Jump to content
House Price Crash Forum
Sign in to follow this  
Guest Baffled_by_it_all

Impact Of Btl This Time Around

Recommended Posts

Guest Baffled_by_it_all

It seems to me that other than high net immigration, the biggest difference between the last crash and the market as it stands now is the emergence of BTL and high second home ownership.

What does the board think the amateur BTL's will do if the market begins to stagnate. Will they hold onto their property for the long term or will any rise in interest rates see them selling?

Share this post


Link to post
Share on other sites

I think that's the million dollar question really. It's the biggest difference from last time - there were flippers last time of course, but far less investors going into it meaning to hang on to property. If they all get out at the first sign of falls, then the falls will be very big indeed. But if they mostly stay in then it's anyone's guess.

I don't think most of them have an exit strategy at all. I suspect a few of the smarter ones are quietly getting out now, having realised from experience that the numbers only stack if big rises continue. But when you read BTLs talking about their "portfolios", the idea that they are in it for the long term and that short-term returns aren't that important is very common. If they take that view then there will still be a proportion who are forced out by heavy short term losses (or other circumstances such as losing jobs, voids etc). But if you get into negative equity on a BTL (as some already are on new-builds), how do you get out? Your mortgage is secured against the property. If the sale price doesn't cover that, then you have to come up with a large sum of money, plus selling a flat is likely to be hard unless you get the tenants out (risking a void for as long as it takes to sell) and spend money doing it up. Basically you may have a choice between quick bankruptcy or hanging on in there and hoping to ride out the storm. (Or as some would say "do you want to go bankrupt the quick way or the slow way??")

The other question here is whether the level of investment we are now seeing in property has raised the equilibrium prices. Many here hark back to average houses at 3.5x income, which you could take as a rough benchmark for what used to be the equilibrium. If BTL has become a permanent part of the scene, might that mean that the equilibrium price is higher than it used to be and that the owner-occupier rate will be lower than in the past? Right now we're at a point where most BTL yields are too low so we're clearly overpriced. But if prices fall enough that yields are at about 8-10% will that be as far as they "need" to fall, or will falls change the sentiment enough to discourage future BTL activity? I think we're in unchartered territory there....

Share this post


Link to post
Share on other sites

I think it depends what they've bought tbh, if I owned a nice 3 bed semi in an DHSS area then I'd hold on to it no matter what because I know it will always be let and you can weather the storm.

If I'd bought a new build 2 bedroom flat, I'd post the keys to the building society.

It also depends of course whether it's been done properly or not, ie 25/75% LTV I know plenty of people who have bought a house and let it out without mention this minor detail to the bank/building society.

Share this post


Link to post
Share on other sites

The other question here is whether the level of investment we are now seeing in property has raised the equilibrium prices. Many here hark back to average houses at 3.5x income, which you could take as a rough benchmark for what used to be the equilibrium. If BTL has become a permanent part of the scene, might that mean that the equilibrium price is higher than it used to be and that the owner-occupier rate will be lower than in the past? Right now we're at a point where most BTL yields are too low so we're clearly overpriced. But if prices fall enough that yields are at about 8-10% will that be as far as they "need" to fall, or will falls change the sentiment enough to discourage future BTL activity? I think we're in unchartered territory there....

Not really sure.

On the one hand a landlord does not have to worry about repaying the principle on the mortgage by the time he or she retires as an owner occupier does.

On the other hand unless they want to subsidise their tennants they do have to make a revenue profit, which an owner occupier does not. At least in the long term.

However, BTL relies on the regulatory environment. Whereas pre-Thatcher there were tax breaks for residential mortgages and harsh protections for tennants, there is now broad tax neutrality between occupation and renting and there was a massive liberalisation on renting. Now a populist government could decide to go for those tennants - who ountnumber landlords and are more geographically concentrated - by "giving" them rent controls and iron-clad tennancies.

Edited by IP Newcomer

Share this post


Link to post
Share on other sites
Guest Baffled_by_it_all

I mentioned this in another post but I'd be interested to see what affect any rise in interest rates would have on the BTL market. Just as increasing monthly payments are going to hurt OOs that would clobber yields for BTLs wouldn't it? Especially the 'mum and dad' operations hoping that the rent will pay off mortage capital over time. How much of a loss per month would they bear? 200? 500?

