Tuesday, Sep 26, 2006

Good news for BTL-ers?

Merrill Lynch: Demand for Rental to Rise

Demand for houses and flats in the private rented sector will grow more sharply in the next 15 years than any other part of the housing market, says a new report by Merrill Lynch which could encourage buy-to-let investors to increase their portfolios.

Mr Harrison says that landlords buying properties in today's market tend to be in their 40s, with deposits of around 25 to 30 per cent and expecting to own the properties for 16 to18 years before realising a lump sum for retirement. This is seen as a safer option than pensions, and much more flexible.

He continued: "Average capital appreciation of bricks and mortar over the past 20 years has been 8.8 per cent per year - this figure takes into account the worst housing crash in living memory between 1991 and 1994."

Posted by little professor @ 02:16 PM (596 views)
Add Comment
Report Article


1. J. B. M. C. said...

Makes some sense I suppose.

With the real (or percieved) collapsing value of pensions, the inability for FTBs to get on the housing ladder (hence, having to rent) and increased immigration from new EU members. These things may make BTL a more attractive option.

I would certainly consider it over a "16 to18" year period. And with interest rates likely to peak at mere 5.5% then I'm fairly sure in my own mind that we won't be seeing a house price crash.

Tuesday, September 26, 2006 03:02PM Report Comment

2. kpjcomp said...

> He continued: "Average capital appreciation of bricks and mortar over the
> past 20 years has been 8.8 per cent per year - this figure takes into account
> the worst housing crash in living memory between 1991 and 1994."

I wonder were he gets his figures from?
Because you've got to compare like for like, and looking at the average prices graph of the home page of this site.
I've worked out that during the last bubble house prices were on average aprox. 100,000, & now there more like 165,000.

So using an online saving calculator you can find on the internet 8.8% over 17 years, would equal 440,000 so were the hell
has he got 8.8% from.??

Even if I take the average house price in 86 to be about 70,000 over 20 years at 8.8% that would give 400,000.

Tuesday, September 26, 2006 03:53PM Report Comment

3. No Dice said...

Good news for renters then: greater supply = downward pressure on rents.

Tuesday, September 26, 2006 04:12PM Report Comment

4. Devil's Advocate said...

I bought my house in 1997 average house prices were 70,000, I remember it well because thats how much I paid for it.It sold in 2005 for 172,500. Unfortunately I sold it late 2003 for 145,000

Tuesday, September 26, 2006 04:12PM Report Comment

5. waitingfor hpc said...

yes and i am really superman. this is more crap from banks. wonder how much this bank is tied up in the money lending on property?

Tuesday, September 26, 2006 04:25PM Report Comment

6. waitingfor hpc said...

wonder if i will be married in 15 years, looking over the last 25 years one would assume that by the age of 45 by law of averages , taking into account divorce rates - I may have been married twice!
That is about as usefull as this article.

Tuesday, September 26, 2006 04:27PM Report Comment

7. paul said...

And the conclusions of the entire article are completely undermined by the analysis from ARLA who are closer to the market rather than analyzing it from a distance.

If current immigration trends were ever going to impact upon rents, they'd have already done so by now.

Nothing to see here, move along (with due respects little prof)

Tuesday, September 26, 2006 04:27PM Report Comment

8. inbreda said...

KPJcomp - your calculations are wrong. You are taking the value of property NOW relative to the value of property at the height of the last boom. That is not 20 years ago

The article is INTENTIONALLY taking prices BEFORE the last boom and comparing it to the current peak. Basically instead of comparing peak to peak (modest increase) they are comparing trough to peak (larger increase).

Of course, what they fail to point out is that we are not in a trough now, we are at a peak, so anyone investing now is much more likely to be subject to your calculation of return than theirs. What's worse is that anyone who buys now will have a NEGATIVE return for many years, and they will literaly be forced to hold onto their investment for 20 years before being able to realise a modest profit.

The article must surely be close to misrepresentation of the facts. If it's not illegal, it's definitely immoral.

Tuesday, September 26, 2006 04:57PM Report Comment

9. japanese uncle said...

Hey Merryll Lynch fraudsters! Say this to the BLTers who happened to have bought property in one of the ghost-town flat blocks in many UK cities. Occupancy rates in one of those blocks in my neighbourhood is estimated be less than 40% even 12 months after completion, judging from the number of windows lit late at night. I can well imagine the frustration of those amature landlords forced to reduce rents after a series of months of unoccupancy and no-income/morgage-payouts only situation. Hahaha.

Tuesday, September 26, 2006 05:30PM Report Comment

10. kpjcomp said...

Hi Imbreda,

Read my post again, I deliberately was comparing Peak to Peak.
And then my second comparison was from 86-2006, IOW the 20 years they were comparing.

> The article must surely be close to misrepresentation of the facts. If it's not illegal, it's definitely immoral.

