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Rents Completely Detached From Prices

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I'm currently renting one of those new build 'executive apartment' style flats. It's a 2 bed flat in one of the outer Greater London boroughs in a fairly nice area. Anyway.. I logged on to nethouseprices today to see what the flats in my apartment block sold for and was slightly shocked.

Identical flats right above and below mine sold for around 350k in 2005, and this level of prices seem to continue for other flats sold in the block this year. I expected prices to be inflated, but not by this much. My monthly rent is £1075. The service charge is £200+ and paid by the landlord. The reason of course the flats don't rent for more is that the market cannot sustain it. Wages are not high enough.

Now.. buying this flat on an average 6% mortgage would cost 1750 pcm on IO. Add to this service charge, maintenance, home insurance etc, and renting is about half the cost.

I can't imagine why anyone would want to buy something like this, let alone invest! Yields must be 2%-ish at best. The only thing that keeps everything going is expectations of capital gains. Dot-com anyone?

Seriously, prices would need to drop by 50% to come to a more realistic level, and even more if IR go up. Rents and prices are fundamentally linked and must be balanced. One way or another it'll correct, and as has been discussed on this board already I doubt it'll be through wage inflation.

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Goes to show that there will always be suckers around. By high sell low in store for many BTLers who got in after 2002-03. IMO, the stockmarkets could get extremely rough later this year and the drop in overall confidence brought in coupled with higher IR will spell a painful end to the entire speculative property bubble. BTLs will suffer the most IMO due to the supply-demand equation and the fact that no one will be buying investment properties this side of a long drawn out crash. If I was an investor of any of these types of properties I would not be sleeping at night.

Edited by Realistbear

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I think you're right - these flats sound massively over-valued.

But don't forget that BTL is one of the only ways people can borrow to invest. It's hard for a normal person to do that with shares, gold, or savings accounts - properties are the only way for people to gear up for a big investment. If people really are thinking for the longer term (ie, two decades), and they really can weather the coming storm, and don't mind a poor (but still positive) investment after that time, it can still seem like a good deal - you end up with a property, after all. At least, so it seems to some...

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I'm currently renting one of those new build 'executive apartment' style flats. It's a 2 bed flat in one of the outer Greater London boroughs in a fairly nice area. Anyway.. I logged on to nethouseprices today to see what the flats in my apartment block sold for and was slightly shocked.

Identical flats right above and below mine sold for around 350k in 2005, and this level of prices seem to continue for other flats sold in the block this year. I expected prices to be inflated, but not by this much. My monthly rent is £1075. The service charge is £200+ and paid by the landlord. The reason of course the flats don't rent for more is that the market cannot sustain it. Wages are not high enough.

Now.. buying this flat on an average 6% mortgage would cost 1750 pcm on IO. Add to this service charge, maintenance, home insurance etc, and renting is about half the cost.

I can't imagine why anyone would want to buy something like this, let alone invest! Yields must be 2%-ish at best. The only thing that keeps everything going is expectations of capital gains. Dot-com anyone?

Seriously, prices would need to drop by 50% to come to a more realistic level, and even more if IR go up. Rents and prices are fundamentally linked and must be balanced. One way or another it'll correct, and as has been discussed on this board already I doubt it'll be through wage inflation.

Nice anecdotal nic.

I've posted this before, but worth mentioning again...a friend of mine has just moved to the US. He tried to sell his house (in Coventry!) for what it was "worth".....£375k. Not surprisingly no bites. So he remortgages it got get cash to buy in Florida (another big bubble) and rents the place out for....wait for it....£1000 a month. Thats a gross yield of 3.2%. Dont know what you'd put aside for voids, insurance and maintenance, but I'd be surprised if you got 2% net. Assuming he's paying 6% to the bank that means he's actually losing £15k a year!!!

I tried to point this out to him, but apparently I'm just being a negative doom-monger.

J.

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An insignificant anecdotal from East Berkshire.

