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SCUMBAG

Is Btl A Red Herring?

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The average price of an asset will fall when supply outstrips demand. In the UK housing market is it argued that prices are being held at their high levels because there is a shortage of affordable property and therefore demand is outstripping supply. At the bottom of the property ladder there is a lot of demand from First Time Buyers (FTB) and Buy To Let (BTL) landlords. FTBs are currently at a historically low level of 7.8%. In other markets and in previous property booms the absence of new blood in the market would be seen as a sign that the market is about to fall as this is needed at the bottom to sustain the rest of the chain all the way to the top. Without them, the people on the second rung can not sell and therefore can not buy and this pattern continues up to the top ensuring that chains collapse until there is an oversupply and eventually the only way to sell properties is to drop the price. This situation is further complicated because not only is the bottom rung so far away from the FTB, but the rungs further up the ladder are too far away to allow people to move up. In addition, those lucky FTBs who are on the ladder who paid a high price for their property will have to stay put for longer as it takes longer to erode the true value of the debt in a low inflation environment. The net effect of situation described here leads to stagnation, which leads to the breakdown of chains, which eventually leads to oversupply, which leads to price falls. This is the situation that was evolving in 2004 before the cut in interest rates in August of that year which, it is argued, was enough to keep the situation free wheeling. It is suggested that this is evident that this can be seen on the graph’s home page.

For reasons discussed above the bottom of the housing market is crucial in propping up the rest of the market. Last month the mainstream news reported that the only thing propping up this part of the market was BTL landlords and those FTBs who were being heavily subsidised by their parents. Much is made on this site that the BTL landlord is taking the place of the FTB and so sustaining the market. Over 50% of the BTL properties in existence were purchased in the last 5 years. I propose that the BTL phenomena is not propping up the market but actually contributing to its final demise because they have no intention of moving up the property ladder and so the stagnation described above will be amplified as a result. In the meantime it gives the impression of a healthy, rising market. Additionally they are blocking FTBs from entering the market (who would be looking to move up the ladder in a few years time) as they are in direct competition with them, adding further stress to the future market.

The situation described could happen independently of interest rate rises (although a rapid rise in interest rates would accelerate any market fall or indeed act as a catalyst, as would any rise in unemployment/repossessions which would also lead to oversupply). So whereas rising interest rates and unemployment could lead to a market correction, the market simply buckling under its own weight due to being top heavy must also be taken into consideration.

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The average price of an asset will fall when supply outstrips demand. In the UK housing market is it argued that prices are being held at their high levels because there is a shortage of affordable property and therefore demand is outstripping supply. At the bottom of the property ladder there is a lot of demand from First Time Buyers (FTB) and Buy To Let (BTL) landlords. FTBs are currently at a historically low level of 7.8%. In other markets and in previous property booms the absence of new blood in the market would be seen as a sign that the market is about to fall as this is needed at the bottom to sustain the rest of the chain all the way to the top. Without them, the people on the second rung can not sell and therefore can not buy and this pattern continues up to the top ensuring that chains collapse until there is an oversupply and eventually the only way to sell properties is to drop the price. This situation is further complicated because not only is the bottom rung so far away from the FTB, but the rungs further up the ladder are too far away to allow people to move up. In addition, those lucky FTBs who are on the ladder who paid a high price for their property will have to stay put for longer as it takes longer to erode the true value of the debt in a low inflation environment. The net effect of situation described here leads to stagnation, which leads to the breakdown of chains, which eventually leads to oversupply, which leads to price falls. This is the situation that was evolving in 2004 before the cut in interest rates in August of that year which, it is argued, was enough to keep the situation free wheeling. It is suggested that this is evident that this can be seen on the graph’s home page.

For reasons discussed above the bottom of the housing market is crucial in propping up the rest of the market. Last month the mainstream news reported that the only thing propping up this part of the market was BTL landlords and those FTBs who were being heavily subsidised by their parents. Much is made on this site that the BTL landlord is taking the place of the FTB and so sustaining the market. Over 50% of the BTL properties in existence were purchased in the last 5 years. I propose that the BTL phenomena is not propping up the market but actually contributing to its final demise because they have no intention of moving up the property ladder and so the stagnation described above will be amplified as a result. In the meantime it gives the impression of a healthy, rising market. Additionally they are blocking FTBs from entering the market (who would be looking to move up the ladder in a few years time) as they are in direct competition with them, adding further stress to the future market.

