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Seamaster

Knowing "the Price Of Everything And Value Of Nothing"

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Had some bearish support for something I've posted in my local forum about a value concept I've been thinking about. Forgive the purely anecdotal nature of this ramble, but I want to throw it out here for a kicking.

We start with a surprising admission from my EA. Talking about a new build development in the city, the residential section of which has sold out, the EA claimed that all but a couple of the apartments had sold to trading-up OOs. BTL hardly took any notice of the place, apparently, which was completely unexpected. Furthermore, across the region he trades in, he's saying new (and new-ish) city-centre property is selling to, and between, OOs, but BTLs right now are buying nothing. Now, I know a certain amount of salt-pinching has to take place here, but all the other EAs I approached recently while flat-hunting were still rampantly bullish on BTL, so these comments were striking. The EA in question himself admitted this was nothing short of a sea-change in his business, year on year, but that sales were still slightly up, suggesting that while new BTL investors are becoming far fewer in number, OOs are on the move again.

And so to my point — which has a massive potential implication for the direction and dynamics of the market and, I'd like to think, for some of the discussions here.

How BTLs value an investment versus how OOs value a home are already starkly different, and becoming more so.

By value I mean specifically how a price (what the seller wants to get out of it, measured purely in £££) reflects the value in a property (what the buyer wants to get from it, not measured purely in £££). My contention, based on what I'm seeing around me is that OOs are happy to pay prices BTL investors can't (or won't) pay to live in a property that suits their needs and their lifestyle.

On this board, especially, we're hung on on prices, percentages, yields, capital gains etc etc etc. And, you know what, completely different factors are motivating buyers, factors that are never discussed here, factors that have much less to do with general mathematics of price, and much more to do with specific concepts of value.

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I do have a couple of thoughts on this. People here often talk about yield-based ways of valuing a house as though this should be relevant to everyone. The 12:20 rule for landlords buying a house for instance, or saying that if the notional yield on a house is below 5% that proves the house is overvalued.

Now obviously with BTL having played such a large part in the recent market it is important to be aware of the calculations that matter to landlords. However I'm not convinced that this is how normal buyers (OOs) do or should value a house. For them the main issues are 1) can I afford the payments and 2) will it be worth more in the future.

I think there is plenty of irrationality in the way that people approach these two questions (especially when you take account of IO mortgages etc, possible IR rises etc). But there's no point saying that the only logical view is to value a house in the same way an investor would.

One other thing I have doubts about is the idea that BTLs "should" or will sell if the yield drops low enough. It is of course correct to say that the best way to value the yield on an asset is on its current value, so as the price rises, the yield drops. However most BTLs have the intention of hanging on to their property and simply don't see the sums this way. They value the yield against what they paid for it, and against their running costs, and see any capital appreciation as a gain. Again they may be irrational in doing that, but we can't force them to view it in a different way.

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Again they may be irrational in doing that, but we can't force them to view it in a different way.

Irrational 'investors' tend to get wiped out pretty soon, even if they're 'investing' with other people's money.

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Now obviously with BTL having played such a large part in the recent market it is important to be aware of...

I'm coming to the conclusion BTL is the "bubble", not the market as a whole. Remember that the overwhelming majority of property in the UK isn't even up for sale. It's occupied. Being lived in. being enjoyed. Of the rest, most is changing hands between OOs.

However I'm not convinced that this is how normal buyers (OOs) do or should value a house. For them the main issues are 1) can I afford the payments and 2) will it be worth more in the future.

I'd put those at 2 and 3, respectively. What about . . .

1. Do I like it? Is it going to be nice place in which to spend the next however-many years? Is it in the right neighbourhood for my lifestyle, my work, my family and friends? Etc.

. . ?

Edited by Seamaster

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I tend to think that the best argument the Bulls had was that BTL was providing a permanent support for the lower end of the market instead of first time buyers. If BTLer's are now getting cold feet then I think this is a distinctly Bearish sign.

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Guest Baffled_by_it_all

Magpie. So what happens to them if interest rates start rising when they've already got a marginal yield.

Do they start subsidising the property themselves and erode their capital gains or cut and run.

I'm no economist so I haven't got a clue what they'll do. Particularly considering the large number of 'ma and pa' BTL's.

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Irrational 'investors' tend to get wiped out pretty soon, even if they're 'investing' with other people's money.

Absolutely, and I can see plenty of reasons why quite a few of them will get wiped out. They may also make it worse by putting up with losing money short-term because they can't afford the capital loss (on new-builds for instance).

What I'm talking about is predicting their behaviour - to predict how people will behave you need to think about how they are viewing the situation, not how you would (or a completely rational person would) in their shoes.

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This is what so concerns me about bulls. Everything is always framed in terms of how people could find yet another good reason to spend vast sums on property.