A 4 bed house up the road from me has been To Let for best part of a year now. I think they got tenants just after Christmas but they only stayed a few weeks. Maybe it's haunted! Or maybe the owner lived there to give it an airing. The To Let sign did go but appeared again after a few weeks.

You can rent 4 bed detached houses worth getting on for 400k for just over a grand a month (so the one above is expensive but they all seem to go on at this price - you have to haggle). Which is weird because the new build 2 bed flats that have sold for 200k or more over the last couple of years seem to rent for about £850 a month.

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Very similar situation with the Flat we rent.

Currently pay £1150 per month.

Last year it went on the market for £350k, sold for £288k.

Landlord pays over £1800 per month on the mortage (I know as he keeps missing the payment and the mortgage company keep writing to us!!)

Really can't see the decision making process he went through to take it on!

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An insignificant anecdotal from East Berkshire.

A 4 bed house up the road from me has been To Let for best part of a year now. I think they got tenants just after Christmas but they only stayed a few weeks. Maybe it's haunted! Or maybe the owner lived there to give it an airing. The To Let sign did go but appeared again after a few weeks.

You can rent 4 bed detached houses worth getting on for 400k for just over a grand a month (so the one above is expensive but they all seem to go on at this price - you have to haggle). Which is weird because the new build 2 bed flats that have sold for 200k or more over the last couple of years seem to rent for about £850 a month.

yes, there is a contraction of rental prices, much like of buying prices in property - seemingly caused principally by the over-valuation of these new flats.

Zone 2 London - we are looking at renting a new place - there is a huge premium on one bed flats (old or new). 3/4 bedroom houses, with gardens can sometimes be as little as 30% more.

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an example from my street in sheffield...

i currently pay £525 per month for a 2 bed terrace. there are THREE similar properties for rent at the moment, all of them in the range of £425 - £450, and all of them bought within the last few months.

price for a similar property on the street - £140 to £155 grand. :blink:

how the hell are they making any money? :unsure:

still, it bodes well for next february when i renegotiate our rent. i can smell a big discount... and some new carpets... :lol:

Edited by starship fighter

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an example from my street in sheffield...

i currently pay £525 per month for a 2 bed terrace. there are THREE similar properties for rent at the moment, all of them in the range of £425 - £450, and all of them bought within the last few months.

price for a similar property on the street - £140 to £155 grand. :blink:

how the hell are they making any money? :unsure:

still, it bodes well for next february when i renegotiate our rent. i can smell a big discount... and some new carpets... :lol:

It does seem that the bigger the property, the more ridiculously cheap it is to rent. I suspect that's because few people who move from property that size consider renting.

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It does seem that the bigger the property, the more ridiculously cheap it is to rent. I suspect that's because few people who move from property that size consider renting.

My in-laws are renting a substantial 5 bedroom house near the most expensive area of Surrey for 2400 a month. The owner bought it for 1.1 million 2 years ago. There are 6 acres of farmland with it that are being used for cows and the prospects for planning permission for anything else are 0.

Let' see, 1.1 million in a savings account at 5% would bring in about 55k p.a. At the rent of 2.4k p.m. that's well under 30k.

Capital appreciation?

Surrey Heath

£415,549 Q: -3.4% YoY:-1.5% 156

Sources:

England and Wales

Land Registry of England and Wales. The information above is based on figures provided by the Land Registry of England and Wales.

Figures for England and Wales are for the period April to June 2006.

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These things are far more dependent on location than most people think. The place that Nic's renting would probably yield more were it in a more desirable area. Notting Hill, Chelsea, Hampstead. Sure it may have cost more but there'd be a lot more tenants to rent it.

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Just another anecdote -- we live in Beckton, East London, and rent a 3-bed detached house (really 2-bed & a box room) for £1040 p.m., which is slightly pricey for the area. The owners put it on the market at £270,000 a few months ago, with no offers; now it's down to £260,000, and still no offers, but more viewings. I reckon they'll make a sale at £240,000 or so, giving the owners a nice £110,000 profit from when they bought it in 2000. Rental demand in Beckton (loads of Lithuanians have moved into Beckton in the last 3-4 years) is fairly steady because it is near the DLR and Canary Wharf, but there is apparently a price ceiling, as I rarely see anything above £1,200 except for giant 4-beds.

