Saturday, Dec 09, 2006


Citywire: Rate rises bite into buy-to-let rental yields

"Landlords profit margins are falling as a result of rising interest rates, while the number of new properties coming onto the lettings market is slowing."

Posted by millard @ 04:05 PM (2880 views)
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1. paul said...

From the article:

"With profit margins potentially reduced, affordability conditions could bite hard into investors pockets and push up rents if interest rates rise further in 2007."

Haha. I don't think so, because there are plenty of BTLers with no mortgage, so if the stretched ones ask for more rent, their tenants will walk. Nice try RICS.


Saturday, December 9, 2006 06:43PM Report Comment

2. harold said...

From what I hear for a number of BTLers this should read "Landlords loss margins are rising as a result of rising interest rates..."

Still, not to worry - as Jelly keeps reminding us.

Saturday, December 9, 2006 07:21PM Report Comment

3. Nohpc said...

The rent for my flat is 1400 pounds per month not including any rates. To buy the flat would cost 300000 (London Sept 2005 probably worth more than that now). At 5% mortgage on the full amount it is still cheaper to buy it than to rent it (I did put down a decent deposit on it and am doing okay). I do find it weird that in some areas it is cheaper to rent than to buy but I don't think this really holds true in good areas in London.

Sunday, December 10, 2006 04:49AM Report Comment

4. tyrellcorporation said...

Massive oversupply of new flats in Exeter. You know the ones... a city block style development goes up and they all immediately appear in the rental paper three weeks after completion. BTLs still piling into the market down here - mostly grizzled orange bitches witha swagger and chewing a wasp!

If they are feeling any pain it's probably just the hard suspension settings on their new Cayman Ss!

Sunday, December 10, 2006 12:30PM Report Comment

5. Leedel20 said...

This is fantastic, great news.

Sunday, December 10, 2006 03:39PM Report Comment

6. bidin'matime said...

Well guys, I'm not normally one to gate-crash, but having spent the last hour preparing a reply to a posting that has in that time dropped off the blog page, I'm sure that you will indulge me as I reproduce it in full here. It's a reply to About to Buy who posted 'We're all doomed' on Friday evening - hope you feel that it's worth the space here:-

About to buy

I'm in a very similar position to Uncle Chris - sold mid 2005 (just before they put the interest rate down..), sitting on enough cash to buy outright the house I rent, but paying less in rent than I get in net interest (ie after tax..) from the sale proceeds of my old house - that sold for nearly 10% less than the landlord paid for this one! So no hurry to buy here

There has always been the odd 'bear' who will go to print in the mainstream press to point out that 'things can't go on like this', but one of the features of a bubble is that the doomsayers are constantly being proved wrong, until they all shut up for fear of being put to the sword (the Emperors new clothes syndrome). Roger Bootle (Capital Economics) is a good example - a year or so ago he quite reasonably expressed the view that prices would fall by around 20% within a year - unfortunately having put a time scale on it, which of course has been proved wrong, he now keeps a bit quiet.

However, while the bears have been hushed by the bubble (they say that when the last bear becomes a bull, that's when a market crashes) as prices keep on upwards, so the more intelligent bulls (the optimists) have to admit that it can't go on and, those in a position to advance independent comment, will start to set out their bearish views. If the bubble keeps going regardless, then they too fall by the wayside, so we get a bit of a stand-off.

However, as Sirgoogle says, certain factors encourage them to come forward, such as seeing the market falling in the US, so more are prepared to come forward and risk being wrong, maybe because they recognise that there is some mileage in being regarded, with the benefit of hindsight, as the little boy in the crowd who pointed out that the Emperor in fact had no clothes.

Whether this adverse comment will of itself bring about the collapse or do much to accelerate it is debatable, but it must gnaw away at the confidence of some who feel that they might just buy, so it can't hurt.

I've spent my life working in the financial field and, whilst this helps in some respects, it hinders in others, as I risk becoming far too analytical - I have often been guilty of 'paralysis by analysis'. However, having made the decision to sell nearly 2 years ago, I've had that long to consider the factors - almost on a daily basis - and my conclusion is based on one simple observation.

This is that, if house price inflation remained at or above the rate of wage inflation for the next 25 years or so, and if my son (currently aged 24 ) was to follow exactly in my footsteps in terms of career and earnings over that time, then he would not be able to afford to buy the house I sold last year. Not only that, at the age of 40, he would not be able to buy the house I owned at that age and even at the age of 30 he would not be able to afford the house I owned at that age. And I repeat, that's assuming that he followed the exact same career path, earning then what someone would earn doing what I did at that age.

(So how was I able to buy them? because or average, incomes rose roughly in line with house prices, up to the time I bought my last house 10 years ago).