How about the scenario where plenty of FTB/young people say "wow! 190K for a one-bed is stupid. i'm going to spend my money on something less expensive instead"? Or the one where people think "wow! I am really concerned about losing my job so buying a 350K home is a little wreckless" or "yikes, however nice it is to live in suburb X, I want to avoid negative equity at all costs"?

The housing market is not the centre of the universe. IRs are at 4.5% and our economy is going nowhere already. Any inflation and we, together with the precious housing market, are screwed.

You can think of as many fancy reasons why you should spend borrowed money property as you like, but that won't change the fact that it is vastly overpriced.

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Magpie. So what happens to them if interest rates start rising when they've already got a marginal yield.

Do they start subsidising the property themselves and erode their capital gains or cut and run.

I'm no economist so I haven't got a clue what they'll do. Particularly considering the large number of 'ma and pa' BTL's.

Good question. I have a nasty feeling that if this happens there will be a delayed reaction from a lot of them. Rather than face up to the problem immediately they will struggle on losing a bit of money on the basis that it is "like a pension contribution". Then the question is what happens in the medium term. Some will already have a cushion because they bought slightly below the local peak. Some will eventually have to face up to the problem, and quite a few may go bankrupt if there is no equity in the property. If property falls then rises again, some may even be vindicated by holding on their property.

So it'll be different in different cases, What I don't think will happen will be all of them rushing to put their BTLs on the market the first day the Daily Express announces price falls or IR rises. Apart from anything else, many will realilse (as Rosie Millard did in a recent piece) that they can't take the costs of liquidating their asset. It'll either be a slow protracted decline in BTL, shaking out the amateurs and idiots, or, if prices don't fall far enough there might really have been a permanent shift in the market with more of the country's property stock in the hands of investors than in the past.

Edited by Magpie

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This is what so concerns me about bulls. Everything is always framed in terms of how people could find yet another good reason to spend vast sums on property. How about the scenario where plenty of FTB/young people say "wow! 190K for a one-bed is stupid. i'm going to spend my money on something less expensive instead"? Or the one where people think "wow! I am really concerned about losing my job so buying a 350K home is a little wreckless" or "yikes, however nice it is to live in suburb X, I want to avoid negative equity at all costs"?

That's my point exactly, just come at from a different angle. Forget price. Think value. At the moment there are enough OO buyers out there who still see value in what they're buying beyond £££. As soon as that stops being the case (a change in broader cultural, rather than narrowly economic terms), they'll stop buying.

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This is what so concerns me about bulls. Everything is always framed in terms of how people could find yet another good reason to spend vast sums on property.

How about the scenario where plenty of FTB/young people say "wow! 190K for a one-bed is stupid. i'm going to spend my money on something less expensive instead"? Or the one where people think "wow! I am really concerned about losing my job so buying a 350K home is a little wreckless" or "yikes, however nice it is to live in suburb X, I want to avoid negative equity at all costs"?...

Well exactly, you could translate all those scenarios as "Can I afford it?" or "Will it be worth more in future?" It may be that in future, if prices are falling, far more people will say no to those questions. It's not just a bull argument, it's a question of what really motivates people ("sheeple" if you must) to buy or sell a house.

What about . . .

1. Do I like it? Is it going to be nice place in which to spend the next however-many years? Is it in the right neighbourhood for my lifestyle, my work, my family and friends? Etc.

. . ?

And yes, you're right, this one's obviously important too.

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That's my point exactly, just come at from a different angle. Forget price. Think value. At the moment there are enough OO buyers out there who still see value in what they're buying beyond £££. As soon as that stops being the case (a change in broader cultural, rather than narrowly economic terms), they'll stop buying.

I think it is a very cunning and intelligent re-working of an old discredited argument - which can be summarised thus:

"people don't care about prices anymore, so prices will keep going up"

well actually there may be some truth in that. Prices are so ridiculous now that buyers have lost sight of just how outrageous they are. It's abstract - purely telephone numbers that are only normalised by the fact that everyone else seems to be (on the surface) unfazed by them.

The housing market is like an Easter egg - sweet on the outside - hollow within.

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I think it is a very cunning and intelligent re-working of an old discredited argument - which can be summarised thus: "people don't care about prices anymore, so prices will keep going up". well actually there may be some truth in that.

I'd phrase it slightly differently:

"People care about other things more than just price, so prices won't come down."

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Prices are so ridiculous now that buyers have lost sight of just how outrageous they are.

Isn't that also because people believe that, even though prices are high, prices will rise in future. So, if they can afford it, they still think it is a rational decision to buy.

It's not that they've completely lost sight of the fact that £350K for a pokey flat is a hell of a lot of money - it's just that they think they'll be selling it for £400K, rather than for £250K.

I'd phrase it slightly differently:

"People care about other things more than just price, so prices won't come down."

