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How Much Would Btls Be Willing To Lose?


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We've all heard how BTLs are "in it for the long term" and so will not ditch their investments in the face of poor returns/a falling housing market.

This decision is obviously affected by the costs and hassles of buying/selling property and tax positions etc.

But given it seems we NEED new BTLs to maintain the market at current levels I just wondered, as an investment, how this logic works?

Humour me... but suppose your bank said to you we have a new product to offer you. Unfortunately, it will lose you 2% a year (in real terms) each year for the first three years and then it will start to make money. How much, net of financing costs etc, would a BTL (or you) want to make in the following years to consider this a good investment today?

Given you can get 5%-plus (perhaps a +2-3% real return, depending on how you choose to measure inflation) on risk-free cash, presumably the answer is quite a bit greater than this... to compensate for the negative real returns of the past three years.

You also then want to be compensated for the costs/hassles of being a landlord (buying, furnishing, letting, maintaining etc), the interest rate risk, the level of gearing taken on etc.

Feel free to replace the -2% annual real return (a flat market rather than a falling one) and period of negative years with other numbers and reconsider the question.

I'm just trying to follow the logic of why someone will buy a BTL today, in the face of a likely flat/falling market (OK, there are occassional weirdos like dogbox who insist everything is going up still but few real world people), with yields at or below the cost of borrowing.

It seems to me you'd have to be confident of capital returns coming back soon or you really need to be in it for the LONG term before the risk is even worth bothering with.

Are there really an army of new BTLs coming to keep prices at current levels?

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I don't think there's an army of BTLs coming in but I don't see them leaving in droves either.

This is a new era in the housing market. Low nominal interest rates, multi properties - the whole thing lends itself to an easy to understand "get rich" scheme.

Early entrants got rich quick, later entrants will still believe they can get richer in the medium to longterm.

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Quite a persuasive argument LL.

May I respectfully ask for your justification on this:

Not saying its wrong, but would just like to understand why. It is not enough for existsing BTLs to hold and a trickle of FTBs to buy to maintain levels?

A fair question leemo.

The basis is that, as we have heard, FTBs are priced out of 90% of the country -although I suppose 10% could make up a trickle.

The problem then is that 90,000 mortgage applications per month are needed to maintain prices (roughly, these are the figures the BOE says are consistent with a stable market) and I don't think this trickle of FTBs willing and able to pay current prices will be sufficient to off-set the number of people who want/need to sell.

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I don't think there's an army of BTLs coming in but I don't see them leaving in droves either.

This is a new era in the housing market. Low nominal interest rates, multi properties - the whole thing lends itself to an easy to understand "get rich" scheme.

Early entrants got rich quick, later entrants will still believe they can get richer in the medium to longterm.

Isent that the definition of a pyramid scheme Steve ;)

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I don't think there's an army of BTLs coming in but I don't see them leaving in droves either.

This is a new era in the housing market. Low nominal interest rates, multi properties - the whole thing lends itself to an easy to understand "get rich" scheme.

Early entrants got rich quick, later entrants will still believe they can get richer in the medium to longterm.

Ignorant Steve,

I think we will have to wait and see whether BTLs leave or not (personally I suspect they will but this is far from certain).

I think low NOMINAL interest rates are a smokescreen (although some people will continue to be fooled by the "money illusion" effect) and multi-properties do not turn a bad investment good.

I agree early entrants have done well (and therefore may or may not decide to take their profits) but I'm really not at all sure later entrants will still believe they can get richer in the medium to longer term.

I actually think the love of BTL will recede once people acknowledge the easy money has gone (in the same way that you can get richer over the medium to long-term by spending your weekends as a plumber but most people would rather go to the pub).

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Wurzel - no I don't think it's a pyramid scheme.

Strip the BTL argument down to basics:

1) Put down some money as a deposit

2) Get a tenant to cover your costs (but don't think too closely as to how that might go wrong)

3) Clear the mortgage

4) How much the value of your, now 100% owned, property exceeds the original deposit is the profit.

5) Choose to sell or carry on renting.

It's a no-brainer surely!

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But I thought it was more like this these days:

1) Put down some money as a deposit

2) HOPEFULLY get a tenant to cover your costs (but don't think too closely as to how that might go wrong)

3) DON'T EVEN WORRY ABOUT TRYING TO clear the mortgage (interest-only is the way forward)

4) How much the value of your property exceeds the original DEBT is the profit.

5) Choose to sell or carry on renting.

Don't get me wrong, I'm not saying that if you buy today you will not make a profit over 25 years... I just not sure it will be that impressive.

Perhaps becoming a plumber during the weekends will make you more?

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Wurzel - no I don't think it's a pyramid scheme.

Strip the BTL argument down to basics:

1) Put down some money as a deposit

2) Get a tenant to cover your costs (but don't think too closely as to how that might go wrong)

3) Clear the mortgage

4) How much the value of your, now 100% owned, property exceeds the original deposit is the profit.