The maths here are just as wacky as most of the examples above. If they get it at £240,000, that's a 5.2% yield, or just above what they could get in money markets, without counting on voids, repairs, etc. And the capital gains possibilities appear slim, given that there is no interest in it above £260,000 despite being on the market for nearly 5 months. Who are the BTL lenders who green-light these purchases with their crap yields since IRs went back over 4%?

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These things are far more dependent on location than most people think. The place that Nic's renting would probably yield more were it in a more desirable area. Notting Hill, Chelsea, Hampstead. Sure it may have cost more but there'd be a lot more tenants to rent it.

I see why a property would cost more to rent in the desirable areas you mention, but not why the price/rent ratio would be different. Surely buyer demand exists in those areas as well as rental demand, pushing up prices and leaving yields poor?

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Great anecdotal evidence showing the stupidity of 'investors' - but when do these people finally wake-up and stampede out of the market causing it's crash?. From what I see, the mentality is to hang-on-in and weather the storm because in 20 years from now they will be far richer - they could well be right of course.

Absolutely. The house I gave as an example that has been empty for best part of a year - I keep looking at the To Let sign and think 'Why don't they just give up and sell it?'

I guess the answer is because the owner probably believes the house has gone up in value anything from 25k to 50k in the last year and is almost thinking 'who needs the hassle of tenants - if I get some at my price I get some - if I don't, who cares?'

For all I know the landlord might have owned it for 5 years and bought it for 200k - or 10 years and bought it for 100k - his mortgage might be very low compared to the consistent capital gains over the last 10 years.

I guess it would take a real change in sentiment - a realization that prices are going down - significantly and continously - for landlords to sell up in numbers that will have an effect on the market.

In the latest 2 bed new build development near me - the last flat has just been sold. It seems there is still a supply of BTL investors keeping the market afloat.

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Guildford is exactly the same as all of the other anecdotal examples/locations discussed in this thread - I rent a £215k flat for 700 p/m.

What intrigues me, is that many of my colleagues who are BTL landlords, or BTL fanatics write off my issue of them only recieving small yields by saying that it isn't much of a problem due to being able to write off most of the interest on their Interest Only BTL mortgage's on their tax returns. They therefore claim that in real terms, they aren't actually having to subsidise the IO mortgage much at all.

Anyone care to explain to me how valid this argument is?

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that's a typical argument used by the btl brigade..

you may claim for the interest part but not for the

capital repayments (if any).

..i wonder if they all realise the capital gain hit

that awaits them when they eventually sell ?

this subject has been discussed more extensively

on other threads.

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Of course the real issue is that rent is included in the CPI basket whereas mortgage costs are not. Thus as rent grows at wage costs only (generally) the true inflation in this country is 2-3 times the headline 2.5% rate.

Go figure !

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Another example.

Paying 1300pcm for 4 double bed double garage house in herts.

Both neighbours houses (one identical) have had recent valuations of £520K and £580K

Assuming the estate agents were on drugs and they are worth around £400K, IO at 5.5% is £1825

do the maths..

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An insignificant anecdotal from East Berkshire.

A 4 bed house up the road from me has been To Let for best part of a year now. I think they got tenants just after Christmas but they only stayed a few weeks. Maybe it's haunted! Or maybe the owner lived there to give it an airing. The To Let sign did go but appeared again after a few weeks.

You can rent 4 bed detached houses worth getting on for 400k for just over a grand a month (so the one above is expensive but they all seem to go on at this price - you have to haggle). Which is weird because the new build 2 bed flats that have sold for 200k or more over the last couple of years seem to rent for about £850 a month.

#

Rental yields do vary ...eg 4 or 5 bed detached house in rural Lincolnshire will yield 2.5-3% but similar where i live in the golden triangle is 5.5%....................

House price is about a third higher here but rent is more than double.

Edited by Michael

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  • 302 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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