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http://www.enhr2007rotterdam.nl/documents/...anlon_Lunde.pdf

In 2004/05, reflecting official concern with the spread of interest-only mortgages in the UK,

the Survey of English Housing included a question about how interest-only borrowers

planned to pay off their mortgage. The results are shown in Table 6. A worryingly high

proportion—more than one third—planned to repay the principal by selling the mortgaged

dwelling; a further 5% did not know how they would repay.

The UK’s Financial Services Authority commissioned more detailed research in this area,

which was published in December 2006. The FSA research set out to determine who the

interest-only borrowers were, how they intended to repay their loans (including how firm their

intentions were), and how well they understood interest-only mortgages. A survey was

conducted of 857 recent interest-only borrowers (that is, borrowers for whom banks had no

record of a repayment vehicle). According to this research a rather smaller percentage of

borrowers planned to sell the mortgaged house to pay off the mortgage (18%, in contrast to

the 36% found by the Survey of English Housing); rather, the concern here was that some

borrowers had no plans, or only very vague plans, for paying off the principal. (FSA, 2006)

Although most borrowers had a good understanding of what an interest-only mortgage was

and the risks involved, ‘a significant minority had no idea or definite plans on how they would

pay back the capital they borrowed. A large proportion of these borrowers admitted that

dealing with finance was best left to the experts, and many had taken an interest-only

mortgage because it was recommended to them by a professional.’ (FSA, 2006, p. 2) Of

those who did have a plan for paying back the mortgage ‘in a number of cases the credibility

of this repayment strategy may be open to question.’ Only 22% had formal arrangements in

place to repay the principal, while 65% had other plans, including selling property or

switching to a repayment mortgage. Some 13% had a ‘rough idea’ or ‘no idea’ of how they

would repay the loan. Such borrowers tended to be in lower social classes and more reliant

on professional advisers. (FSA, 2006)

Most of the borrowers surveyed had remortgaged to an interest-only loan (52%); 29% were

moving home and only 12% were first-time buyers. The main reason borrowers chose such

loans was because the monthly payments were low.

Besides taking advantage of lower interest rates, owner-occupiers may refinance in order to

withdraw equity. Although formal equity-release programmes do exist in some countries

(notably the UK), more common methods of equity release are remortgaging for an increased

amount without moving home, or taking out a second secured loan. In the UK, for example,

31% of all households with mortgages have either remortgaged for a higher amount or taken a

further advance (Survey of English Housing, 2003/04). This releases funds that can be used

at the owner-occupier’s discretion. In an environment of falling interest rates, it may even be

possible to remortgage for a higher amount, but at a lower interest rate, and pay no more in

monthly payments.

Edited by alabala

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http://www.enhr2007rotterdam.nl/documents/...er_Andersen.pdf

Economic strategies for private landlords

Who is investing in private renting and

why and how are they doing it?

Experience from Denmark

“Although the sector has grown significantly in the last decade, it is still a ‘cottage

industry’ owned and managed by small scale individual landlords, few of whom have

any qualifications in property, let alone in the letting business. Very few can either

achieve economics of scale in managing their holdings or manage market risk through

a geographically and otherwise diversified portfolio”

Therefore it is an experience from many countries – especially

Britain - that professional investors often tend to avoid this sector. It could be expected that the

strict Danish rent control to a greater extent would deter professional investors to enter the sector,

but this does not seem to be the case. The composition of landlords in Denmark does not deviate

markedly from landlords in many other countries and compared to Britain, where there is no rent

control, there is a greater share of private rented dwellings owned by professional landlords

(business landlords) in Denmark. It has not been the subject of this article to identify the reasons for

this contradiction, but there could be two explanations. The first is, that returns on Danish properties

in the private rented sector have not been so bad – partly because of increases in property values

and possibilities to avoid the regulation by investing in renovation of dwellings -; the second that

rent control has resulted in a very stable surplus demand for private renting in most of the country,

which has diminished economic risks.

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http://www.threshold.ie/documents/Investme...mpleteFINAL.pdf

Data about the private rented sector is extremely limited. What is available suggests that capital gains on

investment from residential rental properties are competitive but long-term income returns are low. It is the

flow of income returns that provides the benchmark for investment decisions by financial institutions.

Many individual investors are in traditional employment, such as policeman and teachers, and have borrowed

against the large increases in the value of their own property. One to three bed apartment properties are the

most common form of investment. The large increase in demand for investment properties has fuelled rising

prices and forced many who would normally have bought a property into rented accommodation.