5) Choose to sell or carry on renting.

It's a no-brainer surely!

How is point 3 supposed to happen?? Are the costs a tenant is covering include a repayment mortgage - This is a 25 year scenario.

I thought that most BTL use interest only mortgages, so again, how is 3 to occur??

Point 2 is rather a nice assumption, given the yields that are available at present, especially if the rent is to cover a repayment mortgage.

A bit too simplistic perhaps??

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Guest Charlie The Tramp
We've all heard how BTLs are "in it for the long term" and so will not ditch their investments in the face of poor returns/a falling housing market.

In the early eighties the great Margaret Thatcher created the Yuppie, armed them with a filofax and instructed them to visit the newly opened wine bars in the cities to spread the good news to invest in the stock market. They had a language of their own with their Ya,s and you know where I`m coming from. Had names like Dominic, Justin, Nigel, Tristan, Penelope, Amelia, and Sophie. They boasted among each other about their portfolios talking loudly so everyone could hear them. In ten years they claimed they would be millionaires.

On October 19th 1987 there was an explosion and in a puff of smoke they were gone.

The yuppie faded into history and today has been reborn as the amateur BTL investor who I would say is now the majority.

TTRTR, KOTC, BBB, and the serious investors, this does not apply to you. :P

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In the early eighties the great Margaret Thatcher created the Yuppie, armed them with a filofax and instructed them to visit the newly opened wine bars in the cities to spread the good news to invest in the stock market. They had a language of their own with their Ya,s and you know where I`m coming from. Had names like Dominic, Justin, Nigel, Tristan, Penelope, Amelia, and Sophie. They boasted among each other about their portfolios talking loudly so everyone could hear them. In ten years they claimed they would be millionaires.

On October 19th 1987 there was an explosion and in a puff of smoke they were gone.

The yuppie faded into history and today has been reborn as the amateur BTL investor who I would say is now the majority.

TTRTR, KOTC, BBB, and the serious investors, this does not apply to you.  :P

What will be the next investment band waggon?

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In the early eighties the great Margaret Thatcher created the Yuppie, armed them with a filofax and instructed them to visit the newly opened wine bars in the cities to spread the good news to invest in the stock market. They had a language of their own with their Ya,s and you know where I`m coming from. Had names like Dominic, Justin, Nigel, Tristan, Penelope, Amelia, and Sophie. They boasted among each other about their portfolios talking loudly so everyone could hear them. In ten years they claimed they would be millionaires.

On October 19th 1987 there was an explosion and in a puff of smoke they were gone.

The yuppie faded into history and today has been reborn as the amateur BTL investor who I would say is now the majority.

TTRTR, KOTC, BBB, and the serious investors, this does not apply to you.  :P

Charlie, there's a customer of mine that I visit a few times a year. He used to maintain banking systems (IT, I guess) in the city back then. Just to cheer myself up I get him to tell me all about that time. He gets this dreamy look across his face and delights in telling me how bad it got. It's one of his best annecdotes. It starts off with all the Nigels and Tristans in their red braces and their public school accents. Guffawing loudly at how much money they made with a single call (or mouse click?).

Apparently there was even a shortage of particular Porsche models at that time. It was back in the days of 'Loadsa money' and all that.

He builds the story up nicely before the nice juicy ending, how it all went tits up and the keys to the Porsche were handed back....

Smashing fella this customer of mine. He always builds me up and tells me how it all looks very similar today. Tells me to just bide my time.... :D

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Here's a thought: If there is a crash in house prices, say 30% or more, what will happen to 'Mr Longterm' landlord?

Suppose he's now in negative equity and he cannot sell.

Now suppose me, as his tennant, sees a nice 30% drop and hand my notice in to the landlord and buy my first home.

Will I be the only person leaving rented? Doubt it. In fact I could see a very significant proportion of landlords with empty flats and nobody to rent them to and unable to sell them either....

Just a theory. And it does rely on an HPC. Feel free to put the boot into it :D

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The conventional "wisdom" ( :rolleyes: ) among landlords is that when house prices fall, rents rise, as people put off buying houses to wait for the falls to stop. HOWEVER, if prices fall sufficiently that renters can afford to become owners, rents AND house prices will fall! A double whammy!! :lol::lol::lol::lol::lol::lol::lol:

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I think low NOMINAL interest rates are a smokescreen (although some people will continue to be fooled by the "money illusion" effect)

I think it is your good self who is under the illusion here mind. If you take the mean IR's in the 7 years leading up to the 90's crash, and the mean IR's of the last seven years and adjust them both for inflation (the mean of the relevant years in question) then in real terms todays IR's averaged out still work out almost 140% cheaper than the the years leading up to the last crash.

There is no illusion, IR's are hugely cheaper whether real or nominal.

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I think it is your good self who is under the illusion here mind. If you take the mean IR's in the 7 years leading up to the 90's crash, and the mean IR's of the last seven years and adjust them both for inflation (the mean of the relevant years in question) then in real terms todays IR's averaged out still work out almost 140% cheaper than the the years leading up to the last crash.