So what's their only option to selling? Raising rents in a competitive market with loads of BTL property?

Share this post


Link to post
Share on other sites

I think it depends what they've bought tbh, if I owned a nice 3 bed semi in an DHSS area then I'd hold on to it no matter what because I know it will always be let and you can weather the storm.

If I'd bought a new build 2 bedroom flat, I'd post the keys to the building society.

It also depends of course whether it's been done properly or not, ie 25/75% LTV I know plenty of people who have bought a house and let it out without mention this minor detail to the bank/building society.

Even if prices were to drop, BTL would be mad to sell and take a hit. As a BTL LL myself, I would certainly hang in there, whats the point of bailing out! Even if a flood of low cost property came on to the market, potential FTB would always rent whilst waiting for the market to bottom out before going in. So at worst you may have to lower rents a bit, how does this compare to bailing out. It does'nt.

I think that there is a ying-yang in terms of rental conditions and low property prices. If prices tumble, rents will remain high as FTB will wait ( as mentioned above). If prices go up, FTB will jump on the ladder in a growing market so not to miss the boat, this may reduce rental activity but then you are gaining on capital growth.

Its always a long term thing anyway

Share this post


Link to post
Share on other sites

What does the board think the amateur BTL's will do if the market begins to stagnate. Will they hold onto their property for the long term or will any rise in interest rates see them selling?

To be honest to begin with I thought that BTLs would hang on and hang on and hang on, but not anymore.

I am hearing about people selling for what they bought for several years ago, ignoring the fact that stamp duty and everything means they have made a loss overall.

I think people will start to bail out and I also think that those who try to hang on and on will not be able to meet the mortgage repayments and will end up repossessed.

Too many people bought into this because it was the thing to do.

Latest example my sister wanted a BTL but has now realised she can't afford one but is selling her current property anyway - could end up being an accidental STR?

This definately demonstrates to me that the tide has turned. (HPC cliche though it may be)

Edited by underpressuretobuy

Share this post


Link to post
Share on other sites

Not really sure.

On the one hand a landlord does not have to worry about repaying the principle on the mortgage by the time he or she retires as an owner occupier does.

On the other hand unless they want to subsidise their tennants they do have to make a revenue profit, which an owner occupier does not.

True but I've seen a few cases where small short-term losses are being accepted because 1) getting out would be expensive 2) "It's my pension, I'm in it for the long term capital gains..." And in theory if they can ride out a dip in prices, both rents and capital values should increase long term, so it may even make sense for some to do this.

One thing I do think unlikely is that BTLs who bought over the last few years and have already seen some capital appreciation will sell up because the notional yield falls as house price increases. I think they are mainly looking at two things - are they making a bit of money now (in this sense reduced yields don't really matter, only the price they actually paid for the property, and ongoing mortgage costs) and do they believe prices will rise long trem (answer: of course they do, that's why they did it in the first place).

Some here give very eloquent explanations of why BTLs are all on the verge of bailing out, but they always seem to me to be wishful thinking and projecting values on to BTLs that the BTLs don't actually share.

For the most part I think they will hang on in there if they can, so only big IR rises will really force a big proportion out, and even then it may be a delayed reaction as fixed rates expire over time. I see them as being like an invasion of cockroaches, loathsome, stubborn and very hard to shift...

Share this post


Link to post
Share on other sites

It also depends on WHEN they bought.

If prices fall, the loss will only be a paper loss, unless they sell (just as the gains have only been paper gains). So I don't think those who bought a more than a couple of years ago will panic if prices fall. And those who bought more recently - the last thing they will want to do is to sell, as they will make a real and painful loss.

They will try to hang in hoping for prices to pick up again in the long-term. So the question should be, will BTLers HAVE to sell, because they won't WANT to sell.

(Except for those who think the market will crash so they can sell now and pick up bargains later - but I don't think there are too many of those, among the amateurs anyway).

Now I can't see why they would HAVE to sell, unless they bought recently and interest rates go up significantly, or if there is a change in their personal circumstances e.g. losing their job. In other words, it needs a trigger, not just prices to fall a bit.

