Saturday, March 15, 2008

Not everybody is bearish just yet

The Buy-To-Let Boom Isn't Over Yet

Here's a counter-argument to the usual HPC news that we post here. Anybody care to demolish these arguments? "In January Paragon reported that rents were rising at their fastest rate on record - up 19% in 2007 and 8% in the last quarter alone. --- Demand from students and immigrants remains strong, and first-time buyers who fear a crash (or are no longer eligible for a competitive mortgage deal) are renting instead. --- Due to the credit crunch, repossessions are on the up, which means there is greater potential to snap up a bargain, especially at a property auction. --- The buy-to-let boom is probably not quite over yet. In a few years' time, I expect some investors will still be wringing their hands with glee, rather than despair."

Posted by drewster @ 09:08 PM (1694 views)
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27 thoughts on “Not everybody is bearish just yet

  • on rightmove there’s loads of empty rentals.
    nottingham 2500 hpouses /flats from £1500 pm down.city has a population of 250,000.at least 2-3% of it’s property pool is empty and awaiting tenats.no shortage of supply there.no shortsge no rent increases

    retnal yields may be moving up but thats beacause pricves are dropping

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  • little professor says:

    I’ll have a go 🙂

    I won’t deny that rents are rising (they’re up by around 10% YoY locally, much more than inflation.)

    However even with this rise, rental incomes still lag far behind an interest only mortgage for an equivalent property.

    Thus new entrants to BTL would have to subsidise their tenants.

    This was all OK when there was capital growth to be made, but with house prices falling, investors face both negative monthly cashflow and negative capital growth. That’s a lose-lose situation with no upside.

    Also mortgage lenders are tightening up their criteria, so large deposits are required, interest rates are rising, and requirements for rental income to exceed monthly mortgage payments by 125% are being more rigorously enforced. Thus it is harder if not impossible for new investors to enter this market.

    Hence for new investors, BTL is dead, buried, a dead parrot. It’s gone.

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  • Theblacksheeple says:

    Depends if they can still get a mortgage deal. What happens if they come to the end of a deal and cannot refinance? They will be stuck on SVR which could greatly increase their monthly costs. What happens if house prices plummet and they suffer margin calls? This article is out of desperation the VI’s realise the property market is tanking fast, so instead they try and ramp the rental market.

    We are heading at best for a very nasty recession and at worse the most significant financial event to ever happen, worse than a mere 1929 depression. If it makes you feel better though continue to cling to your one remaining argument.

    Regards

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  • montesquieu says:

    Have to agree. In the short-term lack of affordability and nervousness amond ftb, as well as increasing demand from sell to renters cashing in and waiting will drive up both absolute rent levels, and especially yields once prices being to fall big-time (improving rental income to cost ratios).

    Whether this will fix historically low yields is another matter – my landlord gets £1000 a month from me for a property he’s been trying to sell for nine months at £495k (he wouldn’t get a £200k mortgage for that sort of income now – £1000k a month is what is now required to get an 85% morgage on £200k).

    In the longer-term who knows? After prices finally crash, there may be something of a rally as pent-up demand from priced out FTBers make their move. Then again, lenders have so little liquidity that it may be impossible for ‘normal’ buyers (ie 3.5 multiple, 5–10% deposit) to get a mortgage at all, putting yet more upward pressure on rents as sales freeze up altogether.

    Rents have historically shown a much stronger link to income than sale prices so there may be more resistance to price hikes. Will be interesting to see how all this plays out. Right now, I’m certainly seeing that if I move, I’ll need to pay more in rent for something equivalent.

    I;m no economist to all this is very subjective and based on personal experience in the past year.

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  • little professor says:

    However there are still clueless sheeple being driven into BTL like lambs to the slaughter.

    According to the always reliable Assetz, at this months Homebuyer and Property Show in Birmingham, 40% of BTLers stated they were going to hold on to their portfolios, while the other 60% said they were going to add new properties to their existing portfolios. No-one said they were planning to sell up.

    While there are still mugs around, BTL will still splutter on towards its inevitable demise.