The situation described could happen independently of interest rate rises (although a rapid rise in interest rates would accelerate any market fall or indeed act as a catalyst, as would any rise in unemployment/repossessions which would also lead to oversupply). So whereas rising interest rates and unemployment could lead to a market correction, the market simply buckling under its own weight due to being top heavy must also be taken into consideration.

Good Post!

History tells us that to have a HEALTHY housing market we need FTB's. This so called shortage of housing is a load of b0ll0x imho. It is true to say that BTL's have taken a LARGE portion of FTB properties but not what I would call HOUSING. All these LUXURY FLATS sorry APARTMENTS are mainly bought by the BTL brigade. If we taken BTL out of the equation then there will be SHITLOADS of empty ACCOMMODATION. The BTL's also buy the crap terraces that are also big. They can then ge a few people in them and make their yield work.

In the examples above, none of these types of houses/accommodation are real FTB fodder? However, the rising price of flats (most are 120>180K) has forced up the price of OLD housing in ratio. With IR on the rise - yields will NOT work. The luxury apartment will become the highrise flats we seen in the 60's/70's. Then prices will come down with a bang.

BTL is key to houseprices. We have known for some time that BTL is not a viable option in the MAJORITY of cases. When its not viable and the house is depreciating then there WILL be a mass sell-off.

We are getting close.... Just put up those IR's 0.5% (with hints they will rise further) and let the show begin.

TB

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Good Post!

History tells us that to have a HEALTHY housing market we need FTB's. This so called shortage of housing is a load of b0ll0x imho. It is true to say that BTL's have taken a LARGE portion of FTB properties but not what I would call HOUSING. All these LUXURY FLATS sorry APARTMENTS are mainly bought by the BTL brigade. If we taken BTL out of the equation then there will be SHITLOADS of empty ACCOMMODATION. The BTL's also buy the crap terraces that are also big. They can then ge a few people in them and make their yield work.

Hi,

Yeah I was trying to be careful with the wording. I think there is plenty of housing too. What there is a lack of is affordable housing i.e. the housing people can afford to buy. I was saying that the BTL phenomena has created a buffer between the FTB and the rest of the market effectively isolating the rest of the market (or creating a bottleneck) so that it has nothing left to feed on.

SCUMBAG

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Hi,

Yeah I was trying to be careful with the wording. I think there is plenty of housing too. What there is a lack of is affordable housing i.e. the housing people can afford to buy. I was saying that the BTL phenomena has created a buffer between the FTB and the rest of the market effectively isolating the rest of the market (or creating a bottleneck) so that it has nothing left to feed on.

SCUMBAG

I think that's very true. It's key to realise (as you have) what a untidy market property is. I would add that I think that it may be the factor that leads to nominal price drops as well. My theory being BTL was purchased largely as a substitute for pensions/dot.com equities etc over the last 5 years. If the people who bought them were preapred to bail out, they may well do so again.

In terms of the upper echelons of the market having nothing to feed on, I'm not entirely sure that is the situation at the moment, as the FTB's of 01, 02 will now be moving up the chain and will have benefited from the price rises in FTB/BTL properties. However, when there numbers start to decline due to the BTL/FTB replacement, then we could see some downward pressure applying further up the chain.

Does this make sense?

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In terms of the upper echelons of the market having nothing to feed on, I'm not entirely sure that is the situation at the moment, as the FTB's of 01, 02 will now be moving up the chain and will have benefited from the price rises in FTB/BTL properties. However, when there numbers start to decline due to the BTL/FTB replacement, then we could see some downward pressure applying further up the chain.

Does this make sense?

Nope.

Mainly it does, but how can FTbers of an 01/02 vintage now move up the ladder if they cannot sell their first property to a new FTB or BTL?

Downward pressure due to a lack of FTBs will be felt from the bottom of the chain upwards, not the other way round.

Some factors may start at the top of the market and work their way down, but not FTBs.

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I think that's very true. It's key to realise (as you have) what a untidy market property is. I would add that I think that it may be the factor that leads to nominal price drops as well. My theory being BTL was purchased largely as a substitute for pensions/dot.com equities etc over the last 5 years. If the people who bought them were preapred to bail out, they may well do so again.