          There is no illusion, IR's are hugely cheaper whether real or nominal.

KOTC,

I'm happy that you want to talk about REAL interest rates rather than nominal interest rates. Now are those RPI, RPIX or what inflation figures you are adjusting?

I'm not sure that your method of averaging is the right way to consider real returns but, more importantly, why such a selective analysis period?

Why would you not look at long-term historic figures rather than focus on two selective seven-year periods that coincide with major housing bull runs?

I would agree real interest rates were very low in the last few years (before Merv put rates up by 1.25%) but I would argue this had more to do with an over-reaction to fears relating to 9/11 rather than a long-term huge reduction in the real interest rate.

Some would even argue this temporary, artifically low interest rate environment drove the BTL bubble of recent years and led the MPC to force rates up by 35% or so (to fight the monster it awoke) with the possibility of more to come.

Still... interesting to see you didn't address my question. Strangely, none of the bulls have addressed the question. Is that because the answer is not very palatable?

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KOTC,

I'm happy that you want to talk about REAL interest rates rather than nominal interest rates. Now are those RPI, RPIX or what inflation figures you are adjusting?

I'm not sure that your method of averaging is the right way to consider real returns but, more importantly, why such a selective analysis period?

Why would you not look at long-term historic figures rather than focus on two selective seven-year periods that coincide with major housing bull runs?

I would agree real interest rates were very low in the last few years (before Merv put rates up by 1.25%) but I would argue this had more to do with an over-reaction to fears relating to 9/11 rather than a long-term huge reduction in the real interest rate.

Some would even argue this temporary, artifically low interest rate environment drove the BTL bubble of recent years and led the MPC to force rates up by 35% or so (to fight the monster it awoke) with the possibility of more to come.

Still... interesting to see you didn't address my question. Strangely, none of the bulls have addressed the question. Is that because the answer is not very palatable?

The figures are RPI adjusted. It takes the means as it shows a truer picture of the times. If you take one month in isolation, that is all it is, one month in isolation. For example 'The new paradigmn' theory isn't about one brief moment in time, it is about a new era, with a new set of economic conditions.

By taking the mean it is also fairer on you bears, as the very late 80's saw IR's hit almost 15%, however this was for a very short period of time, so again the mean evens the whole thing out. You say why look at 7 years? well the economic cycles have always more or less followed seven year cycles. However my point is that with this cycle, we are not even close to where rates were in the last peak. no where near, either nominal or real.

I'll dig up the full workings of this if you want to see exactly what I mean in black and white?

The answer to your question.

Yes BTL's will continue to buy, anecdotally I am seeing a slight surge again, in recent weeks.However don't take my word on it try one of your own

http://www.housepricecrash.co.uk/forum/ind...?showtopic=5476

It is lower priced properties that are being bought (sub 120k) however this is the only area BTL's need to be active in, owner occupiers can take care of the rest of the market.In London more expensive properties work as BTL a la TTRTR's sharers.

I honestly think that fundamentally FTB'ers are no longer required to turn the market over. I know that comment may infuriate many of ou FTB'ers , however that is the reality.I know that many of you disregard Sipps, however you'd only need a 40 or 50k pension pot to get involved in this. Again this will all add fuel to the bottom end of the market.As with a fire, it's only the bottom you need to put the fuel onto. Every man and their dog wants into BTL still with the likes of you chaps sitting on the sidelines renting, you only add more fuel to the fire yourselves.

I can't believe you've 'got me into' writing reams on here, you've done it so you can call me a hypocrite haven't you?

KOTC.

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I don't think there's an army of BTLs coming in but I don't see them leaving in droves either.

This is a new era in the housing market. Low nominal interest rates, multi properties - the whole thing lends itself to an easy to understand "get rich" scheme.

Early entrants got rich quick, later entrants will still believe they can get richer in the medium to longterm.

Well said, you just explained how many markets outside the UK worked over the past decade whilst the UK enjoyed a boom that can now settle into an enjoyable ride.

Research the housing act 1988 & 1996 if you don't know what I mean.

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Well said, you just explained how many markets outside the UK worked over the past decade whilst the UK enjoyed a boom that can now settle into an enjoyable ride.

Research the housing act 1988 & 1996 if you don't know what I mean.

Yes I will enjoy watching you take that ride trigger(oops i mean ttwtt) :lol:

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I think it is your good self who is under the illusion here mind. If you take the mean IR's in the 7 years leading up to the 90's crash, and the mean IR's of the last seven years and adjust them both for inflation (the mean of the relevant years in question) then in real terms todays IR's averaged out still work out almost 140% cheaper than the the years leading up to the last crash.

          There is no illusion, IR's are hugely cheaper whether real or nominal.

Also if you take the average house price over those same periods they are currently 125% more expensive. Whoops...nearly wiped out all that 140%.

So what with the record levels of other debt people are also holding we are in fact worse off than before.

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