Saturday, September 2, 2006

Twenty percent of BTL investors are in neg. equity territory

If house prices crash by twenty percent, half of buy to let investors will be ruined

The median figure, a 7% fall in values causing negative equity for 21% of investors, this is probably where we are currently at today, given that most sellers accept offers at 93% of their asking price. One in five BTL investors therefore have no equitable value in their property and have no chance of creating any in the short to medium term given most use interest only BTL mortgages...a sobering thought.

Posted by converted lurker @ 01:29 PM (564 views)
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8 thoughts on “Twenty percent of BTL investors are in neg. equity territory

  • This doesn’t take into account the fact that they all say that they are in it ‘for the long term’ and many know that they will be paying out more in mortgage interest than the rental income. They wont necessarily be ‘ruined’, but the question is, how long can they face paying out to subsidise the tenants once they realise that their equity has all gone…

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  • Bidin,

    I agree, but havn’t the BTL Brigade also based these ‘in it for the long term’ views upon the assumption that infaltion was dead, IRs will remain low for ever, and over the long term prices always rise.

    The decay of empire (or what many on the right call the downturn of the ‘ imperial cycle’) makes these assumptions laughable.

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  • Just because a property was bought afew years ago doesn’t mean it hasn’t been remortgaged to finance a deposit for another property.

    Will the added exposure to the flat/apartment style property increase the fall in that area of the market?

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  • Ticktock – I agree – you may be interested to read the following that I have just drafted for a client newsletter. You will appreciate that I have to pull my punches as I have many clients with BTLs, some of whom have bought quite recently…
    _________________________________________________________

    Buy to let – pension or poison?

    Buy-to-let has been a gold-mine for some, but could it end in a nightmare for others? In the mid 1990’s, when property prices had slumped and interest rates were falling, it became cheaper to buy a property than to rent. However, not everyone was in a position to buy, so investors realised that if they borrowed the money and bought the property, then let it out, they could make a profit.

    Gradually, property prices started to recover and landlords realised that they were onto a good thing – not only were they making a profit on the rents, but they saw their investment increase in value. This encouraged them to buy more and to tell their friends, who also went out and bought property.

    All this extra interest in property helped to push up prices, so more people jumped on the bandwagon. Other factors, such as immigration and more relaxed lending by the banks and the general rush to get on, and up, the ‘property ladder’ helped to push prices to the levels we see today.

    So is buy-to-let still a good investment? If you can find somewhere that will produce more in rent than it costs in mortgage interest, agents’ fees, insurance and maintenance, then possibly. But don’t forget to factor in the anticipated further rises in interest rates and ‘void periods’, ie. when you have no tenant. As the standard tenancy is for 6 months, after which they can give you one month’s notice, most landlords allow for around one vacant month per year, but it could of course be longer if there are plenty of comparable properties around.

    The simple fact is that prices have risen so high that few properties would now generate a profit, unless you happen to have most of the purchase price tucked away in a bank account. And even then, you would probably get a better return from a good building society account than from rental income at today’s prices.

    Many regard buy-to-let as a form of pension. The logic is that inflation will make the mortgage seem small in 15–20 years’ time and it can either be sold for a big profit or let out to provide an income in retirement. Some are even prepared to subsidise the place in the meantime, by paying more in interest than it can generate in rental income, paying the rest from other income. This is a particularly risky strategy – unlike an ordinary pension, you cannot simply increase or decrease payments as it suits you.

    What if interest rates rise? What if other income drops? If you are looking ahead 15-20 years, you need to bear in mind that within the last 15-20 years, mortgage rates have been in excess of 15% – economics is cyclical and it may be ‘unthinkable’ that we would be back at these levels, but it’s certainly not impossible. And who would buy the place off you then, when the mortgage interest is two or three times the rent? In short, it could ruin you at a time of life when you were hoping to see your finances on a more secure footing.

    The rapid rise in property values has made buy-to-let seem like a ‘no brainer’, but buying at today’s prices requires full engagement of brain before proceeding. If you would like to discuss your plans in more detail, please contact us.

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  • Bidin,

    A very good summery of the current situation I would say.

    Out of interest, who are the clients? Are you a finance/pension advisor?

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  • I’m an accountant – also qualified and authorised as an investment advisor, but I don’t do much of that now and don’t take on new clients for that work – too much red tape!

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  • bidin’matime: good summary fully agree.

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  • bidin’matime, “mortgage rates have been in excess of 15% – economics is cyclical and it may be ‘unthinkable’ that we would be back at these levels, but it’s certainly not impossible.”
    Good point bidin, just to add a little perspective to it. Rates that high are probably impossible. But for reasons other than the one most people would think.
    It real terms because the proportion people have borrowed relative to their income is so much higher than in the last crash we only need a interest rate increase of a few percent to have the same effect. I think I’ve seen articles stating that rates at 6% percent would have the same effect as rates did at ~13% during the last crash. And 7/8% would be much higher in effect than 15% in 1991. By the time it reaches that level the effect it would have had on the economy would probably decimate most BTLers, small businesses (downward trend in consumer spending etc..), and other parts of the economy, the base rate wouldn’t have to get past the 10% mark before we see the country in the same state.

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