Is Buy-to-let On The Brink Of Collapse?

[Converted Lurker]

I agree that the explosive recent growth in BTL was fuelled by cheap and abundant credit, something which isn't going to come back in the next decade.

However, the BTL model that will most likely flourish in the future, once house prices have declined, is unfortunately a less democratic version. Future landlords will need the financial wherewithal to stump up 10 and 20% deposits. But there's millions of higher earners, who won't have defined benefit/final salary pension schemes, but will have the ability to meet stricter lending conditions. These are the people who will be able to take advantage of the much higher BTL yields that will prevail once this forthcoming housing crash has run its course. And it's precisely because they'll feel there's a practical barrier to competition in the form of tighter credit that they'll be confident enough to re-start BTL. Tomorrow's BTL will essentially be based on rental yields, not on the anticipation of capital appreciation.

Really? is it not only 1% of earners who earn 100K+ and 2% of households? Even then they hardly have the ability of saving up 25K each year to put into another buy to let property. I'd also suggest that in a recession those earning in the region of this figure will suffer in terms of job culls as I'd suggest the majortiy of those earning 100K+ salaries are related to the 'boom' in financial services which is busting.

[Converted Lurker]

Agreed.

If my STR fund survives the turmoil of the next few years, and if houses see large nominal falls, making yields attractive, I'd be buying with a great big deposit.

Of course those are big IFs.

and when it's all falling apart how confident will you feel? Example; buy 100K 2 bed terrace property for 100K, get 700 quid a month rent (which would be a very good yield), you've put in 25K, mortgage will still be circa £700 quid a month. Now if property is stagant or falling whats the point? However, if you have 100K cash the overall yield is obviously better than cash in the bank, but if prices are falling/still static after a huge correction...? difficult isn't it. FWIW as stated I know players who will steam in once they've seen a huge correction and see yields at 10% but they "won't buy in a falling market" (when will it stop once the wheels come off?), 'cos that's all they know and these guys have been in their 'landlord trade' man and boy. For that 10% rental yield to return we need (apparently, I havn't done the sums) a 35-40% correction, or a resuming of normal service in relation to affordability.

[Selling up]

and when it's all falling apart how confident will you feel?

I've never been in this situation before of having taken the time to understand the economic situation and the behaviour of a particular asset.

So I honestly don't know whether I'd have the confidence to jump in. Look forward to finding out though!

[silver surfer]

Really? is it not only 1% of earners who earn 100K+ and 2% of households? Even then they hardly have the ability of saving up 25K each year to put into another buy to let property. I'd also suggest that in a recession those earning in the region of this figure will suffer in terms of job culls as I'd suggest the majortiy of those earning 100K+ salaries are related to the 'boom' in financial services which is busting.

You underestimate middle class resources.

Take a baby boomer about to retire earning a not outrageous £75k, with a full final salary pension. They have a £1m pension pot that would deliver a £250k tax free lump sum. If that individual retires in 2012, with house prices considerably down, where will they invest that money? I think many of them wiould seriously consider a BTL punt.

Or take the forty or fifty year old who inherits a property from their parents. They've quite possibly seen their final salary pension scheme recently closed. Of the options open to them, simply retaining that property and renting it out will be one that they'll take very seriously.

The BTL cat is now well and truly out of the bag, the last crash didn't extinguish the British love affair with property and neither will this forthcoming one.

[right_freds_dead]

I don't think BTL will truly collapse until another hair brain fashion fad investment scheme becomes popular.

The people I know who have them know nothing about rental yields and some are not even aware that with an interest only mortgage they are not repaying any capital.

What it does give them is something to brag about down the pub or at dinner.

i do. i think it will be a total collapse.

it has zero support.

[thedebtisreal]

Are people still buying dotcom shares? Yes, but it's a smaller more specialised area.

Same with BTL. The field will be cleared out until there is nothing but professionals with deep pockets and a genuine entrepreneurial knack. The gains will be modest, but respectable. It is my hope that there will be more development in places that people will actually want to live, (it'll be the only people looking for a place to live who will be buying).

BTL will become hugely unfashionable. Everyone will know someone who lost everything in the crash. BTL will join endowment mortgages, dot com and subprime as a by word for financial disaster. The term itself, I suspect will be blighted from banks marketing models, but property investment will remain, just not in the non mass market fashion of yesteryear.

[cartimandua51]

BTL will become hugely unfashionable. Everyone will know someone who lost everything in the crash. BTL will join endowment mortgages, dot com and subprime as a by word for financial disaster. The term itself, I suspect will be blighted from banks marketing models, but property investment will remain, just not in the non mass market fashion of yesteryear.

Perhaps more in line the the Lloyds disaster?

