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The Demise Of Btl

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Now that the tabloids have finally begun to sink thier teeth into BTL it is fair to say the beginning of the end has arrived. We all know those smug b*stards are f*cked but I for one am not really convinced by Paddles systemic margin call theory as it would amount some kind of strange suicide pact from the banks, and little as I respect these insititutions I just don't think they're that stupid. So, for your consideration I submit my own vision of how these tossers are going to go broke.

To be clear when I say BTL I am really reffering to those dismal blocks of slave boxes in the middle of every city. I'll use an imaginary block of city centre newbuilds as an example, lets call it sheeple heights in Manchester which contains one hundred individual 1-3 bed units. First unit completed in 05 last one 07 with ninety percent sold offplan to investors. In '05 a one bed box cost 70k and peaked at 120k in '07 and rents @ 425~month. For the sake of argument I'll assume that both the sale and rent price are straight multiples of the numbers of bedrooms. Currently about 40% of the stock lies empty as many property club investors await a tenant prepared to pony up 'market' value.

In this one block then there are dozens of individual investors who bought at different prices who can only achieve a set price per bedroom. Where is this price set? at the margin of course, by the landlords who bought in first who can achieve a respectable 7-8% on 425pcm which forces yields to drop progressively for those who purchsed later, with landlords of '06 vintage+ being cash flow negative. As prices fall these fools give up on capital gains and allow their flat to be repossesed and eventually sold at auction. Now the auction room in full crash mode is not kind to these places and the first batch fetch £60k per room when sold to new slightly smarter landlords who can gaurantee tenancy by undercutting the current rental price. So rents drop across the whole block as tenants realise they can save a few quid a month by moving thier stuff down the hall-driving the breakeven LL's into loss, wihch triggers another wave of defaults and auction sales which now only achieves £50K per room, rinse and repeat. I'll call this a negative rent-price spiral, and it will completely decimate poorly invested amatuer landlords. It will have the greatest effect on high density rental accomodation with a high proportion of unnocuppied units and breakeven or losing landlords. This process will continue until all of the flats in the block are rented out or owner occupied at a price that reflects the underlying demand for rental property, depending on the relative oversupply in the area this number could be surprisingly small.

To conclude: No margin calls, or at least not a significant number; it will be market forces that introduce BTL'ers to consequneces of risk.

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That is fairly good analysis.

One thing, you assume that margin calls would be a bad thing for the banks.

It may well be for those with large BTL portfolios, but for those with smaller ones that would not be the case, it might be better. One because it protects them and get the money in prior to it getting really bad - many of the BTL'er will have several portfolios, with several companies - so getting in first is critical for the small guys. Suck up any little bits of cash the BTL'er have.

Also as a secondary effct, it could send a crippling blow to the bigger rivals, more potential for the future.

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The banks can call all they like , in a block described above I think very few LL will have any spare cash lying about . Most of them got their original deposit by the price being inflated and then deposit paid by the developer.

Margin calls would also just speed up the process of price drops and force more LL's to gingle mail.

I said on a similar topic a few months back that , I think many banks and developers will become accidental LL themselves . Due to loads of Repos . and developers being unable to sell.

Many disagreed with me, however since then developers have started renting out unsold stock , and im sure that when the banks cry for help from government part of the contract will be stop repossessing and selling bringing market down lower. So I think banks will take back or get back many of these flats and will rent them themselves.

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