Yes, totally wrong. I'm still stumped at were they have got 8.8% from.
To me the wording 8.8% year on year means the house price has gone up 8.8% a year for the past 20 years.
So even just using the simple calculator built into windows do this->
Say the average house price in 86 was 70K.
Now type 70 into Calc then multiply by 1.088 and press the = button 20 times. I get 378, nowhere near 165K.

From my calculations 70K to 165K is more like 4.4%, and when you consider banks are giving you 5% for savings and that's while interest rates are low. And of course this is when not comparing Peak to Peak, when comparing Peak to Peak, or trough to trough I would think house prices have only ever followed inflation.

Tuesday, September 26, 2006 05:49PM Report Comment

11. Surfgatinho said...

If rental demand is going up then maybe demand to buy will be declining ergo house prices will be flat at best.

Tuesday, September 26, 2006 05:52PM Report Comment

12. Dalek said...

Doesn't tally with what an estate agent in East Dulwich, London told me last week. He rang me to tell me my flat had gone up since he valued it this time last year. When I said btl's were pushing up prices he said: 'We don't see many of those now'! When I asked if rental value had also gone up, he said: 'No, that's more likely to have gone down'!

Tuesday, September 26, 2006 06:44PM Report Comment

13. This comment has been removed as it was found to be in breach of our Blog Policies.


14. This comment has been removed as it was found to be in breach of our Blog Policies.


15. bidin'matime said...

Nationwide data page http://www.nationwide.co.uk/hpi/downloads/UK_house_price_since_1952.xls shows the average price in 1986 Q2 to be 37,015 and 2006 Q2 to be 165,035. That's a compound growth rate of 7.8%pa. If you compare the peak of that boom, in 1989 Q3, when the average was 62,782, with the current price, you get 5.0%pa.

Unfortunately the BTL logic is based on the notion that you put in 10k, borrow 90k and the rents cover the interest, so if the average price growth is 5%, then you are in fact getting 50%, because you only put in 10k but have a 5k increase in value. What they fail to look at is yield - the fact that the net rental income is what ultimately determines the value of a rented property - and at current prices, most property is not producing enough income - a fact that must and will lead to a fall in prices.

Tuesday, September 26, 2006 08:08PM Report Comment

16. Redwing said...

bidin'matime's right with the point about gearing.

It'll be gearing that really does for the BTL brigade. That 10% equity is going to be cut in half (50% loss) if prices fall by a mere 5%.

I can't wait.

Tuesday, September 26, 2006 08:38PM Report Comment

17. Chillilizard said...

>a fact that must and will lead to a fall in prices.

or massive amounts of inflation. Or most likely a mix of the two. Hey - anyway have any thoughts on the european economy???

Wednesday, September 27, 2006 10:27AM Report Comment

18. denzil said...

>>What they fail to look at is yield - the fact that the net rental income is what ultimately determines the value of a rented property - and at current prices, most property is not producing enough income - a fact that must and will lead to a fall in prices.

I'm not sure in all cases if net rental income alone is the determining factor as some people can afford to forget yield for long-term growth which would probably mean subsidising their tenant but........

With ten minutes to spare I imagined myself a BTL landlord and did some fag packet maths. A reasonable BTL type property in my area that would for example cost 170K. If I took a BTL repayment mortgage with a loan to value (ltv) of 85% then my monthly repayments just for the mortgage (no building insurance) would be around 835. Looking at similar properties that are available for rent would suggest the rent on my BTL would be around 600 per month. Obviously I would have to consider maintenance and empty periods so in a best case scenario I invested around 25K of my own money and for each and every month I have to also subsidise to the tune of at least 235. At first glance it looks to me like a really hopeless investment and I am aware that BTL landlords are taking out IO mortgages but I like to think I'm not quite as stupid as that type of BTL investor.

The thing that I'm unsure of is, which of these would give me the best growth over a 20 year period.:
A) I invest 25K in a basic tracker of the FTSE 100 and I continue to invest 235 per month for 20 years and over the 20 years (for arguments sake) my returns are the long term average for the FTSE.

B) I invest 25K as a deposit of 15% on a BTL and on average over a 20 year period I also subsidise (invest) 235 per month to top up my rental shortfall. Presuming the price of my BTL increases in line with long-term property inflation.

I know their are many caveats to both but it would be good if one of you financial guys on the blog could show me the results of the two scenarios.

Wednesday, September 27, 2006 10:28AM Report Comment

19. miniftse said...

hi denzil.

remember in case b your rent should increase with earnings, so although you may start off subsidising, in 5 years chances are your rent will match your repayment in 10 years it will exceed your repayment. also you can find much better btl op's than your case study, i see one here in edinburgh, 1 bed 100k flat, 15k deposit, 500 a month repayment, 500\550 a month rental potential.


Wednesday, September 27, 2006 11:17AM Report Comment

20. Ganesh said...

Hi kjcomp, Imbreda & others,

Please correct me. I am confusing real with nominal house prices.

I think the nationwide data gives us real house prices i.e., inflation adjusted. whereas the kjcomp is comparing the nominal house prices. Is this what is causing the confusion. houses may appreciate 8+% in real terms but more in nominal terms. is this right?