[silver surfer]

Perhaps more in line the the Lloyds disaster?

Good analogy. A near mortal shock, but both Lloyds and the insurance business adapted and survived.

[thedebtisreal]

Perhaps more in line the the Lloyds disaster?

Yes, but larger. I know somewhere in the region of 20-30 people who are deep into BTL. I doubt half of them will survive with their primary residence. Those that do will be scarred by the experience for the rest of their life.

[Paddles]

Are people still buying dotcom shares? Yes, but it's a smaller more specialised area.

Same with BTL. The field will be cleared out until there is nothing but professionals with deep pockets and a genuine entrepreneurial knack. The gains will be modest, but respectable. It is my hope that there will be more development in places that people will actually want to live, (it'll be the only people looking for a place to live who will be buying).

BTL will become hugely unfashionable. Everyone will know someone who lost everything in the crash. BTL will join endowment mortgages, dot com and subprime as a by word for financial disaster. The term itself, I suspect will be blighted from banks marketing models, but property investment will remain, just not in the non mass market fashion of yesteryear.

Let's extrapolate this further. We all know someone who's bought into this dream and is asssuming their "portfolio" will be their pension, which presumably means that they are not currently paying any money into their company pension above what is mandated.

What are the social consequences of this once it all goes belly up? A huge swathe of mainly middle-class 30/40/50somethings have just consigned themselves to working longer and harder than they had ever expected to. Retirement dates will be pushed back and when these people eventually have to stop work they will be reliant on the state pension. Jobs will not be vacated at the higher levels as quickly, promotion prospects further down the employment tree will dry up. Higher unemployment among school leavers?

Society could end up picking up the bill for this bubble a long time into the future.

[thedebtisreal]

Society could end up picking up the bill for this bubble a long time into the future.

Not necessarily. People who lost everything will to work longer and have no way to retire. Britain's workforce therefore becomes more productive. Less retirees to support and hence more competitive.

[Si1]

Buy To Let is certainly dead today, but will it stay dead in the future?

I don't think so.

Only about 14% of the private sector work force now have final salary pension schemes, consequently millions of people need to think about how they themselves are going to secure a comfortable retirement without leaving it up to their employers. Most of course will just cross their fingers, hope for the best, and end up working until they're well into their seventies. But some will consider the problem carefully and conclude that, once property prices have fallen, BTL could make good financial sense.

So, BTL is down, but it isn't out.

agree entirely. property is a magic asset class unlike any other and will almost certainly be a better investment than anything else because it's made of bricks. not.

[Converted Lurker]

You underestimate middle class resources.

Take a baby boomer about to retire earning a not outrageous £75k, with a full final salary pension. They have a £1m pension pot that would deliver a £250k tax free lump sum. If that individual retires in 2012, with house prices considerably down, where will they invest that money? I think many of them wiould seriously consider a BTL punt.

Or take the forty or fifty year old who inherits a property from their parents. They've quite possibly seen their final salary pension scheme recently closed. Of the options open to them, simply retaining that property and renting it out will be one that they'll take very seriously.

The BTL cat is now well and truly out of the bag, the last crash didn't extinguish the British love affair with property and neither will this forthcoming one.

so is that a massive 1.5% of the working population, or is that you ? As for the forty or fifty year old scenario does he have siblings, will the govt increase/decrease the IT threshold, will his parents have to downsize/sell it of because they don't live in the 'white picket fence world' of the scenario you suggest, will he/she have to sell the inherited house, in order to raise a deposit because the baby boomers/ silver surfers priced them out and they finally have enough to buy their own place as 40-50 year olds?

There has never been a love affair/obsession with property of the like we have witnessed over the past 7 years or so, it is unprecedented. There is still lots of liquidity in property, given the wall of cash that's been created to 'play houses' but that's it, very little specualtive cash will no be entering for 2 decades IMHO, by which time the new generation will possibly start the whole process all over again and the older generations will have had to severely revise their retirement options which, according to companies such as Standard Life, are too biased towards property equity expectations

[silver surfer]

There has never been a love affair/obsession with property of the like we have witnessed over the past 7 years or so, it is unprecedented.

Owner occupation was just 11% in 1900, it steadily grew to nearly 25% by the end of the second world war, then rocketed to over 70% by 2000. There's nothing new or unprecendented about the British love affair with property.

[Converted Lurker]

Owner occupation was just 11% in 1900, it steadily grew to nearly 25% by the end of the second world war, then rocketed to over 70% by 2000. There's nothing new or unprecendented about the British love affair with property.

I think you've got your facts wrong there, and I don't mean that in the 70's there weren't over 25 property related tv programmes on tv every week. Property has been an obsession of sorts in muddled england over the past seven years.