This growth was subsequently fuelled by rapidly rising house prices, leading to

investors buying property primarily for capital appreciation. Investments are highly geared: landlords have

received around 80% mortgages and so needed to put in only 20% equity. Often rents are not sufficient to

cover mortgage and letting costs and investments rely on capital growth for long term returns.

Some interviewees argued that many people in Ireland with spare money to invest put it into property and

were not very price sensitive when acquiring properties. This has led to excessive demand. Private

investors have been buying everything from apartment dwellings to standard semi-detached properties in

suburbia and letting them. Investors were thus crowding out first time buyers and were hence, and

ironically, securing tenants by effectively making property unaffordable for them to purchase.

Concern about the implications of these rapidly rising house prices for owner-occupiers (created as much by

supply side constraints as by investor demand) and also for the state of the construction industry has

dominated recent policy decisions. There has in particular been concern about competition between ‘one

off’ purchases by individual investors and first time buyers with private investors crowded out traditional

owner-occupiers. It was a market in a booming economy with a tightly constrained supply. There has been

a willingness on the part of the government to use tax measures to shape the market. In the absence of

monetary control, interviewees pointed out that fiscal measures are the main instrument available for the

Irish government to influence the market.

Mortgage data indicate that investors appear to be ‘ordinary’ people in ‘ordinary’ jobs. Evidence in early

2002 suggested that landlords were then able to get about 80% mortgage on valuation, so needed to put in

only 20% as equity (sometimes 90% loans were available for the first investment property). This does not

necessarily mean landlords have to find this equity as many recent entrants to the investor market are using

increases in their own home to finance a mortgage on a second (investment) property. This means that

new landlords (and existing ones wanting to enlarge their portfolio) do not need additional equity to become

an investor; they can lever in the equity from their own house. But many investors will use private savings

as equity, typically, €20,000 to pay for stamp duty and to undertake refurbishment. Examples quoted

included policemen, teachers, and bank officials all investing in properties based on the value of their first

houses and the capital rise expected from their investments.

Given the extent of capital appreciation, individual

investors are not as concerned with income growth as financial institutions, provided that rents cover interest

and other running costs. Hence, private investors may ‘crowd out’ equity investment from financial institutions,

since they are not seeking a target income or total return on their investments.

We can say with confidence that:

• the PRS has grown rapidly in recent years, spurred originally by tax incentives and more recently by

capital growth prospects and low interest rates;

• the vast majority of PRS dwellings are owned by individual landlords, seeking capital gains; debt

funding is readily available with high loan to value ratios and competitive interest rates; overseas lenders

are active in the lending market; this ‘buy to let’ market is hence highly geared;

• most of the new supply is targeted at the middle and upper end of the lettings market; there is some

evidence that supply at the lower end has fallen, and that rising rents on this limited (if not diminished)

supply have led to increased rent subsidies for low income tenants;

• although financial institutions are very active in the debt market, there is no evidence of equity

investment by them, nor any immediate prospects for it; some of the reasons for this are the perceived

high costs (and risk to reputation) of both entering the market (in terms of transactions costs) and of

management and maintenance costs, both compared with commercial property; the lack of tax

transparent investment vehicles may be a factor deterring indirect investment by non tax paying

institutions who do not want to own and manage residential lettings directly themselves;

• there is even less likelihood that institutions would wish to be involved directly in financing landlords in

the low income sub-sector, for a combination of return and reputation risk; providing subsidies to

enhance returns is unlikely to work as institutions look unfavourably upon like investments where the

returns are dependent on tax breaks; tax transparency however is desired;

Because the quantitative data are poor we can say with less confidence that:

• income returns appear to be low, by comparison with other European, including UK, residential markets;

this appears to be a product of the high levels of capital appreciation, as a result of which total returns are

equivalent to returns from both commercial property in Ireland and residential lettings elsewhere in Europe;

the evidence suggests that initial income returns may be unattractive to potential new corporate

landlords and to equity investment by financial institutions; this barrier is significant in the light of the

risk and liquidity characteristics of residential property and of its novelty; all these latter factors imply a

high ‘hurdle’ rate of return for new corporate investors; whilst this might fall with increasing experience

and familiarity with the market, it suggests that there are few, if any, immediate prospects of equity

investment in the PRS by financial institutions;

by contrast, the environment is conducive to small scale and individual investors, seeking capital gains

and willing to manage property themselves; they may be content with the low net income returns,

provided rents cover debt charges and other running costs, because of the long term prospects of capital

growth and hence high total returns; as there are few, if any, investment vehicles that enable ‘retail’

investors to invest in residential property, becoming a small scale landlord is the best way to invest;

• as these individual landlords are ‘content’ with rents that cover costs, this investment pattern may

‘crowd out’ large scale equity investment from financial institutions that are seeking a higher initial

income return.