In terms of the upper echelons of the market having nothing to feed on, I'm not entirely sure that is the situation at the moment, as the FTB's of 01, 02 will now be moving up the chain and will have benefited from the price rises in FTB/BTL properties. However, when there numbers start to decline due to the BTL/FTB replacement, then we could see some downward pressure applying further up the chain.

Does this make sense?

The FTBs I know who bought in 01/02 are not able to sell their houses as the price they are asking is too high. They need that price though as the price of the next house up is too high.

I think the BTL phenomena is a symptom of the bubble but also partly the cause. They would be the first to be burned as the typical properties they buy are likely to fall the most in value and they are also largely funded by IO mortgages which are the most sensitive to interest rate rises. The BTLs who bought before the boom (and there are still a lot of them) will be more hardened to IR rises and so will help to keep rents down.

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Dont forget my theory - BTL is a way for the government to provide social housing (rented accomodation) without any large capital outlay or maintainence costs. The costs now fall on the private sector.

The market will turn when the BTLs realise that in spite of their investment rising by 50k they still have a mortgage debt of 150k. The dinner-party conversation of "how much the house has increased in value" would be very different if called "how big is your mortgage".

But on another note, we dont have debt anymore, we have lines of credit!

Debts are a bad thing, but credit is a reflection of status.

Welcome to Nu Britain.

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Very good post.

I thought the biggest cause of HPI was 100% self-certification mortgages, irresponsible lending and people stretching themselves to get onto the gravy train as it were with house prices rising so quickly. It didn't occur to me that BTLers, and investors are the main drive for speculative house prices. They are like a parasite to the market. The flat I live in is a BTL, and has just sold - hopefully sentiment is changing with those that have bought FTB properties and are leaving the market and selling their studios, 1-bed flats etc.

But don't under estimate the stupidity of people that continue to buy, this flat sold on it's first viewing for £130k. Nethouseprices show in 2000 they sold for £80k! lol

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Very good post.

Thanks

I thought the biggest cause of HPI was 100% self-certification mortgages, irresponsible lending and people stretching themselves to get onto the gravy train as it were with house prices rising so quickly.

Yeah it's a mixture of all of them. It was noted on another thread today though that a lot of people stay in their first homes they buy. Not sure how true that is. If nobody moved up then the whole argument above falls down.

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BTLs have certinly pushed the bubble higher like never before but so have those buying a second home....country cottages and seaside cottages....e.g. Runswick Bay, N. Yorks. ca. 100 old fishermans cottages by the sea front. 3 lived in full time, the rest empty 90% of the time.

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Another key point to bear in mind re BTL.

Once the market starts to head down any tuned in BTLer is going to sell up resulting in a flood of ex-BTL properties on the market at the same time as the supply of new BTL money dries up.

The above broadly does not apply to OO's who are much more willing to ride out the peaks and troughs.

So the result of the BTL fad is that the UK property market is now much more volatile than before. BTLers have blown up a speculative bubble in the market, as soon as it bursts they will be the first to leave.

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Another key point to bear in mind re BTL.

Once the market starts to head down any tuned in BTLer is going to sell up resulting in a flood of ex-BTL properties on the market at the same time as the supply of new BTL money dries up.

The above broadly does not apply to OO's who are much more willing to ride out the peaks and troughs.

So the result of the BTL fad is that the UK property market is now much more volatile than before. BTLers have blown up a speculative bubble in the market, as soon as it bursts they will be the first to leave.

I believe that this is paramount to a crash. We will get correction - I have absolutely no reservations about that. A crash COULD happen if the market is flooded.

IR up 2 x 0.25bp by January and we will see 2007 as the year of RAPID DECENT. I believe its going down now - at a small pace. BTL will be history in the next 5 years.

As house prices come down and the market ius flooded with properties. It will become more financially viable to buy the property, resulting in dropped rents.

Interesting times ahead me thinks.....

TB

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Another key point to bear in mind re BTL.

Once the market starts to head down any tuned in BTLer is going to sell up resulting in a flood of ex-BTL properties on the market at the same time as the supply of new BTL money dries up.

The above broadly does not apply to OO's who are much more willing to ride out the peaks and troughs.

