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Sparker

Stop Press! Prices Of Flats Are Falling By Up To 36% A Year

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Good article from Newsweek although nothing we didn't already know.

Amateur landlords are the new tech investors. What on earth do I mean by that? Let me explain...

Buy-to-let borrowing is soaring. Buy-to-let mortgage specialist Paragon reports that lending activity is 60% higher than a year ago. The Council of Mortgage Lenders says buy-to-let lenders issued a record 130,400 loans in the second half of 2005. Investment property now accounts for 8% of the total outstanding mortgage market.

And with the Association of Residential Letting Agents claiming that rental property currently generates an annual return of 22.7%, it’s no surprise people are flocking to buy.

You heard correctly - a 22.7% annual return. That sounds good. Almost too good to be true…

And unfortunately, it is to good to be true. You can take my word for it, but looking at the maths is a good way of showing why you should never trust statistics from a partisan source. So here’s how Arla composes that juicy double-digit return.

They assume that the landlord is buying a property priced around £285,315, with a 25% deposit. So the landlord pays £77,035 up front and takes on a mortgage of £213,986.

Assuming a gross annual rental yield of 4.99% - which is apparently the average yield achieved by Arla’s members – the landlord takes in annual rent of £14,233.

Of course, a property isn’t let out all of the time, so Arla throws in a month-long void period, again based on the average reported by their members. That cuts the annual rent by £1,061 to £13,162.

But at 6.25%, mortgage interest repayments come in at £13,374. So that means in the course of a year (not including any repairs, broken boilers, or dodgy tenants), the landlord is actually making a grand loss of £212.

So where on earth does that 22% annual gain come from?

Well, here’s the clever bit. After all those meticulously calculated numbers (right down to the last £1), Arla makes a whopping great leap of faith. It assumes that every year, for the next five years, property values will rise at 8.8% a year. That means that £285,000 property would be worth nearly £435,000 by the end of 2010.

So even though the landlord has lost money every year on the rental income, by the end of five years, the value of his initial deposit (£77,035 remember) has more than doubled. And that’s how you get a 22% annual return on a flat that loses the owner money every year.

This is clearly fantasy. Arla says the 8.8% is based on the national average rise between 1984 and 2004. But if you invested in property at the start of 2005, you would have been lucky to see any house price growth at all. And even the most optimistic forecaster would be stunned if house price growth hits anywhere near 8% this year.

Worse still, the figure contradicts the group’s own findings. In the introduction to the report, Arla reports that its members reckon the average “capital asset value” – ie, the price - of rented homes fell 1.5% during the period. Meanwhile, the average value of rented flats “throughout the country” fell, by as much as 9% - in just three months. If you annualise that, that’s a fall of 36%.

So there you have it. Don’t fall for the hype – buy-to-let is officially a loss-making investment. And remember to look carefully when vested interests wheel out their statistics.

And don't expect things to get any better. UK consumers can't afford to pay higher rents. They are already struggling with soaring energy prices and ever-increasing council tax bills - as the record number of UK bankruptcies demonstrates.

And it's not just consumers feeling the pain. Banking giant Barclays saw bad debt provisions surge 44% to £1.57bn during 2005, driven mainly by overstretched UK borrowers defaulting on their credit cards.

Let's think about that for a minute. That's £1.57bn that Barclays expects it will never see again. Annual turnover for the entire group came in at £18bn, so that's not peanuts by any manner of means.

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Thanks Sparker, that's a good article, nice and concise/ clear, even my mother could just about grasp that! Suitable for printing off and accidentally leaving lying around the office for people to find.

After all the office assistant where I work ( must be on all of £16k ) a year and her husband who is a mechanic, already have two BTL flats and are in the process of buying a third..........but they wouldn't touch stocks and shares with a barge pole because "that's too risky but you know where you are with bricks and mortar" :rolleyes:

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Guest The_Oldie

After all the office assistant where I work ( must be on all of £16k ) a year and her husband who is a mechanic, already have two BTL flats and are in the process of buying a third..........but they wouldn't touch stocks and shares with a barge pole because "that's too risky but you know where you are with bricks and mortar" :rolleyes:

It seems that the whole world is into BTL, this is going to get really messy :(.

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After all the office assistant where I work ( must be on all of £16k ) a year and her husband who is a mechanic, already have two BTL flats and are in the process of buying a third

Sounds like the proverbial shoe shine boy to me. :rolleyes:

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Very good article, think I'll subscribe to their mail-out. And I liked it not just because it debunks the crap with actual maths, but it kept me interested right til the end - which is no mean feat!

Thanks for the headsup OP

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It seems that the whole world is into BTL, this is going to get really messy :(.

Except you have to consider the political element in all this.

Are BTL people now considered worthy of note by Politicians always counting votes? Especially if they are presented as "ordinary folk" just trying to plan for their future.

Is it possible that if things got "messy" for enough BTLers "casualty reduction" schemes might be introduced?

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Guest The_Oldie

Except you have to consider the political element in all this.

Are BTL people now considered worthy of note by Politicians always counting votes? Especially if they are presented as "ordinary folk" just trying to plan for their future.

Is it possible that if things got "messy" for enough BTLers "casualty reduction" schemes might be introduced?

Yes, that is a possible scenario, the one year bankruptcy let off is already in place, what next? :(.

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Yes, that is a possible scenario, the one year bankruptcy let off is already in place, what next? :(.

Off top of my head without much thought.

Special tax relief for lenders who "support" BTLers through "difficult times".

Extra funds for HAs to specifically buy from distressed BTLers because "We still need the houses and this helps everyone".

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Two questions here. Is it intellectually honest to annualise the fall and use that in the headline. A drop of 8% in a year is pretty impressive by itself, but I don't think anyone would claim that the price changes are likely to be constant quarter to quarter. When people annualise house prices rises to get flashy headlines, they get (rightly) criticised. Why should the same not apply when the changes are in the opposite direction?

And does this quoted price drop work on official sale prices? Given that builders are over-valuing flats and then selling with all sorts of discounts, not taken account of in the official sale price, some of the apparent drop could be due to resales at honest, rather than fudged prices. On the other hand, if discounts are getting bigger and more frequent (as a percentage of total sales) the drop could be even faster than it appears. Anybody with figures?

Billy Shears

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Great piece of debunking there.

Everyone wants to jack in their jobs and become a landlord, just as everyone wanted to jack in their dayjobs and become a daytrader back in the late 90's. The world just doesn't work like that. It will end very badly.

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Two questions here. Is it intellectually honest to annualise the fall and use that in the headline. A drop of 8% in a year is pretty impressive by itself,

Typo: that should be "9% in a quarter" rather than "8% in a year". Though I'd still consider an 8% YOY drop to be impressive enough in itself.

Billy Shears

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  • 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%



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