I am an amateur BTLer myself at the mo in that I am working abroad and will be for the next few years. I have let my house and the rental income does not quite cover all the expenses (there is a shortfall of about £100 per month, assuming no major repairs needed - I'm not expecting any for a good few years as the house is in good condition, new boiler etc). I have toyed with the idea of selling as a sort of non-resident STR, as I think it likely prices will fall - but then again, I see the house as a long-term investment, there's a hassle factor involved especially as I am abroad and not really interested in the stock market, I seem to have good tenants, even if prices fall they will surely rise again in the long-term.

Now these may seem like pathetic reasons to you, but that's what I'm doing and I suspect most other amateur BTLers are thinking along similar lines.

Share this post


Link to post
Share on other sites

It seems to me that other than high net immigration, the biggest difference between the last crash and the market as it stands now is the emergence of BTL and high second home ownership.

What does the board think the amateur BTL's will do if the market begins to stagnate. Will they hold onto their property for the long term or will any rise in interest rates see them selling?

The size of BTL is ONE difference. But IMO by far the most important reasons for HPI are the tsunami of credit and the mountain of money supply that have been used to stave off a recession in the western economies. It is these that allow the BTL craze to continue, even if more fitfully, and will discourage amateur BTLers from getting out.

That may all end in deflationary tears. But IMO the more likely scenario is continued and growing inflation in the economy for a couple of years. HPs may increase in nominal terms (allowing the bulls to cry told you so) whilst declining slowly in real terms (allowing us bears to claim a big drop is around the corner).

Share this post


Link to post
Share on other sites

As I mentioned on another thread, we've been viewing properties (to buy) in North London over the past couple of weeks, all FTB/BTL type stuff, i.e. 2 bed flats. Out of 15 places we've viewed so far, only 3 have been owner-occupied. All the rest were either tenanted, or were empty and according to the agents had previously been rented out. Does this signify BTL getting out?

Share this post


Link to post
Share on other sites

:lol::lol:

The bears have been saying here for 2+ years that investors will bail......any minute now.......

:lol:

they will do EXACTLY the same as with tech shares!!!!....that being,hold until the sky is falling in on them...even at 15% down they will hang on to recoup their losses.

...only when we get a surge of bad PR will amateur BTL stampede for the exit....when this happens expect to see 3-4 % MONTHLY falls......ETA for this is late 2008.

...until then expect more of the same in the media,with a gentle hint of bearishness and plenty of seasonal adjustment....a slow (unexpected) national decline of 1-2% this year will set the scene.

Share this post


Link to post
Share on other sites

I mentioned this in another post but I'd be interested to see what affect any rise in interest rates would have on the BTL market. Just as increasing monthly payments are going to hurt OOs that would clobber yields for BTLs wouldn't it? Especially the 'mum and dad' operations hoping that the rent will pay off mortage capital over time. How much of a loss per month would they bear? 200? 500?

So what's their only option to selling? Raising rents in a competitive market with loads of BTL property?

Increased interest rates have two effects. The monthly cost of a highly leveraged BTL investment goes up. The return from simply having the money sitting in a bank account will also probably go up. Combine both and even small changes in interest rates of a percent or two can make a big difference to the comparative return from BTL.

Others have asked whether BTL landlords will head for the exits. Should it be widely perceived that prices are going down, then some will head for the exits. Should interest rates rise even slightly, then some will head for the exits. But it only requires a few to go for the exits, particularly if the number of buyers drops due to increased costs reducing affordability or a perception that prices are going down meaning that better bargains will be found by waiting rather than buying now, for there to be further oversupply.

I was in Brighton yesterday. Very interesting to see the for sale signs everywhere in the centre of town. Lot of renting in those areas.

Billy Shears

True but I've seen a few cases where small short-term losses are being accepted because 1) getting out would be expensive 2) "It's my pension, I'm in it for the long term capital gains..." And in theory if they can ride out a dip in prices, both rents and capital values should increase long term, so it may even make sense for some to do this.

It doesn't require all BTLs to stampede for the exit before oversupply occurs and prices drop, which becomes a self-fulfilling prophecy. Remember that prices are set at the margin. If everyone who could held onto their properties, then only those who are motivated sellers would sell, and they are the ones most likely to accept lower prices, or have lower prices forced on them as their properties are sold by mortgagees.

Billy Shears

Share this post


Link to post
Share on other sites

they will do EXACTLY the same as with tech shares!!!!....that being,hold until the sky is falling in on them...even at 15% down they will hang on to recoup their losses.