You see there I don't agree. If there is a sufficient change in sentiment for people to stop believing that property always goes up, then of course prices can come down. it might or might not happen, but you could easily have made a statement like that in 1989 and been proved hopelessly wrong.

Edited by Magpie

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That's my point exactly, just come at from a different angle. Forget price. Think value. At the moment there are enough OO buyers out there who still see value in what they're buying beyond £££. As soon as that stops being the case (a change in broader cultural, rather than narrowly economic terms), they'll stop buying.

The points not VALUE or sentiment it's AFFORDABILITY!

I really depair. No one thinks owning a home isn't desirable. Some people just like to live comfortably within their earnings. If peope are being squeezed christ know what will happen as this so called NICE period dissolves.

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Ok, I will pass on bit of the sap side wisdom of BTL.

I bought a flat in aberdeen in 97 while a student there. In 2001 I moved down to london to get a proper job, so stuck it up for sale. Not a sniff.

So up for rent. Mortgage was £27k, or £190 odd a month. Rental was £300 (after agents keep £50 odd). Voids, bad tenants, bad repairs, council tax, safety checks, routine maintenance etc probably set me back to the point where I have made an overall loss on it.

I can afford to buy down in london - I am just unwilling to part with a 5x mortgage (on £50k) for a reasonable 2 bed flat. I dont see it as being worthwhile.

Anyway, back to the flat... MEW'd it for an extra £20k - pushing the mortgage up to £290 a month (£210 ish interest - but getting me out of paying over £1k a month in student based debt payments), rental is up to £325. So effectively £30 a month in my pocket -if- theres no expenses. But there are always expenses, doubly so living 500 miles from it. New holes frequently get ripped.

Anyway, the point is, the thinking goes that even if it costs me £1k a year, then someone else is buying me a property which in 25 years time will be still generating an income enough to cover the costs of renting a basic flat in an uninspiring part of the country, or indeed can be sold for that value (whatever it is). It is THAT that I think most of the very amatuer btls are looking at, not the short or medium term cash flow situation.

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The points not VALUE or sentiment it's AFFORDABILITY!

I really depair. No one thinks owning a home isn't desirable. Some people just like to live comfortably within their earnings. If peope are being squeezed christ know what will happen as this so called NICE period dissolves.

Also worth bearing in mind that the affordability constraint would have been passed some time ago for most people if the banks weren't merrily peddling IO mortgages.

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Ok, I will pass on bit of the sap side wisdom of BTL.

I bought a flat in aberdeen in 97 while a student there. In 2001 I moved down to london to get a proper job, so stuck it up for sale. Not a sniff.

So up for rent. Mortgage was £27k, or £190 odd a month. Rental was £300 (after agents keep £50 odd). Voids, bad tenants, bad repairs, council tax, safety checks, routine maintenance etc probably set me back to the point where I have made an overall loss on it....

Thanks Rich - very useful example of how it might be a rational decision to keep on a BTL even if it's losing a bit of money short term. Some here would argue that having bought low you should sell high (now or whenever Aberdeen stops rising), but presumably you see the long term advantage as outweighing the possible short term gain?

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Mostly I just see me getting another hole ripped if I sell from down here.

"Put it on at offers over 45k, we'll only charge you 5k to do it".

Basically I think that unless I go up there for a year or so contract job, I stand little or no chance of getting out of it cleanly.

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Mostly I just see me getting another hole ripped if I sell from down here.

"Put it on at offers over 45k, we'll only charge you 5k to do it".

Basically I think that unless I go up there for a year or so contract job, I stand little or no chance of getting out of it cleanly.

I suppose also if you've MEWed it you might need a bit more HPI before it's worth selling anyway. I think Aberdeen is still going up though...

Good luck with it whatever.

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I think it is a very cunning and intelligent re-working of an old discredited argument - which can be summarised thus:

"people don't care about prices anymore, so prices will keep going up"

well actually there may be some truth in that. Prices are so ridiculous now that buyers have lost sight of just how outrageous they are. It's abstract - purely telephone numbers that are only normalised by the fact that everyone else seems to be (on the surface) unfazed by them.

The housing market is like an Easter egg - sweet on the outside - hollow within.

Spot on IMO

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Guest Baffled_by_it_all

But how much money would a BTL with one property be prepared to lose a month in order to have the value of a their house in capital in 20 years time. £100? £500?

Doesn't it all depend on the cost of repayments on their mortgage. Higher mortgage rate will sting a bit more.

Payments go up and that investment starts to become a monthly liability.

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I think the much-quoted 12/20 rule is an old wive's tale..........and so must TTRTR....

you SELL..........when the yield drops below 5%......because of rising prices or falling rents or bit of both

you BUY...........when the yield goes above 8.5%....because of falling prices or rising rents or bit of both

Edited by Michael

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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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