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Traps For The Unwary In A Soft Housing Market

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Sorry for being lazy, but this article is excellent. Explains how easy it is to lose money when the market slows - it doesn't even need a crash. All BTL investors should read but, then again, I doubt any will.

http://www.ft.com/cms/s/8886c774-a736-11da...00779e2340.html

For some reason, I seemed to get hold of the article without subscribing/logging in.

Interesting, but I don't like the maths, especially this late on a Thursday :( Have not got the energy to study it in detail but it looks flawed.

Biggest weakness to me is the argument to invest your £50,000 deposit. Firstly, where are you going to get a 6% deal for £50,000 risk free? Honestly, let me know because I'll take a slice of that. Secondly, the article forgets that the income from the interest on this £50,000 is probably taxable. Strikes me he is including one tax (Stamp Duty) because it suits his argument and ignoring another (Income Tax) when it does not.

As a consequence, I think it has no credibility. It can be replaced with the simple statement; static nominal house prices = falling real house prices due to inflation. That gets rid of all the smoke and mirrors he is using.

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1. FTB/BTLer buys a 250K flat at full asking price (as market is buoyant) and 100% mortgage

2. Interest creep up 25 points - no crash, but market turns a little softer, and things are now going for 95% of asking price.

3. Said FTB/BTLer are in negative equity by 12.5k.

4. It doesn't take a crash to lose some serious money very quickly.

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Sorry for being lazy, but this article is excellent. Explains how easy it is to lose money when the market slows - it doesn't even need a crash. All BTL investors should read but, then again, I doubt any will.

http://www.ft.com/cms/s/8886c774-a736-11da...00779e2340.html

This BTL investor tried but I can't afford the subscription and the words would probably be too big for me anyway.

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The FT article shows how even in a 'soft landing' scenario (i. with prices neither rising nor falling) you can lose a substantial amount whether buying a home to live in or a BTL investment.

The writer uses a genuine example from his street in south-west London. At the start of the period he assumes you put down a £50,000 deposit on a £300,000 house to live in.

"Your entry costs were £12,000 (stamp duty at 3 per cent, lawyers' fees, survey, etc). You should also consider the typical repairs over five years; £600 a year, or £3,000, seems modest. So after five years, in this softest of soft markets, you have turned £50,000 into £35,000. If you sell at this point you will be hit with another £7,000 of fees (estate agents, lawyers, etc) leaving you with £28,000."

He then goes on to opportunity cost comparisons i.e that it may have been cheaper to rent (a £300,000 property would let out for about £1,100 a month) and

"Pity those people forced to sell property by events; they change jobs, they become redundant, they get divorced or have children."

He then looks at a buy-to-let investment with the same figures. His conclusion is that "When you take away the £12,000 for entry costs (never underestimate how illiquid property can be) and £3,000 for repairs, you have turned £50,000 into an effective loss of £9,700." and that assumes a 'soft' landing where property prices haven't even fallen!

"The examples illustrate the traps awaiting the unwary in a static market. It is the gearing effect of property that makes the housing market so exhilarating on the way up and so alarming on the way down. Investors with smaller deposits are highly exposed to the slightest movement in prices."

A good article and well worth reading. :)

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  • 338 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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