...only when we get a surge of bad PR will amateur BTL stampede for the exit....when this happens expect to see 3-4 % MONTHLY falls......ETA for this is late 2008.

3-4% monthly falls? This is the kind of wishful thinking I was talking about. Once tech shares collapsed they were extremely unlikely to recover as they had no intrinsic value, whereas (most) property will still have some intrinsic value and is likely to recover in the medium to long term (might not happen, I grant, but it will always be worth something).

To get out of property when you are in negative equity is very likely to mean bankruptcy, and while some would opt for that, plenty of others would opt to stay in there. It's not like tech shares where there was no option but to sell up or take the loss, so it's not a very useful comparison. Maybe there will be something like this in new-builds, although even they will have some kind of remaining value, even if it is much diminished.

Share this post


Link to post
Share on other sites

I mentioned this in another post but I'd be interested to see what affect any rise in interest rates would have on the BTL market. Just as increasing monthly payments are going to hurt OOs that would clobber yields for BTLs wouldn't it? Especially the 'mum and dad' operations hoping that the rent will pay off mortage capital over time. How much of a loss per month would they bear? 200? 500?

So what's their only option to selling? Raising rents in a competitive market with loads of BTL property?

what about the impact of fuel prices on tenants???...they are responsible for utility bills and their travel to/from work??

3-4% monthly falls? This is the kind of wishful thinking I was talking about. Once tech shares collapsed they were extremely unlikely to recover as they had no intrinsic value, whereas (most) property will still have some intrinsic value and is likely to recover in the medium to long term (might not happen, I grant, but it will always be worth something).

To get out of property when you are in negative equity is very likely to mean bankruptcy, and while some would opt for that, plenty of others would opt to stay in there. It's not like tech shares where there was no option but to sell up or take the loss, so it's not a very useful comparison. Maybe there will be something like this in new-builds, although even they will have some kind of remaining value, even if it is much diminished.

PRECISELY!!!!!

when people get their heads around the fact they DON'T all have to have a 1/2 bed newbuild each and can cut back on costs(and have a decent social life) in units of 4/5 then BTL will be screwed.

...4 or 5 per house is actually a lot of fun....just think back to uni!!!!

with so many singls/divorcees etc now it makes a lot of sense......only gets tricky when offspring happen.

...property is just a fashion!!!!,many immigrants will live 10 or 11 per 3-bed house when they first arrive....if you think like them then you have a chance of surviving this!!!

Edited by oracle

Share this post


Link to post
Share on other sites

Increased interest rates have two effects. The monthly cost of a highly leveraged BTL investment goes up. The return from simply having the money sitting in a bank account will also probably go up. Combine both and even small changes in interest rates of a percent or two can make a big difference to the comparative return from BTL.

I think comparative return is probably fairly irrelevant for most BTLers. Their investment isn't liquid enough, and they are too wedded to the idea of property (and gearing) for the fact that they could perhaps make more money elsewhere to be relevant. Look at the stony ground that Dr Bubb's message falls on at Singing Pig - the piggies just take the view that they are making a bit of money from property and that's what they understand. The argument that "property is a boring investment" doesn't convince them at all.

It doesn't require all BTLs to stampede for the exit before oversupply occurs and prices drop, which becomes a self-fulfilling prophecy. Remember that prices are set at the margin. If everyone who could held onto their properties, then only those who are motivated sellers would sell, and they are the ones most likely to accept lower prices, or have lower prices forced on them as their properties are sold by mortgagees.

Maybe you're right - it's certainly a possibility that I'm being too pessimistic. But I tend to fear that the motivated sellers will be a constant trickle rather than a sudden deluge and as a result might not have such a dramatic impact. Fair enough if there are a lot of repos caused by high IRs, that will have a big impact. But if it's just a constant trickle of BTLs throwing in the towel, I'd be less confident - they'll all be hanging in there for the best price they can squeeze out of it. Did you see Rosie Millard's article a couple of weeks ago, where she considered selling her BTL, and then realised how much it would cost her to do it? Basically she started out being sensible and then backtracked into fantasy land because she couldn't take the short term costs.

Share this post


Link to post
Share on other sites

4 or 5 per house is actually a lot of fun....just think back to uni!!!!

I do... with horror. And anyway I've got a kid myself, so I'm well past that point myself.