    P.S. there are free tickets to the next show available – anyone in the midlands want to go undercover and do a report for us?
    http://www.propertyinvestor.co.uk/birmingham/register.asp

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  • little professor says:

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  • May have a point-as I’m about to rent,so theres some rental income for the parasites.
    BUT ONLY BECAUSE I’M HAVING A HOUSE BUILT IN GREECE-AND GETTING OUT OF THIS COUNTRY BEFORE IT COLLAPSES

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  • Just Waiting says:

    Estate agents in my area have been rising asking prices, probably knowing that people are asking for bigger discounts and agents are attempting to hold prices rather than let them decline.

    Letting agents are asking for bigger rents. Interesting, where is the bigger demand for lettings coming from? We are all living in houses already and the Poles have started to go home.

    Although on the BTL, if my mortgage is 1100 and the rent 800 I would have to subsidise the rent by 300 per month. Although this seems stupid, putting 300 quid into a pension fund now knowing what the future value will be is also stupid. If BTL people see this as a long term investment then inflation will act to reduce the subsidy to where the mortgage covers the rent and eventually get a return when people want to retire. (In a stable economic environment)

    If the economy does turn and unemployment grows then people will return to there home countries, people will bunch up a bit more, rents will fall leaving BTLers further subsidising the mortgage. The governement may also start to see these BTLer’s as easy targets for tax revenue and as a cheap way to house those who will be unemployed, capping rents. The BTLers future does not look certain nor rosy.

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  • So sincere! I’m convinced.

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  • I have heard that a major high street estate agent has braced their staff for layoffs in the near future…
    sellers expecting highs, buyers expecting discounts result no sales, no need for estate agents..

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  • Stuart Law from the Assetz Boyz! Your video is very convincing – it doesn’t sound like a pyramid selling scheme at all! And no – you can expect the Homebuyer and Property Show to be rather echoey and vacant just like Evan Davies reported last year!!

    Bad luck.

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  • “repossessions are on the up, which means there is greater potential to snap up a bargain”

    Great potential = lower implied risk = excessive risk taking = more repossessions.

    Stuart, do you know what the term “circular argument” means?

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  • hah haha hhahahahahah hah hhahha hah aha hahha hahahaha
    ahah ahhahhahahahhaha ha hahha ahhahhaha hahahha hha ah
    ahahah haha hahhha ahah

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  • new user 2007 says:

    I like the line that BTL are in it for the long term, as opposed to home owners, who would want to clearly bail out of their own homes faster than BTL would sell when making losses.

    As for the BTL who see a falling market as a buying opportunity. This is beyond anything I can comprehend. That would be a unique investment strategy i.e. buying in a falling market (where shorting does not exist).

    I have no doubt that BTL who bought in or before the first half of 2005 have some chance of covering interest and have equity built in. BUT, of the 1mn BTL half bought since 2005, and they clearly bought at levels where they could only afford them at interest rates at that time.

    Rates are higher, as is the cost of everything else, WHILE rents may have risen but have not kept up.

    There are some very angry BTL out there and they are becoming increasingly vocal. That is a good sign, as it implies a closer move to panic. Greed is now moving to the next phase, denial and anger. Panic very soon:)

    There was one person on there who first talks of the social role of BTL as providing rental accommodation, then says many say they cannot afford to buy owing to BTL buying in the first place and these people must be waiting for BTL to sell, but then ends why this will not happen with a scientific analysis “in your dreams”.

    Not sure what the author of the story is talking about in general. Once she quotes Paragon as a credible source I started skim reading and found the comments more interesting.

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  • new user 2007 says:

    I read the Mr ASSetz comments. He makes it up anyway so can be ignored.

    But other surveys say only 20% are thinking of selling. Only 20% of 2m BTL properties? Or 20% of the 1m BTLers themselves? Either way, large numbers.

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  • Landofconfusion says:

    My brother recently started renting a 1 bed flat in Greenhive (nr. Ebbsfleet). £500/month.

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  • new user 2007…..
    I like your comment best! That’s a brilliant way of looking at it — “BTL are in it for the long term, as opposed to home owners, who would want to clearly bail out of their own homes”. That comment really exposes the idiocy and self-deluded mindset of BTL investors!

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  • A lot of poeople clearly don’t understand future demographics. The number of 18 year olds is set to fall dramatically for the next 10 years,

    why? because of reduced birthrate. How do I know? because my partner is a university lecturer. Universities are hoping to make up the shortfall with mature students with the help of higher unemployment.

    What are the implications for BTL over the next 10 years? fewer students and beyond that fewer new tenants when these people leave university.

