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Buy To Let And The Myth Of Rising Rents

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My own suspicions are that rents will enjoy a few months in the sun but will be hammered as disposable incomes fall, unemployment rises and the Poles leave.

City wire

Apologies if this is a repost.

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My own suspicions are that rents will enjoy a few months in the sun but will be hammered as disposable incomes fall, unemployment rises and the Poles leave.

City wire

Apologies if this is a repost.

My thoughts exactly... hence I'm staying put for a few more months in a rather grotty but cheap house, building up my deposit, watching the market getting flooded with distressed sellers' homes suddenly up for rent (lots of unfurnished places coming up!) who are setting the rents by the cost of their mortgage and out of all proportion to local wages (£700 for a room!!!!), and waiting for the time when landlords become more realistic in terms of rent, and realise how painful voids are for them financially. I mean where are shop workers and nurses meant to live? I earn good money, but unfortunately was born too late to take part in the last few years HPI madness, but I am certainly not going to go out and rent at the stupid rates that have been asked for the last three months - it'll only encourage them...

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Buy to let and the myth of rising rents

By Lorna Bourke | 00:01:00 | 14 July 2008

As a landlord of some 16 years standing I continue to report with disbelief the figures from those with a vested interest in talking up buy to let.

Yes – buy to let has had a good run with property prices doubling over the past eight years. But the notion that rental values will now rise to counteract the effect of falling property values is, in my view and experience, flawed.

The Association of Residential Letting Agents (ARLA) is, once again, forecasting that ‘rents will rise significantly in the short term.’

And ARLA is not alone. All the mortgage lenders in this market blithely say that rises in interest rates are not a problem for landlords because demand will remain strong and landlords will be able to increase rents.

Even if this were true, landlords will have to wait until the end of the existing lease, or a break, before they can pass on higher costs. And few tenants are going to accept a doubling in their rent – which is what many landlords have suffered in mortgage interest charges. Those coming off fixed rates of 4.5% are now having to pay 8%.

While there is no doubt that local conditions vary enormously and some landlords may be able to put up rents to cover higher interest charges, this is by no means certain or universal. In my neck of the wood, Notting Hill Gate in central London, rents have actually gone down over the past five years – and this during an economic boom.

In 2000 I was able to let my flat in Notting Hill, conveniently placed for the tubes, buses, late night shops and Portobello Road, for £1,500 a month. Today I would be lucky to get £1,300 – in spite of having spent £25,000 on a new kitchen, bathroom and wood floors. My neighbour upstairs has had a flat on the market for months without finding a tenant. The reason – an excess of supply over demand.

In the ARLA report Professor Michael Ball, Professor of Urban and Property Economics at Reading University, forecasts rents to rise by 10% to 15% in both 2008 and 2009. He may be right.

But if homebuyers are having difficulty paying higher mortgage repayments, why won’t tenants suffer the same difficulties finding the money for higher rents?

Moreover, rising rentals pre-suppose rising demand. In a recession unemployment rises and it will be a case of last-in-first out with employers who will make the youngest and newest employees redundant – the very people most likely to be renting.

Secondly, if jobs become scarcer, young school leavers and graduates won’t leave home but will stay living with parents until they can find a secure job. It is young flatsharers who make up by far the greater proportion of the rental market both in London and other employment centres.

Professor Ball points out that rents have been outstripped by house price rises for much of the past 15 years, although they have risen faster than general price inflation.

The report comments that the Department for Communities and Local Government (DCLG) Rent Index suggests rents have risen by almost 40% since 2000 and ARLA's own research shows that rents rose by around a fifth between 2003 and 2007 – although it does concede that ‘averages are driven by London and surrounding areas and there are significant regional variations, especially when taking Scotland and the North into account. There are also variations in property types and rents achieved.’

But it goes on to say, ‘investment in residential property is driven by capital gains.’ Talk to any serious professional landlord and he will tell you that’s rubbish. They buy on yield – which is why most professional landlords have bought very little in the past few years – and capital gain is largely seen as a bonus.

The report also cheerfully says that, ‘a re-run of the 1990s, when negative equity prolonged the housing market recession and blighted the lives of many is less likely to occur in this downswing.’ Tell that to the 1.3 million homebuyers who bought in the past two years and are now seeing the value of their property down to 2006 levels, mortgage payments practically double and negative equity looming if they need to move house.

If household costs like mortgage interest, heating, food, and council tax remain high, or even worse, increase, as seems likely, homebuyers' ability to buy or move house will decline and they will still be unable to afford their first home or to afford a larger mortgage in order to move – even if house prices drop substantially. It is already happening.