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http://enhr2006-ljubljana.uirs.si/publish/W02_Smith.pdf

Third, and crucially, our analysis suggests that the balance of spend of MEW between

homes and on other things may be changing. This trend is best-illustrated across the

13 sweeps of the BHPS shown in figure 1. While 65 per cent households spent their

MEW on home improvements in 1991, just 44 per cent were doing so by 2003. The

proportion of those spending on home extensions also dropped by a nearly third, from

30 per cent to 22 per cent in that period, while the tendency to spend on cars, other

consumer goods and other specified (but unrecoverable) reasons all increased. And

although the numbers are small, a comparison of the five year periods 1994-8 and

1999-2003, shows that while households only reinvesting in the home doubled, those

only spending on other things increased threefold.

MEW is usually, and surprisingly uncritically, presumed to be net of reinvestment,

yet the truth is that not much is known about the way mortgage holders weigh the lure

of the high street against the practicalities of conserving home assets (or spending

them in other ways).

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http://enhr2006-ljubljana.uirs.si/publish/...akili%20Zad.pdf

In Italy, one in every five dwellings is vacant, whereas in Malta and Spain the degree of vacancies is

15%. In Portugal and Greece, the vacancy rate is respectively 11% and 9%, also higher than in most

other European countries. For four of the five Southern European countries, the second homes are

not included in the definition of a vacant dwelling.

As far as this is concerned, two countries particularly stand out: Spain and Malta. These two

countries are characterized by both the highest vacancy rates and the highest increase in house

prices! This firmly contradicts with what we would expect on the basis of economic theory and

strongly suggest that most Spanish and Maltese vacant dwellings are not available for the housing

market. Rather, they seem to be kept aside for some reason or another

Based on the figures that were presented in this section, the following conclusions can be drawn.

First of all, it is clear that within the European Union, the highest vacancy rates can be found in the

Southern European EU countries: Greece, Italy, Portugal, Spain and Malta. Furthermore, contrary to

what one would expect on the basis of economic theory, these high Southern European vacancy

rates go together with substantial increases in house prices, a high rate of housing production and a

high degree of home ownership. Especially in Spain and Malta, the interrelationship between these

four variables is very strong.

Thus, the housing markets of the Mediterranean countries seem to be governed by a different logic;

they don’t follow the principles of ‘normal’ economic theory. In the rest of this paper, we try to

explain this Mediterranean paradox.

The profitability of investments in homes largely depends on the development of house prices. In

both Malta and Spain, these developments have been very positive. House prices have been rising in

Malta since anybody remembers. Since 1987, the average price for housing has been rising by on

average 10.3 percent annually. In 1987, the average price of a flat was Lm16,354 (approximately €

40,000 ) whereas it was LM85,376 (approximately € 190,000) in 2004; almost 5 times as much!

(Falzon et al, 2005, p.64). In Spain, the price developments are rather similar. Between 1995 and

2005, the average square meter price for housing has risen from € 662 in 1995 till € 1824 in 2005

(www.mviv.es). Although there are some economic and demographic reasons for this price

explosion (rather strong economic growth, low interest rates, deregulation of the mortgage market),

many analysts fear that the Spanish housing market is built on a bubble, caused by speculation

(Garcia-Montalvo, 2003). This is best illustrated by the extremely high housing costs that Spanish

households have to bear. Spanish house-buyers that bought a house in 2004 on average needed 8 net

yearly salaries to carry out this purchase. This results in an average mortgage repayment of 55% of

the net monthly household income! (Europa Press, 2005).

As long as the house prices keep on rising in the pace described above, there is no urgent need for

Maltese or Spanish owners of vacant dwellings to let or to sell these dwellings. After all, in the

current housing market, only possessing a dwelling is enough to yield an attractive (although

fictitious as long as the dwelling is not sold) return.

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http://enhr2006-ljubljana.uirs.si/publish/W24_Paris.pdf

Second homes in the UK and Ireland

Good data on second home ownership in England are collected biannually in the

Survey of English Housing (SEH), including both where second home owners live

and also where their second homes are located. The SEH shows that the number of

households with second homes increased from 329,000 in 1994/95 to 502,000 in

2003/04. Most second homes were in England, especially in the South West,

South East and London. Most households with second homes had household

reference persons in older age groups (45<), mid to high household incomes, and

their second homes were for holiday use, future retirement and/or investment.