Wednesday, September 27, 2006 11:28AM Report Comment

21. Sam. said...

hey miniftsi,

Good point, it's also means that people who've been BTL'ing for a while are in a more competative position as more BTL'ers come into the market, kinda creates a skewed competative edge for old timers.

However, I can see people taking that example and suggesting that they should buy and rent at breakeven or perhaps a small loss because they'll make they're money back over a 5-10year period, and remember "property prices always go up...."

Also the inverse is true for the stocks/shares, any money made is reinvested as apposed to being tied up in the property, so as your initial 25k grows you end up making money on the money you made. I also think once you stop working, the amount of tax you pay on it (as income) may come down as apposed to paying CGT when you sell your BTL property.

Wednesday, September 27, 2006 12:14PM Report Comment

22. bidin'matime said...

But Denzil, what is 'long-term property inflation' going forwards? Back in the 1990's when I was very active in investment advice, I would stress the long-term performance record of investments - but that didnt stop them nose-diving in 2000. Some had a track record going back a decade or more, but they nearly all suffered badly in the following years. (It was this that put paid to my work as an investment adviser - an IFA has to tread that thin line between giving confidence that the client will not lose their money, whilst issuing warnings that they might...! Once you lose confidence in the data and the balance shifts towards too far away from the former and towards the latter, you can kiss the commission goodbye...)

However, ignoring the likelihood of imminent HPC, how best to predict long-term HPI? Data back to the mid 1950s suggests that the house price to earnings ratio will gravitate back towards 3.5:1 in the long term (currently at around 6:1), so if we take your 20 years and assume that wages rise by 4%pa over that time, house prices only need to rise at an average of 1.23%pa in order to achieve the 3.5:1 ratio at the end of that period. Given the risk of HPC in the meantime, I would not feel confident to recommend BTL to anyone, no matter how long-term they were thinking.

Wednesday, September 27, 2006 01:48PM Report Comment

23. C'mon Correction said...

Mini - even in that 'good potential' btl you describe at an interest rate of 5% and 'assuming' rents increase and interest base rates don't, you only gain approx 22k capital. Then minus off all the costs - maintenance, letting agent fees, insurance, void periods etc, etc - say approx 12k over 10 years (potentially a lot higher). Leaves 10k over ten years, adjust for inflation and that doesn't look a good investment. You can argue equity gain or loss but in reality prices will be the same in 10-15 years adjusted for inflation.

BTL at this time is a poor investment, people are not getting it. Any good financial advisor will advise you the same.

Don't get me wrong, buying into it at the right time (ie 8-10 years a go) is a great investment, but currently buying into it now is too late and too expensive.

Wednesday, September 27, 2006 02:47PM Report Comment

24. denzil said...

I fully accept your points as they are by and large the caveats I referred to.

If we accept the current ratio of house prices to income then I accept prices could stagnate or crash to return us to the norm but I am mindful of the fact that property over probably any 20 year timeframe is worth more at the end of that duration than at the start of the 20 year period. Granted that because we are sat on a plateau of high prices at present then my 20 year estimate for HPI in my hypothetical may be a bit generous but also with many people predicting recession then growth in my hypothetical FTSE investment may be generous too. There are so many "ifs" to both my scenarios that is why I tried to put them on a level playing field for comparison.

Personally I have absolutely no interest in BTL whatsoever and all I'm doing is trying to is look at what the best investment would be between equities and BTL over a longish time-frame based on long-term average returns. I am trying to understand the logic with which BTL is keeping going and I would love someone to point at that the FTSE would be better than BTL but working it out in my head suggests BTL would be better than my FTSE investment.


Wednesday, September 27, 2006 03:13PM Report Comment

25. inbreda said...

I don't think there is a 20 year period - with ANY startpoint - where housing outperforms the FTSE all share.

It's therefore a null discussion. The only reason 'bigger' bucks can be made from housing is that it's a leveraged investment - i.e. only 10% of the value is yours.

Wednesday, September 27, 2006 04:16PM Report Comment

26. denzil said...

inbreda said:
>>I don't think there is a 20 year period - with ANY startpoint - where housing outperforms the FTSE all share.

I don't doubt that one bit but I don't think you are considering the larger proportion of the BTL asset has been paid for by the tenant and based on long-term HPI that asset would have increased significantly in value and what's more somebody else bought it for me or at least they paid for it minus my deposit and monthly subsidy.

Wednesday, September 27, 2006 04:55PM Report Comment

Add comment

  • If you do not have an admin password leave the password field blank.
  • If you would like to request a password allowing you to add comments and blog news articles without needing each one approved manually, send an e-mail to the webmaster.
  • Your email address is required so we can verify that the comment is genuine. It will not be posted anywhere on the site, will be stored confidentially by us and never given out to any third party.
  • Please note that any viewpoints published here as comments are user's views and not the views of HousePriceCrash.co.uk.
  • Please adhere to the Guidelines
Admin Password
Email Address

Main Blog | Archive | Add Article | Blog Policies