If all this sounds gloomy – well, it is. That is not to say that landlords aren’t doing a great job, that tenants now have a huge choice of good quality accommodation at affordable prices from which to choose. Or that, long term, landlords won’t make money out of buy to let.

It’s just that it isn’t a quick way to get rich – and it can be a lot of hassle – especially in a recession when tenants are fewer and are not inclined to pay higher rents.

I became a landlord in the last recession in 1991 when I couldn’t sell a property for anything like the price I had paid for it. The property, admittedly, has probably tripled in value since then, but I have never made a penny of income out of it.

And if I wanted to cash in I would be lucky to find a buyer in today’s market.

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My thoughts exactly... hence I'm staying put for a few more months in a rather grotty but cheap house, building up my deposit, watching the market getting flooded with distressed sellers' homes suddenly up for rent (lots of unfurnished places coming up!) who are setting the rents by the cost of their mortgage and out of all proportion to local wages (£700 for a room!!!!), and waiting for the time when landlords become more realistic in terms of rent, and realise how painful voids are for them financially. I mean where are shop workers and nurses meant to live? I earn good money, but unfortunately was born too late to take part in the last few years HPI madness, but I am certainly not going to go out and rent at the stupid rates that have been asked for the last three months - it'll only encourage them...

Saw an article in yesterday's Sunday Times saying (according to Landlord Mortgages - not a VI at all !) that rents are set to rise by 20%.

My response to that is renters will reduce in number by 20% or more - it is the ultimate flexible market - younger people will decide to share rather than take on a property by themselves. some people will stay with parents & family and not get their own place or move back home if their rent goes too high.

Rents generally grow in line with wage inflation (i.e. minimally now) and I think house prices will fall back in line with rents (which are themselves a function of wages).

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My own suspicions are that rents will enjoy a few months in the sun but will be hammered as disposable incomes fall, unemployment rises and the Poles leave.

City wire

Apologies if this is a repost.

Talking it up is just a desperate attempt by the likes of Paragon to keep their investors believing the lie that it is impossible for landlords to default.

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My thoughts exactly... hence I'm staying put for a few more months in a rather grotty but cheap house, building up my deposit, watching the market getting flooded with distressed sellers' homes suddenly up for rent (lots of unfurnished places coming up!) who are setting the rents by the cost of their mortgage and out of all proportion to local wages (£700 for a room!!!!), and waiting for the time when landlords become more realistic in terms of rent, and realise how painful voids are for them financially. I mean where are shop workers and nurses meant to live? I earn good money, but unfortunately was born too late to take part in the last few years HPI madness, but I am certainly not going to go out and rent at the stupid rates that have been asked for the last three months - it'll only encourage them...

i totally agree. i would love to move out of my HA flat as its tiny, but to do so encourages BTLs who need to feel another 6-12 months of burn.

my money and savings are mine - not theirs. ill just take another holiday break.

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There is a further point thE BTL brigage are failing to notice.

Take a block of 200 "luxury apartments" in a typical city centre - imagine they were all bought at some overinflated price, let's say 300k, by 10 BTLetters in 2005 (20 each) and are priced to rent accordingly, but occupancy is only say 80%.

Now imagine that just 2 of the 10 BTLetters are repossessed. Flats (note; they are now flats) sell at auction for approx. 140k each. New landlords come along and they can price rentals at say 30% lower and still cover their costs!

What do you think will happen to the rents in the rest of the block then?

Repeat - across city and country

Q.E.D. Rents are not going up much longer....

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Guest An Bearin Bui
Saw an article in yesterday's Sunday Times saying (according to Landlord Mortgages - not a VI at all !) that rents are set to rise by 20%.

My response to that is renters will reduce in number by 20% or more - it is the ultimate flexible market - younger people will decide to share rather than take on a property by themselves. some people will stay with parents & family and not get their own place or move back home if their rent goes too high.

Rents generally grow in line with wage inflation (i.e. minimally now) and I think house prices will fall back in line with rents (which are themselves a function of wages).

That's the one thing these property evangelists seem to ignore: renting is the ultimate price-setting freedom. If your rent goes up beyond what you can afford or are happy to pay, you can just move out unlike when the bank doubles your interest rate from 4 to 8%. There's no walking away from an expensive mortgage whereas there is ample opportunity to walk away from expensive rent e.g. staying with family, sharing or just downsizing.