We have to use the census and house condition surveys for data on second homes

and vacant dwellings in other UK jurisdictions. On that basis, we estimate there

were about 5,000 second homes in NI in 2001, where house condition survey data

showed rapid growth between 1996 and 2001: 65% overall equal to about 5% of

total stock growth. There are no official statistics on second homes in the RoI as

the census only covers occupied dwellings. Recent estimates suggest that second

homes and other vacant dwellings accounted for 30% of all new housing between

1996 and 2002, with more in areas of high demand along the ‘Atlantic seaboard’

(McCarthy et al, 2003; FitzGerald, 2004) with second homes representing an

increasing share of new housing construction (NESC, 2004).

In areas where the inflation of house prices has made it impossible for many

local people to obtain their own homes, the sight of outsiders purchasing

houses when they already have one elsewhere can be an affront to local

dignity…it is not surprising that the local population becomes angered. Their

children have little prospect of finding any housing in their village when they

wish to set up their own homes. The locals must leave, while houses in their

village remain locked and empty for months at a time (Newby, 1979: 176-177).

In other cases, common in Britain from the 1960s through 1980s, second home

cycles began with the purchase of abandoned or dilapidated dwellings in the

countryside and moved on through purchase of existing occupied dwellings

coming on the market, often in places where new building was constrained by

planning regulations. Coppock (1977c) argued that many Welsh houses acquired

as second homes in the 1960s were old and unmodernised in areas of

depopulation. Although their new owners restored vacant or derelict structures,

they were vilified by militant locals. In 2006, however, such debates are

anachronistic: few cheap abandoned dwellings remain to be converted as most

houses in the Welsh countryside are priced on the basis of hugely inflated

expectations.

The property sections of national UK newspapers reveal rampant growth in

overseas second home ownership. In September 2005, for example, a supplement2

in The Times featured famous sporting personalities extolling the virtues of

overseas property investment. Dozens of advertisements proclaim the virtues of a

staggering array of opportunities in Cyprus, France, Spain, Italy and South Africa,

as well as ‘superb value tropical holiday homes’ in Thailand, luxury apartments in

Dubai and Kuala Lumpur, ‘perfect sea views’ in Bulgaria, ‘superb chalet

residences’ in Switzerland and ‘five star relaxation’ in a resort development in

Newfoundland, Canada. Columnist Sarah Marks (2005: 30) reported that

‘dedicated amateurs’ search the globe for investment properties:

Five years ago only professionals were interested in overseas property

investment. Then the toe-dipping amateurs arrived on the scene(…)today a new

breed is buying not just one property but building sizeable foreign holdings.

Asia, the Caribbean, South America, the former communist states – it does not

matter how far away it is as long as the investment logic is sound’ (op. cit).

to such property investment. Issues of equity and choice, however, come into

sharper focus as the growth of transnational second home ownerships brings

greater differentials of incomes and wealth between ‘locals’ and second home

owners (Smith & Duffy, 2003). Citizens of different countries have hugely

different capacities to be mobile, both in terms of the financial costs of mobility

and differential rights to mobility (relating to national jurisdictions etc). In some

countries it may be easier for non-nationals to buy a second home, to come and go

more freely than nationals and to be regulated by different rules and legislation

(legal access to alcohol, tax free shopping opportunities etc). Some countries,

actively seek transnational investment by second home purchasers, for example

Malaysia and Dubai, but other countries, notably Australia, impose barriers to

second home ownership by non-citizens

The extent to which second home and holiday accommodation developments are

sustainable in the longer term will be affected by many factors, including taxation

policies and practices of national governments and multi-national institutions,

especially the EU, as well as fuel costs, especially aviation fuel. There are also

question marks over the longer-term sustainability of local housing markets with

high proportions of second homes. The 2005 annual RICS review of European

housing markets for the first time included a chapter on ‘the second home boom’

and discussed the growth and impact of second home ownership across Europe.

This noted the traditions of second home ownership in some countries and

examined rapid growth of a possible ‘holiday home bubble’ bursting in the event

of any economic downturn.

The RICS review suggested (2005: 14) that local markets with high proportions of

second homes may be much more volatile than ‘primary’ housing markets for four

reasons: ‘demand is more discretionary than primary home markets’; lenders may

take a tougher line on defaults; ‘there is no fallback demand’; and, ‘the supply

side is more likely to transmit volatility’. The report did not predict major

problems ahead in second homes markets but warned (p.35) that ‘the longer the

second homes markets boom, the greater is the chance that shocks will lead to

serious short-term declines’.