So the result of the BTL fad is that the UK property market is now much more volatile than before. BTLers have blown up a speculative bubble in the market, as soon as it bursts they will be the first to leave.

Would this not require large jumps in IRs? Even if they are buying with IO mortgages, does it not depend on how easily they can pass on the IR rises to the tennants in the form of increased rents? And, conversely, what options are open to tennants other than paying higher rents? If they can pass on the extra costs as increased rent then they'll be able to ride out any downturn.

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Would this not require large jumps in IRs? Even if they are buying with IO mortgages, does it not depend on how easily they can pass on the IR rises to the tennants in the form of increased rents? And, conversely, what options are open to tennants other than paying higher rents? If they can pass on the extra costs as increased rent then they'll be able to ride out any downturn.

see my post above yours.

There will be a mass exodus from BTL. Sure there are well leveraged BTL'rs who bought early but I can guarantee that those that bought in the last 4 years are at a VERY HIGH RISK!!!!!

EG.

1 Have 1 property, it cost £150K minus 20% deposit I have a mortgage of £120K

Total cost = £600 I/O I get £650 pcm rent

If I take into account VOIDS, Maintenance then there is next to nothing in it. I am almost negative.

If IR's went up 0.5% base rate then it will cost me £650pcm. I am now DEFINATELY running at a loss.

IR's have now gone up 1%!!!! Its costing me £700 a month!!!! I have to increase my rent. OK tenant I want £750pcm rent. Go F*ck yourself I'm moving out if you raise the rent! What dya do? You could potentially have a void???? Sh*it I am losing money fast!!!!

In the meantime, the housing market collapses. The High INterest rates have stopped people buying property. The only way to sell it is to drop the prices to entice people in. But I cant, I am already losing money and not even get capital gain now????? SHHHIIIIITTTT!!!!! Sell at all costs!

I eventually sell for £120K. I have lost my £30k deposit :( I have also made NO MONEY WHATSOEVER!!!.

Everyone else is doing this. Every week MORE and MORE property comes onto the market. Your original tenent decides that he does not want to pay £600 pcm to his new Landlord as it is now becoming more affordable to buy a property on a repayment mortgage!!!! So Mr. Landlord. I am leaving unless you drop your rent to £450pcm.

He leaves and buys a property for £600pcm repayment mortgage. The landlord has a massive void becuase his rent is too high.. he is regretting not re-negotiating his rental price. His flat is standing empty. He is losing £600 pcm whilst it is standing there. What can he do. He needs £600 to cover mortgage? The market says that is too expensive? His flat is now worth 10% less than it was 6 months ago?

He sells at a massive loss.....

NOW MULTIPLY THAT BY 4, 6, 8, 10 etc. This is just 1 PROPERTY. The ones who own multiples are well and truly screwed. You cannot be in it for the long term when your rent does NOT cover the mortgage repayment AND the property is depreciating!!!!

Believe me... the prices can come down JUST AS FAST as they have gone up IF the conditions are right!!!

TB

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Would this not require large jumps in IRs? Even if they are buying with IO mortgages, does it not depend on how easily they can pass on the IR rises to the tennants in the form of increased rents? And, conversely, what options are open to tennants other than paying higher rents? If they can pass on the extra costs as increased rent then they'll be able to ride out any downturn.

IO mortgages (as most BTLs are) are more sensitive to IR rises as 0.25% increase on the whole capital is greater than the reduced capital on a repayment morgage. So BTL properties are more sensitive to that. Over 50% of BTLs have been bought in the last 5 years so the other 50% will not need to raise their rents and so they will be in competition with those.

Also there is no more rented property available today than there was 10 years ago. All that has happened is that it has changed hands. The professional property speculator has sold off his/her properties (the first slope down on the head and shoulders bit on the graph on the home page) to a much larger group of amateur BTLs who then proceeded to outbid each other in a bidding war (the rising part of the head and shoulders on the graph on the home page) in 2004ish. So as far as rental is concerned there are no more rented properties available yet demand is higher because of proced out FTBs. Rents rise, inflation rises, interest rates rise, BTLs suffer. The whole thing is one big convoluted, intertwined mess. I don't even know what the hell we are doing here trying to work out what is going to happen.

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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% +
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      • Even
      • up 2.5%
      • up 5%



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