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U.K. Buy-to-Rent Market

May Hit Rough Patch

Increase in Interest Rates

And Drop in House Prices

Could Hurt New Investors

February 25, 2005

Financial markets are getting nervous about an end to so-called carry trades. So, too, should investors in the U.K.'s buy-to-rent property market. They have engaged in the mother of all carry trades.

Imagine you paid £200,000, or about €290,000 ($382,328), for a London house in early 2003, borrowing 80% of the property's value. Suppose the house now is valued at £250,000. The £40,000 of equity you injected now would be worth £90,000 -- a 50% annualized capital gain.

Furthermore, you might have paid a 4.75% interest rate on your mortgage. But you could have achieved a rental yield of perhaps 5.5% of the property value, after deducting costs. The difference would be valued at £6,000 a year. This is an additional 15%, increasing your total return to 65%.

So much for the good old days. For entrants to the market, the math no longer looks so enticing. Capital appreciation appears to have ended. But the earlier rise in prices has depressed net yields to more like 4.5%. And rising interest rates have pushed up mortgage rates to about 5.75%. On this basis, somebody buying a £250,000 London house to rent on an 80% mortgage today actually would lose £250 of cash a year.

OK, this may be small change. But what if interest rates rose by another half a percentage point? The hapless buy-to-rent investor then would be losing £1,250 a year.

This assumes house prices don't actually fall. But suppose they drop by 10%, taking a house that was valued at £250,000 down to £225,000. For an investor who bought at the higher price on an 80% mortgage, that would cut his £50,000 of equity in half.

Of course, for an investor who got in at £200,000 two years ago, things wouldn't look so bad. His £40,000 of equity still would be worth £65,000. Moreover, he wouldn't be suffering a cash-flow loss yet because his mortgage would be lower than a more recent entrant to the game.

This analysis is a tad simplistic. It assumes rental yields don't respond to price falls. In reality, they would rise. Furthermore, it uses London prices and yields. U.K.-wide figures are kinder to buy-to-rent investors.

But the wider message is clear. Buy-to-rent has become a misnomer. Investors really have been buying for capital appreciation. But if interest rates rise and house prices fall now, the Johnny-come-lately buy-to-rent investor will be taken to the cleaners.

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But the wider message is clear. Buy-to-rent has become a misnomer. Investors really have been buying for capital appreciation.

This gets it absolutely spot on. Confirms succinctly the motives of 90% of BTL's. They are not interested in providing property for rent. That is simply a necessary by-product of waiting (now in vain) for capital appreciation.

This quote should be a compulsory banner headline on all newspapers spreading rubbish about property for the last two years.

VP

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Guest prudence

U.K. Buy-to-Rent Market

May Hit Rough Patch

Increase in Interest Rates

And Drop in House Prices

Could Hurt New Investors

February 25, 2005

Furthermore, you might have paid a 4.75% interest rate on your mortgage. But you could have achieved a rental yield of perhaps 5.5% of the property value, after deducting costs. The difference would be valued at £6,000 a year. This is an additional 15%, increasing your total return to 65%.

I think it highly questionable that those who bought btls in the last 2 years are achieving a net rental yield of 5.5 percent. Certainly in London it is only in the last few months that even gross yield would have risen to that amount

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Very good article, and true hp speculators are effectively taking a highly leveraged IR trade.

Short a bond ( mortgage )

Long a bond ( offsetting rent )

Make a small carry profit on the offset of rent v. mortage (until rates started to rise ) and pocket any appreciation in the value of the Long Bond position ( the property price ) versus the Short Bond ( the mortgage, which has a fixed value ).

Great trade so long as rates were stable/ falling and hps rising, not so good now. Oh and don't forget the credit risk they're taking on if that tenant stops paying then you have to cover those offsetting payments to the bank.

Undoubtedly this trade is what people have been doing on a massive scale with there 'property millionaire' portfolios......question is do they realise what they have been doing... :ph34r:

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Excellent post.

How many BTL's actually fully understand economics and financing?

Only a few professional types I should imagine.

I've often thought of shares and stocks, but realise that at my present level of knowledge any gains that I'd have made would be by luck mainly, lots of people have entered into a situation they really do not understand the implications of.

Over heard 4 months ago: Yeah we just got our 3rd house, interest only mortgages 'capital repayment mortages are for wimps' we'll be getting an 1500 a month in profit from our porfolio. Hope he's been saving it and not splashing it on his wife not having to go to work!

This guy is an idiot as we were standing in the till queue at Argos at the time (no not buying jewelery!) and he proceded to boast to his friend about lack of customer service in Argos and that he worked at the head office just up the road, he'd get John Lewis to do a price check as their customer service is better.

Anyway I digress, such an idiot is in the BTL game, what hope of survival has it got in times of hardship. Head in sand or rats jumping springs to my mind!

Hope so, times could very hard, a lot of people could get hurt, lets hope no of them are inocent parties that had no part of this farce.

Greed is one of the seven deadly sins, no?

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I know a woman who now works on the checkout in my local Sainsburys. For years she and her husband would buy a house, do it up and then sell it on for a profit. It was their living and they were doing this since the 1980s long before it became fashionable.

The reason she now works in the local Sainsburys is because they stopped doing this 2 years ago as the maths simply did not work out. However, once the crash has come, they intend to start again.

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  • 439 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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