sensible" and "BTL investor" in one sentence. Ooops, sorry.

So I think the analogy - whilst useful - needs to be treated with care.

[iamnumerate]

1 hour ago, Aidan Ap Word said:

• The BTL investor is buying the property at a lower price in the expectation that the price will rise (bricks'n'mortar innit/'my property is my pension) OR
• The (leveraged) BTL investor is capturing the property from the market and slicing a cut off the dividends/rent. A leveraged BTLer really just rents the property from the bank for less rent than the tenant pays the BTL investor in 'real' rent. And offsetting this rent with the 'rent' (interest) paid to the bank. The incorporated leveraged BTL investor gets a bigger arbitrage cut because mortgage interest is an expense to the business (but not for much longer).

 

I have met both type of BTL investor and the ones without a strategy (sadly the most common).

However they all need rent to hold on to their investment.  If all tenants decided to share rooms tomorrow, then a lot of BTL investors would have problems (I know this is not a possible thing).

[Locke]

On 24/08/2018 at 17:36, Wayward said:

with stocks this is more likely to be rational

Sure, but how rational do you think the residential property market is compared to any other market? How much of an appetite for 35 year bonds do you think there is? Yet people seem not to be blinking when looking at 35 year mortgages.

Madness.

On 24/08/2018 at 17:36, Wayward said:

'investors' are more likely to be following the 'greater fool' method

I always wonder just who my peers getting into property think they will be offloading their houses to.

On 24/08/2018 at 18:10, Aidan Ap Word said:

The incorporated leveraged BTL investor gets a bigger arbitrage cut because mortgage interest is an expense to the business (but not for much longer).

Plus the risk of the market collapsing/plumbing flooding/property burning to the ground.

On 24/08/2018 at 18:10, Aidan Ap Word said:

But a BTL investment is not liquid. Quite the opposite.

In a falling market, yes. In a rising one, they are like hotcakes. Sure, there is more paperwork than e.g. Treasuries, but they don't lack for buyers.

[iamnumerate]

3 minutes ago, Locke said:

Sure, but how rational do you think the residential property market is compared to any other market? How much of an appetite for 35 year bonds do you think there is? Yet people seem not to be blinking when looking at 35 year mortgages.

 

I think it is rational but superficial.  I.e. people think that investing in property in the past worked (ignoring the crash early 90s) so it will work this time.

Of course whether a BTL owner is rational or irrational, if the rent drops then they will have problems paying their mortgage!  If it rises they have "made money" and maybe want to invest in something, and property would be an obvious choice to many.