[Ash4781]

Prices need to fall quite a bit to improve the rental yield to reflect the risks involved.

How much liability do these people have doing BTL ?

I hope BTL's have thought about this.

Edited March 4, 2008 by Ash4781

[DoctorJ]

Yes, but larger. I know somewhere in the region of 20-30 people who are deep into BTL. I doubt half of them will survive with their primary residence. Those that do will be scarred by the experience for the rest of their life.

God I hope so

[kingsgate]

It so much depends on WHEN people got into BTL, and HOW they did.

Those who either bought pretty recently, and especially those who were suckered into over-paying for new-build city centre "ready for BTL" apartment blocks, will do worst.

Those who have owned property for 5 - 7 years plus, and not MEWed up, and who bought cheap but good to rent houses will probably be OK. They, like me, will be making a 12 - 15% return on the price we paid for them back then.

Only those who have borrowed too much and paid too much will be in problems. People who bought sensibly and want to just carry on renting will not have problems - except that they will "lose" some of their "paper profit", which won't necessarily bother them.

[Carrington]

This would make financial sense, and I for one will consider BTL when yields make sense.

However, don't overlook the irony of sentiment:

At the time when BTL is actually a good investment, nobody will touch it with a barge pole.

But if another bubble develops, plenty will pour their money in; some will gain and many will lose.

As the old saying goes "sell when everyone is buying and buy when everyone is selling," i think btl will be a good investment when yields add up, and falling interest rates as well as falling house prices will make that happen maybe sooner rather than later. I am a broker and I havn't done a btl deal for 6 months, but the 12 months before that I did loads. I mewed 3 months ago and am sitting on cash waiting for a 20pct drop, and I fully intend to go back into the market - my guess is that yields will stack up at the beginning of next year.

best regards

Carrington

[Converted Lurker]

It so much depends on WHEN people got into BTL, and HOW they did.

Those who either bought pretty recently, and especially those who were suckered into over-paying for new-build city centre "ready for BTL" apartment blocks, will do worst.

Those who have owned property for 5 - 7 years plus, and not MEWed up, and who bought cheap but good to rent houses will probably be OK. They, like me, will be making a 12 - 15% return on the price we paid for them back then.

Only those who have borrowed too much and paid too much will be in problems. People who bought sensibly and want to just carry on renting will not have problems - except that they will "lose" some of their "paper profit", which won't necessarily bother them.

one glaring fault with your assumption, it's as though you suggest retrospectively folk piled into BTL 5-10 years back, bought in that window and then stopped. Fact is BTL never really caught the public's attention until 2004 onwards, This is when BTL mortgages really went mainstream. Most still had to come up with deposits for 'portfolio building' and simply went back to their broker who re-jigged their agreements, took some commission, started them afresh with a new 25 year IO mortgage by eating into their illusory paper gains over the years. Further, and we've done this ad nauseum in the past, BTL was all about capital gains never yield. On average (iirc) you'd have to go back to 2001 prices for average rent to wash face on average value property. On average (nationally) you can only get £650-700 quid for a 190K house. If you got 650-700 quid when average prices were 125K (pre 2001) chances are you were into positive yield territory. For most BTL has been an unmitigated disaster (once capital gians are stripped out), and a significant margin on those gains are for the tax man when you come to sell.

Edited March 4, 2008 by Converted Lurker

[kingsgate]

Tomorrow's BTL will essentially be based on rental yields, not on the anticipation of capital appreciation.

My BTLs were ALWAYS based on rental yield. Capital growth, I always saw as a bonus that may never happen.

Because I am old enough to remember that prices don't always go up.

I have always thought that these people "subsidising" their tenants rent to even pay their BTL mortgage were fools.

[lowrentyieldmakessense(honest!)]

Owner occupation was just 11% in 1900, it steadily grew to nearly 25% by the end of the second world war, then rocketed to over 70% by 2000. There's nothing new or unprecendented about the British love affair with property.

just a guess - but isn't the main reason for this the availiability of credit for people who cant really afford it. The availability of credit has just dried up and my guess is it will be a long time before it again becomes easily available.

[roger196]

Yes, but larger. I know somewhere in the region of 20-30 people who are deep into BTL. I doubt half of them will survive with their primary residence. Those that do will be scarred by the experience for the rest of their life.

Does anyone know the extent that BTL's are held in a limited company, so that one's primary residence is not at risk. Or even held by an LLP?( limited liability partnership).

[winkie]

Two words for future reference; "bunk" and "bed".

Too true, lived eight in 2 bed one box, never did me any harm, in fact did us all world of good...got love, got food, got a roof with warmth and security...what more do you need?