We've just had our letting agency write to us informing us that the rent 'has been increased' as our lease is up for renewal. I loved the naivete of their letter: as if you can just demand an increase in rent that's far beyond the market rate in the area by stating it as fact. By those standards we can write to them and inform them that the rent has been decreased. We plan to play them along for a couple of months and argue over it and then hand in our notice around the middle of November anyway as that's when the market will be at its bleakest ebb and we'll have our pick of rental properties, unlike late summer when the rental market is at its peak. :lol::lol: Market manipulation works both ways!

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Already seeing the odd 'new price' or 'reduced price' banners on the RENTAL ads in our local paper. Also more and more 'to let' signs going up and, once up, they seem to stay up.

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'The Association of Residential Letting Agents (ARLA) is, once again, forecasting that ‘rents will rise significantly in the short term.'

Though, to be fair, they have provided news of falls quite recently: http://www.housepricecrash.co.uk/forum/ind...c=78906&hl=

Here's a graph for the UK as a whole (from http://rentright.co.uk/ ):

UK_rents.JPG

post-7978-1216040923_thumb.jpg

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i did some landlord baiting a couple of weeks ago.

spotted a nice rental. too much dough.

called them. offered what i thought.

they declined.

place is still up for let.

1 message delivered.

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My anecdotal that I already posted about 3-4 weeks ago.

Might have to work back in London after the summer so am looking at rentals of 1 bed flats. Nice areas only ;)

When I last did this in 2006, I was seeing prices of £250 pw for Olympia/Hammersmith areas.

Checked Gumtree recently and see prices of £150 pw posted by agencies (ie. not private landlords). Also looked at Canary Wharf area and prices seem in freefall. Difficult to get something under £1000 pm in 05-06, they'll now give parking and gym membership for £800pm or less....

Times are a changing :)

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As the price of property falls so will rents, If you buy cheaper you can afford to let the property out cheaper, landlords that bought at the peak won't be able to compete with those who will be buying at 30% less. if you buy property at the bottom of the slump you are quids in, There are Landlords that bought at the bottom of the last slump who are now mortgage free.

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Landlords will try to set rents using the laws of supply and demand. In reality, the market will set rentals using supply and EFFECTIVE demand. There is a fundamental difference!

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There is a further point thE BTL brigage are failing to notice.

Take a block of 200 "luxury apartments" in a typical city centre - imagine they were all bought at some overinflated price, let's say 300k, by 10 BTLetters in 2005 (20 each) and are priced to rent accordingly, but occupancy is only say 80%.

Now imagine that just 2 of the 10 BTLetters are repossessed. Flats (note; they are now flats) sell at auction for approx. 140k each. New landlords come along and they can price rentals at say 30% lower and still cover their costs!

What do you think will happen to the rents in the rest of the block then?

Repeat - across city and country

Q.E.D. Rents are not going up much longer....

New landlords will have trouble finding a mortgage company to lend to them on these newbuild "Ipads".

Still, if its their own money, maybe they wil be just that little bit more attentive to their tenants needs.

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I love the argument about rising costs pushing up rents. Thing is it's not even a good myth.

Landlord should and will charge as much as they can get for their property, they are not going to give it to you for 20% less because they like the cut of your jaw. So prices are set by what people can afford or are willing to pay. the landlord costs are irelevent.

If anything it works the other way around rents indicate fundamental value. The market has displayed that on average someone will Pay X per month to live here, add in a premium for being able to paint the walls purple and not having to move and you get an idea of the underlying value of a property.

You do need to be carefull though if you have an amature LL as they may well turf you out if they believe this.

Ireland is about 9 months ahead of the UK in terms of it's crash.

Look at the rental volume data posted here http://daftwatch.atspace.com/

My landlord at the time spiked my rent by 25% in Jan 07 as I came to the end of our lease, safe in the knowledge that rent were rising due to higher costs and lack of availability. From the rest of the graph you can see he was clearly wrong but I still ended up having to move.

The rising rent myth lasted about 3 months ( until the next property report from Daft) but I bet it clinched the last few BTL deals even though there were already clear indications that the market had turned.

I don't need to comment on what rents are doing now.

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Expect large numbers of people to let rooms in their own homes to help meet their mortgage payments.

Where people working away from home during the week also need to save money, they will vacate

their weekday flat to become weekday lodgers.

More voids. :lol:

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good to hear.this is a myth I like to see nipped in the bud.

You can get this in Docklands for £800 pcm. 1 bed, 50m square, near DLR. No sense in buying.