    What is the implication for the future housing market ? Fewer 20 something first time buyers. I’m surprised this isn’t more widely known. The birth rate hit the bottom in 2001 by the way so it will be 2019 before that feeds back through into student numbers and even longer for the rental and housing market.

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  • Most of the BTLers I come across are now looking at selling as a good option!!

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  • Clever, buy at the top of the market and turn a 15% deposit into a highly leveraged loss.

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  • Another interesting quote from the comments on the above article:-

    “Just to add, for those people who have multiple BTL properties and little equity, a “margin call” is when a lender asks for the Loan to Value to be maintained; e.g. if I borrowed £90k with a £10k deposit and the property value falls from £100k to £90k, the lender can (and will) ask for a further £9k deposit.”

    Will be interesting to see if this scenario pans out.

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  • Anything Paragon say about rising rentals has to be taken with an ocean of salt. Their business is struggling and they will do and say anything they can get away with to save their skins. When this credit disaster is finally played out, the likes of Paragon and similar freeloaders will be just an unpleasant memory, although rather a long lasting one for those taken in by them.

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  • sacred contracts says:

    It all depends on the specifics doesn’t it… one area near where I live that was a haven for BTLers now has them all selling up….. and its easy to see why… people bought in when these 2 bedroom Victorian terraces were very cheap… some below £50k… in 2000 they were still going for under £100k

    The rental is now around £700 pcm (so a maximum gross of £8.4k a year if you’ve a steady tenant)

    but the current asking prices are all around £240k and the land registry average for the last few years over £200k, so that’s a yield of less than 4% gross.

    If you are just interested in the money you don’t need to be in trouble to decide that its worth selling now and simply putting the proceeds in the bank. Those people who haven’t “geared” away their equity and bought at under £100k will be able to get near that £700k pcm (e.g. with Northern Rock!) without any of the hassle, mortgages and other expenses of being a landlord…

    This isn’t, obviously, an argument again BTL in general, but an example of where an area has simply ceased to be worth buying into… and well worth getting out of. But that’s because it all does depend on the specifics…

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  • new user 2007 says:

    Sacred…

    That is how I look at it. In my and surrounding areas it has not made financial sense for BTL to be here since 2006 but even more arrived in 2007. That was totally based on capital appreciation expectations.
    Asking prices have not moved since May last year (admittedly in part because estate agents in the area acted in concert in the same month to raise asking prices to silly levels…everyone stopped buying even before the crunch) and are only now beginning to fall.

    The point is that these BTL are seeing no capital gain and subsidising tenants. I have seen a small but consistent rise in For Sale signs since Xmas. What is forgotten, however, is that the market is not just about BTL or others selling, it will start falling just because no new BTL and FTB enter (given BTL not only replaced but outcompeted FTBs i.e. increased prices). BTL selling is just anecdotal, new ones not entering is more obvious.

    And virtually all the sellers have no chain…the classic sign of a BTL area.

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  • sacred contracts says:

    new user 2007…

    Yes.

    Though I’ve never thought it a good idea to be calculating in capital appreciation. I’m a “money in the hand” is worth more than “an estate agent’s hopeful valuation” sort of person!

    Probably stopped me making my fortune on this cycle, but it also stopped me losing one.

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  • “In January Paragon reported that rents were rising at their fastest rate on record – up 19% in 2007 and 8% in the last quarter alone.”

    Who is getting these returns? I’m coming up for nearly two years rent without any increase at all. In my last place, the rent rose about 4% to 5% per annum on average, I estimate.

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  • Mary Sandeman says:

    The Essential Information Group have been providing Auction information to property professionals, private buyers and investors since 1990.

    Adding 3,000+ lots monthly to their data base they work with over 250 UK Auctions Houses. http//www.eigroup.co.uk

    David Sandeman, managing director said ‘Whilst more lots were offered at the 31 auctions held in January 08 when compared with January 07, the amount raised slipped 25% to £50 million, as did the sale rate which was 61% for January 08 as opposed to 82% for January 07. It was however, a relatively quiet month with only 966 lots being offered and Februarys results will give a better indication as to where the market is in terms of percentage sold when the figures are released next month.
    The performance of both residential and commercial lots can be seen as very similar, and the rolling quarter and yearly figures follow the trends that we have seen develop since the summer of last year’.

    Full information http://www.eigroup.co.uk/newsletters/2008/February.html

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