So my question is simple - if the next generation are not going to be able to afford these properties, who the hell is going to buy them? Certainly not BTL my landlord gets a return of 3.3% on this place, so it's only a good investment if you assume HPI (he bought it before setting of to cruise the Caribbean and wanted to keep his foothold in the market). BTL, while it lasts, will prop up the bottom end of the market, but you wont find many who will borrow several hundred thousand to buy one property.

The only conclusion is that they will have to fall in price, in relation to earnings. Which, of course, is the crunch if inflation takes off and earnings double in the next five years, then house prices can keep going up in price (but more slowly than wages), because earnings would catch them up. But if inflation were to take off in such a way, interest rates would have to rise I had feared that the government would re-define a suitable rate of inflation earlier this year (eg 3% - still pretty low by historical standards) to avoid the need for rate rises, but they did not and allowed rates to rise, so I can't see them back-tracking now if inflation were to return to double figures, wed have to be looking at substantial rate rises.

And if rates rise substantially, then, yes, youve guessed it, millions find themselves unable to afford their existing home, let alone move up the so-called ladder.

So there you have it either the market will stagnate and prices start to fall to sensible levels (frightening off the BTLs completely, thus popping that particular bubble) or we get inflation and rates rise, resulting in stagnation and repossessions and an almighty crash. Take your pick.

Sunday, December 10, 2006 06:29PM Report Comment

7. millard said...

bidin'matime, you need to go in to the newsblog section and click show week, its only on the main home page thats its dropped off.

Sunday, December 10, 2006 06:54PM Report Comment

8. bidin'matime said...

Thanks Millard, but that's not the point - if I post on one that's dropped off, no other bugger sees it! I didn't do all that purely for the benefit of my health and About to Buy's edification...

Having now read the article above, I should point out that my landlord gets 3.3% before agents' fees, so he probably gets below 3% before tax. And NoHPC - for your info, and to compare with your situation, we pay 1,400 per month on a house that the landlord paid 500k for a few months ago. Even as a cash buyer, it would cost me more (in lost interest) to take my cash out of the building society and buy the house, than I pay in rent!

Sunday, December 10, 2006 07:10PM Report Comment

9. Poppalaz said...

With regard to NoHPC's comment; I live in a 2 bed flat on the edge of Dulwich Village (one of the most sought after areas in London) and our rent (850) is half of what the couple next door pay on their IO mortgage for exactly the same type of flat.

Sunday, December 10, 2006 08:41PM Report Comment

10. paul said...

My conclusions about the market after watching things develop for the last few years.

I can afford to buy, but I am conscious that to get the place, I'll have to work until I drop, and won't EVER have that much to spare unless I start earning considerably more than I do now.

We are now, unfortunately in a death march to the top of the market. The tell-tale sign is that rising HPI fuels the speculative market. In other words, if HPI goes up by 5% there are 10% more speculators piling into the market. Specualtors feed the market and the resulting reports of rising HPI feed the speculators.

Where does it end? Look to Japan. When I talk even to bankers here in the UK they dismiss the idea that the UK could make the same mistakes, but can't pin-point why - they believe that somehow Japan's circumstances which brought about the Asian economic recession in the early 90s are different. I suspect that a mixture of denial and thinly veiled superiority ideology may be to blame.

They are naiive, as speculators often are. I've also said for a while that a house price crash is increasingly becoming an optimistic scenario, because the signs are that we are already heading into the rather nasty alternative. Japan's recession lasted over 20 years resulting in a "lost generation" of kids who never knew anything other than economic recession, over which time property prices fell BY OVER 60% nationally. The current top 3 banks in Japan are each the result of mergers between at least fifteen different banks, who all had their fingers badly burned from lending to companies whose assets were property-based. There is very little to distinguish the UK current market attitude towards property from Japan's in 1985-1990.

The only thing that will curb the cycle of speculation is heavily taxing second properties, but the government is obsessed with the idea that BTLers are "creating wealth" (or at least the ONS believes so) so they're hardly likely to bring about the end of the party while they can still collect IHT, stamp duty and re-indexed council tax on the back of inflated property prices.

The crucial difference is that Japan retained a robust manufacturing and services industry export market, so were able to lift their economy out of recession (by ending the stagflation cycle). But Britain doesn't have that, so I believe the outlook is far less rosy, and will hit the UK much much harder.

The current labour government will be remembered for trashing the economy in order to increase their tax take.

Their legacy will be more infamous the Maggie's.

Sunday, December 10, 2006 11:33PM Report Comment

11. paul said...

PS I pay 150 quid a week for a one bedroom flat in an area of London where the same would cost me 200-300K. Rational market? I don't think so.

Sunday, December 10, 2006 11:43PM Report Comment

12. Micthemike said...

yes i agree they have trashed the economy they deserted any socialist principles and adopted a thatcherite type of system a market corporate economy- the left wing in british politics is dead.

Monday, December 11, 2006 12:32AM Report Comment

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