I know some are happy in shared households, but I think it will take more than a few years of high house prices to shake the British preference for living in their own space. If anything I think the problem with new-builds is that they are just taking us back to the high rise mentality of shared common areas, everyone in their own hutch. They're going to crash because they are overpriced, gardenless, and shoddily built, so in a few year's time will just look like student accomodation or slums.

Not slagging you off personally, but I find that most people who bang on about how great it is living in shared housing grew up in middle-class comfort, and expect to be able to buy a decent space sometime in the future. It's not a sentiment you often hear expressed by people who grew up in overcrowded 2-up 2-downs. (Personally I grew up in comfortable surroundings but those I know who didn't are the keenest on having their own space.)

Share this post


Link to post
Share on other sites

The last time around BTL’s amateurs weren’t a factor, this time they are. When things get tough (I/R increases, job loss, inflation, property price dropping etc) people will batten down the hatches to preserve and keep their main family homes roof over their and the kids heads. So things are getting tough and the vast majority of BTL’s will do everything they can to keep a roof over their heads. They’ll be trying to sell and if they can’t, they’ll be chucking the keys back at the lenders, shouting have the 2 bed exec lux flat just leave us the 3 bed semi we’ve foolishly mew’d to buy it!

In 1988 to 1995 I knew no BTL investors, now the hairdresser, the postman and Butcher Baker et-al have got a couple. They are all shi$$ing themselves.

Pablo Silver or Lead?

Share this post


Link to post
Share on other sites

:lol::lol:

The bears have been saying here for 2+ years that investors will bail......any minute now.......

:lol:

and the bears warned of "irrational exuberance" way before the crash,,,,at least two years..,, if the market had ajusted to the madness then maybe the stock market crash would not have been so bad

similarly if the bubble had been pricked earlier maybe the downturn would not have been so severe

unfortunately people are nowhere near as intelligent as we would like

bubbles burst, new paradigms are as reliables as mirages

the bigger the bubble, the bigger the burst. look at 1929, look at the Japanese property market ( another low area high population area)

Share this post


Link to post
Share on other sites

So things are getting tough and the vast majority of BTL’s will do everything they can to keep a roof over their heads. They’ll be trying to sell and if they can’t, they’ll be chucking the keys back at the lenders, shouting have the 2 bed exec lux flat just leave us the 3 bed semi we’ve foolishly mew’d to buy it!

Except that the result of doing that would most likely be to lose the family home. You can't just let them repo the BTL and expect them to sell it at a loss and not pursue you for the debt.

So they're in a worse situation than they realise if prices fall, but paradoxically that makes it all the more imperative that they try to hang in there for prices to go back up. It's just not as easy as this HPC fantasy scenario makes it out to be. People in that situation may go bankrupt in the end anyway but they would hasten that by chucking the keys back and most people will fight to avoid that even if it is at a cost.

Share this post


Link to post
Share on other sites

Except that the result of doing that would most likely be to lose the family home. You can't just let them repo the BTL and expect them to sell it at a loss and not pursue you for the debt.

So they're in a worse situation than they realise if prices fall, but paradoxically that makes it all the more imperative that they try to hang in there for prices to go back up. It's just not as easy as this HPC fantasy scenario makes it out to be. People in that situation may go bankrupt in the end anyway but they would hasten that by chucking the keys back and most people will fight to avoid that even if it is at a cost.

The ameature BTL investors may exit the market in drips, simply because they don't have the money to cover a negitive cash flow asset for a length of time - but this that either assumes that IRs or void periods go up to the point to take the investment into negitive cash flow. Because it's an investment i would have thought they would be quite willing to sell quickly and accept a loss to avoid lossing their non-investment assests.

but i suspect the serious investors have enough cash to cover dry periods and will most likely brave through it without worrying too much. If i was a serious BTL investor, the only significant factor would be that the investment was cashflow positive (and above inflation), capital gains would only be considered a bonus.

Share this post


Link to post
Share on other sites

My 2nd post so here goes..

Just like to start by saying hello to Dr Bubb, Realistbear, Frugalista & Billy Shears. I have found your posts to be very interesting, informative & thought provoking.

Just a bit of inside info on BTL

My other half is a lettings manager has said recently there has been quite a few of her professional landlords now wantng to get the tenants out and sell up. Maybe this is a sign of the smart money trying to get out before its to late?

PP

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 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%



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.