The idea that owning a second home is an investment recurs strongly across the

literature. As well, however, the literature also identifies second homes as items of

leisure consumption. Thus second homes are distinctive leisure/consumption

items: house prices usually appreciate, albeit largely as a function of increased

land values, whereas most consumption goods depreciate in value (caravans,

boats, RVs etc). There are no meaningful barriers between ‘housing’ and ‘leisure’

markets, apart from regulatory requirements or contractual arrangements (either or

both of which may frequently be ignored in practice). It is a matter of personal

choice, albeit partly influenced by legal and regulatory cvonditions, whether and

when a particular dwelling is used as a second home for personal consumption,

and/or to let on a commercial basis to other leisure users (‘on holiday’) or private

tenants as an investment. Any appreciation in value depends on overall market

trends, not whether the dwelling is conceptualised as a second home for personal

consumption or as an investment for financial gain.

Many ‘boosters’ of second home sales claim that such investments will increase in

value well above the rate of inflation, though such claims may be based more in

wishful thinking or salespersons’ hype than sound business planning. Media and

other commentators often suggest that there is a growing preference for

investment in property (buy-to-let private rental housing, holiday homes to let and

second homes) rather than pensions or the stock market (e.g. Francis, 2006b).

Such investment has increasingly taken a transnational dimension, fuelled by the

growth of housing assets and disposable incomes in rich countries. Greater levels

of mobility, both personal and of financial assets, are resulting in massive

expansion of leisure-related investment and consumption (Forrest, 2005). Smith

(2005) recently argued that housing wealth ‘is no longer a fixed asset’ but ‘is

mobile in all kinds of ways’ (p. 9). She suggested that low interest rates and the

low cost of secured loans combined to make borrowing against the primary

residence an easy and highly cost-effective way of funding spending. The

available funds, moreover, appear to be massive: ‘With estimates of unmortgaged

housing equity now standing at £2.2 trillion, this is a significant resource’ (loc.

cit). She suggested that equity withdrawal may be routinely utilised as ‘a part of

households’ financial management’, although she emphasized that very little was

known about these processes.

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http://borg.hi.is/enhr2005iceland/ppr/Ronald.pdf

Property, Consumption and Investment

“A central goal has been to discredit the social democratic concept of universal

citizenship rights, guaranteed and enforced through public agencies and to replace it

with a concept of citizenship rights achieved through property ownership and

participation in markets.”

“There is a popular saying that house prices are like an accelerating train – you

should get on the train as soon as possible otherwise you will never make it… In this

situation the home ownership ethos is cultivated in which people believe that they

should purchase their home as soon as possible, or invest in housing as much as

possible. Everyone believes that a fortune can be made as long as he or she can

afford to buy a flat” (Chan 2000:34).

“There is, however, a strong belief that a mortgage is buying something in a way that

rental payments are not. Even in negative equity there is an ownership goal, a debt is

hopefully being reduced and at the end of the day there will be something to show for

it”

“The general message…was that respondents still aspired to owning their own home

but that these aspirations were no longer so closely associated with financial

gain…The notion of developing a housing career, of accumulating equity and

improving one’s dwelling, also seemed to have diminished with households expecting

to make long-term housing choices involving manageable financial commitment”

For Japanese homeowners, like British ones, the main advantage, or reason given in the

majority of cases for home purchase was financial. Money spent on rent was seen as

wasted, and discourses tended to fit with the wasted money arguments identified by

Gurney (1999a) and Richards (1990). Housing loan repayments of the other hand were

a means of accumulation of wealth or asset building. Interviewees were very explicit

about such motivations.

No matter what happens in the future, we will always have a place to live, because we

own rather than rent. We can always use the house or convert it into cash if we need

to. The house is the most valuable asset and so it is very important how we use and

manage it (F 57).

Do you think this house has been a good investment?

I don’t think so at all. We knew at the time we bought this place that the prices were

going down. I don’t really expect them to recover too much either, but it is quite

important to maximize the performance of this house. You might feel that it is better to

own a house than renting even though the value has gone down (M 37).

How about your home, has it been a good investment?

Not really. Maybe a couple of years ago. I don’t really think of this place as an

investment. I am not interested in investments. This place is bought for living in, that’s

why we are not worrying about this place as an investment (F 36).

Investment and speculation in Hong Kong

appears driven by the volatility of the housing market and the activity of developers,

whereas in Britain the historical pattern of boom and bust has embedded faith in an

inevitability of house price re-inflation and housing as a long term investment.

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