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Dave_The_Vinyl_Junkie

How Btl Affects The Housing Ladder

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Not sure if this point has been addressed before, and the reason I am mostly a lurker (see left! :lol: ) is because most of this site's contributors seem to voice exactly what I am feeling, and do it better! So most contributions I'd make would be little more than 'wot he said'. I also try not to spend too much time on here, as I'm more of a hifi nut and more interested in old valve amps and vinyl LP's, but it would be nice to one day own the house I live in so that I can wire in a separate spur to the music system! :lol: got my priorities right there eh?

Anyway, tiresome self-deprecating aside....

I've been havin' a good old think about the 'permanently high plateau' argument and how it can be sustained. My conclusion is that I can't possibly see how it can. The theory goes that pensions are knackered and a lot of people have turned to bricks and mortar in their place, which is holding up the market at its current level.

OK, we have FTB's at 7-8% now, so it's pretty clear that investment money is mostly holding up the bottom. Now, I imagine property investors would tend to go for properties that would otherwise be of interest to FTB's, i.e. cheap - it would presumably be a bit foolish to buy a large detached house when you could buy two flats fot the same outlay - i.e. you're spreading your 'void risk' over two entities instead of one. In addition, it could be said that you have a captive tenancy market - all those people forced off the housing ladder into renting, they mostly would be interested in properties they would otherwise have bought. Who are you going to rent your large detached to?

So we have the 'bottom strata' of housing increasingly being owned by investors, quite a lot of whom claim they are in it for the long term, occupied by renters, and this will support the housing market as a whole.

Or will it?? This, for me, is where the argument starts to fall off a bit.

The 'housing ladder' is referred to as a ladder, as opposed to a snake, precisely because people tend to move up it. As a rule, people sell their 'starter home' when they start a family a few years down the road, and move to a semi, thence on to a detached, etc. A generalisation, I know.

Now, how is this housing ladder going to function if the bottom level is no longer supporting it? Why do I ask that? I'll answer with another question - who are the people the next rung up going to sell their houses to? Traditionally they would be selling to the previous FTB 'A', who would be flogging their starter home to the next FTB 'B' behind them. However, in today's pattern, how is FTB 'A', being stuck in rented because they can't afford to buy a starter house, going to afford to buy the 'next rung up' house? Answer, they aren't. Similarly, are property investors going to be interested in that bigger property? I refer the honourable reader to the point I made earlier.

So, taking the argument that BTL may not rush for the door as we'd all like to think, then it could be said that we have the 'rentier' pattern increasingly operating in the bottom strata of properties. The crucial point being, that it will tend to stay there and not spread up the ladder, I cannot see how it would make monetory sense for it to do so. Taking this theory to its conclusion, the very nature of the beast will, in time, cause the market to topple for bigger houses as less and less people are in a financial position to buy them. Demand collapses, prices start to drop in this sector of the market, thereby making starter home values look very top-heavy indeed.

Conclusion: BTL, currently supporting the market, will eventually throttle it. This may explain why things look a bit sticky-downwards, as presumably this scenario would take some time to play out.

A valid argument? Or complete and utter rubbish? I'll slink off back to my old Quad II's now....

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Yes.

Wot he said!

If BTL does hang on "for the long term" the market must eventually fall from the middle up and would be

FTBs would see extra value, save up more and leap-frog the "first rung".

I don't think BTL is the only thing distorting the differentials between prices at the different rungs, though. I think that there are serious sellers who are pricing down now and time wasters who aren't.

Where I live in Reading. New build flats trying to sell for £200K (after incentives etc) and a street away there are three bed detached houses marketed at £230K.

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'ello Dave.

It's a good point. It could be a hole in the supposed "paradigm shift" that we are in. Presumably the counter argument would be that there are far more pokey FTB properties than decent family homes (perhaps recent building trends at least would support this). A section of the pokey FTB properties will be owned by BTLers and occupied by renters. The other section will be owned and occupied by those who earn more, are helped on to the ladder by parents or who bought a while back. This second section is big enough to provide demand for the next rung up.

I think another interesting potential flaw in the "BTLers replace FTBs" argument is this. You are a BTLer. You own a pokey 2 bed flat or whatever. There seems to be tenant demand for this kind of dwelling. The demand supposedly comes from "priced out" FTBs. But, if they are priced out (even with the tax and lending advantages only available to owner-occupiers) then how can they pay your rent and make you a profit? Your costs to run the place are higher than theirs. The only reason you would run that business is to take a speculative risk on the capital value. If an entire industry is based on capital speculation and not income it must eventually collapse.

Don't get me wrong, there is money to be made by landlords, e.g. in high occupancy properties which the occupants would not buy. It just does not make long term sense to rent places which people would buy to the people who would buy them.

frugalista

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I think this argument applies even without BTL. With very little inflation to erode away debt, those in highly-leveraged starter homes will be unable to move up the ladder. As somebody succinctly put it here the other week, you're either renting the home off the landlord, or the money to buy the home off the bank. With low inflation, renting the money hardly gets easier over time. This is particularly a problem with the average FTB being 34 years old and near peak-earnings.

T&T

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The bulls argument would be that the larger homes would be rented out room by room, or redeveloped into small flats. But this could only be done with a very small amount of stock.

The problem is I still think BTLers are still buying for speculative gains. I have thought about buying a few times (to live in), and after looking at the feasibility of it, it simply does not stack up financially. It is simply cheaper to rent (although only slightly where I live). And with the risk of interest rates going up, renting would become far cheaper.

Many of my friends still say it is cheaper to buy than rent (although they don't know what this really means), but it is simply not true. The rent I would pay matches the interest of the mortgage. So, looking into BTL I cannot see how it can make money without capital gains.

I looked into getting a student BTL (in Preston, Lancs) in the spring of 2004 (before I knew of this website) as I was priced out down here in the south. I couldn't make the figures stack up then, and since then prices have risen but student rent has hardly moved.

Getting back to your point, I agree the lower market is becoming more fragmented and could be disastorous for the market as a whole. What ever happens, I will aim to buy a largish home as my first - if prices rise from now on, I shall rent. If prices stagnate, I'll continue to live with my parents and save more. If prices fall, I shall buy a detached!

Edited by Jason

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If they are priced out (even with the tax and lending advantages only available to owner-occupiers) then how can they pay your rent and make you a profit? Your costs to run the place are higher than theirs.

frugalista

Wot he said! Hadn't thought about it like this, but it puts a lot of holes in the 'rentier society' thing. cheers Frugalista

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In Norfolk I can buy a pokey I bed flat for £100 - 110K, or for £140K 4 bedrooms.

Not a tough choice - and quite a small jump of the rungs of the ficticious ladder.

I think you have a strong point Dave, why go to step 1 on the ladder when step 2 is so little more relatively.

And so market forces will take there place and we will see the first rung cometh down in price soon.

Happy Days - hey Fonz

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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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