Not sure re. the area :huh:

http://www.gumtree.com/london/74/26221074.html

Maybe wait a month to see if the price falls :)

I checked the Gumtree site today and notice the rents have increased. Think this is due to the leases ending in June as students and workers head elsewhere and the landlords still thinking the price in 08 is the same as 07 or 06.

2 months ago rents were much lower. I reckon come Sept, they'll have dropped back as landlords realise they ain't shifting. Fingers crossed.

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Ohh Just found the daft rental report for Q1 07. http://www.daft.ie/report/Daft-Rental-Report-March-2007.pdf

It starts..

With the spring buying and selling season well under way, one thing remains clear – the Irish

property market is in rude health and continues to defy sensationalist reports of an imminent

downturn. As each week goes by, activity steadily gathers pace with the number of enquiries,

viewings and sales rising on the back of strong demand from all purchaser types, whether

they are buying their first home, trading-up, down-sizing or investing. The property market

has now entered a new period of stability and moderation, which is good news for everyone

concerned, especially first-time buyers.

The latest analysis of the rental market contained in this edition of the Daft Report shows

rental values continuing to increase steadily right across the country, with the annual rate

of growth reaching 10.5 per cent in February 2007..

They go on to say they will continue to rise and you should pile into property.

And for Q1 08 http://www.daft.ie/report/Daft-Rental-Report-Q1-2008.pdf

The broad trend that emerges from the Daft Rental Report for the first quarter of 2008 is that rents

dropped slightly between January and April. This follows a long period of rental growth, as after

rents declined sharply between January 2002 and March 2004, they rose continuously, peaking

in June 2007. The second half of 2007 was more volatile, but the emerging pattern is of a gradual

decrease in rent levels. This is not all that surprising; indeed, it is only surprising that the decline is

modest, given that the stock of properties available to rent nationwide increased from over 5,000

in May 2007 to almost 12,000 in May 2008.

I'd say it is only surprising if you believed the editorial of previous reports..

there has still never been a better time to buy of course.

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My local area had a supply of 36 flats on Rightmove that fulfilled my criteria 3 months ago (N London). That has now increased to 110. Funnily enough, quite a few are flats that have been on the site throughout (so at least some are incurring voids). And some of these have seen recent increases in rental asking prices.

Someone I know was advised a month ago by his letting agent that rents were going up significantly (15%+). Give it a few months of voids and oversupply, and those rents will come crashing down.

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I love the argument about rising costs pushing up rents. Thing is it's not even a good myth.

Landlord should and will charge as much as they can get for their property, they are not going to give it to you for 20% less because they like the cut of your jaw. So prices are set by what people can afford or are willing to pay. the landlord costs are irelevent.

absolutely correct - it p1sses me off down here in Sydney no end to hear this claptrap - "if rates go up rents will rise" etc etc - if LL mortgage costs had any bearing on rent then why my rental providing < 2% gross yield? Must be some mortgage my LL has :lol:

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There is a further point thE BTL brigage are failing to notice.

Take a block of 200 "luxury apartments" in a typical city centre - imagine they were all bought at some overinflated price, let's say 300k, by 10 BTLetters in 2005 (20 each) and are priced to rent accordingly, but occupancy is only say 80%.

Now imagine that just 2 of the 10 BTLetters are repossessed. Flats (note; they are now flats) sell at auction for approx. 140k each. New landlords come along and they can price rentals at say 30% lower and still cover their costs!

What do you think will happen to the rents in the rest of the block then?

Repeat - across city and country

Q.E.D. Rents are not going up much longer....

Agree completely.

Then the two new landlords, having reset the rent level, push a few more landlords over the edge and a few more properties into repossession. These get auctioned off at £120k, to make a decent profit at the new rent level, etc.

With the collapse in demand due to the recession, Poles going home, etc, and the huge overhang of new property still coming to market, where this vicious downward spiral will end is anybody's guess.

The rental market is going to be carnage over the next 18 months or so, starting already in northern cities, probably hit London full on late 2008 early 2009.

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Landlords will try to set rents using the laws of supply and demand. In reality, the market will set rentals using supply and EFFECTIVE demand. There is a fundamental difference!

I'm glad I'm not the only one who gets perturbed by the loose definition of demand that gets bandied about - no one (in the mainstream) cares about the effective bit. (FWIW I thought to be demand the desire had to be effective, thus the 'effective' bit is technically redundant - maybe it's just me being pedantic.)

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