Friday, September 20, 2013

More great news for the Lords of Land

Cost of renting on the rise again

Rent increases.....Same bull, same solutions, different day

Posted by tom101 @ 09:13 AM (2782 views)
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24 thoughts on “More great news for the Lords of Land

  • I saw a great chart the other day showing disposable income vs rents, it is quite clear that rents will fall if incomes do not pick up. I have a feeling that Wonga et al are temporarily bridging the gap.

    A chart showing the plight of the under 35’s.

    http://www.thisismoney.co.uk/money/news/article-2364001/Is-making-work-pay-Report-warns-millions-risk-homelessness-afford-private-rents-vulnerable-social-housing.html

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  • Thecountofnowhere says:

    More housing propaganda…read as….renting is expense you must buy or you will miss out.

    No thanks. renting is cheap compared to be stuck with a mortgages/immovable weight round your neck.

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  • Khards, that is the spiteful thing about rents.

    If wages decrease by the same amount all round the country, then yes, rents will go down. Rents in any area depend largely on local average wages.

    But actually rents are based on the wage differential between the area concerned and the cheapest/worst/lowest wage area.

    So let’s split up the UK arbitrarily in “London and South East” and “Rest of Country”.

    If wages in LSE are £25,000 and in ROC £15,000, rents will be £10,000 higher in LSE (to soak up the difference).

    If wages in LSE go up to £30,000 but in ROC they stay at £15,000, then rents in LSE go up to £15,000.

    But what happens is wages in LSE stay at £25,000 but wages in ROC fall to £10,000?

    The same thing happens – rents in LSE go up to £15,000, or perhaps, rents in ROC fall by a bit and rents in LSE go up by less than £5,000 – but overall the landlord always wins.

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  • I like your theory Mark, though I would suggest that to work properly it would require that people were perfectly mobile with no family ties to any area – robotic. It would also depend upon take home rather than gross pay. Psychological factors would temper this effect. On the other hand the international city status of London would accentuate the effect. The cruel rent levels we have are the result of years of low interest rates. Labour caused it and Osbourne is pouring petrol onto the fire.

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  • @righttoleech – I am not sure if you are correct with the interest rates link, as London yields are around 3% and tending towards zero. If saving rates increased (which they will) then it would be more profitable to keep your money in the bank than rent out houses. This would reduce the number of properties to rent and increase rents.

    100% believe that high rents are caused by:

    1) subsidies via housing benefit
    2) An acute shortage of housing in some areas.

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  • had rates remained at 5% then ftbs would be buying the liquidated portfolios of btl

    there would be little demand for rentals…..its as simple as that

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  • Mark, let’s not help sell the myth that the landlord always wins!

    The average UK house price is £242k (per land registry). The average rent is £740. The average yield is therefore

    12 x 740/242000 x 100 = 3.66%

    This is barely more than treasuries (and will likely soon be less) and less than the dividend on loads of FTSE companies e.g. most supermarket share yield 4 – 5%.

    Of course you can’t really leverage up to buy shares, but the interest costs of so doing for a BTL borrower will be greater than 3.66%. So that part of the equation doesn’t work either.

    At a less general level I’m sure there are bargains (social housing etc) low capital cost high yield. But for middle of the road properties – ,the sort you would want to own, the return is below par compared to other investments – and much worse when you factor in voids, repairs, agent fees and the whole labour intensive nature of the thing.

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  • bellwether – the average UK house price might be 242k but I wouldn’t mind betting that the average price of houses which are rented out is some way beneath that figure, so the yield would be higher.

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  • ‘Of course you can’t really leverage up to buy shares’@[email protected]

    Yes you can…..several brokerages/ financial firms will lend you over 1 million on 200K held in a margin account at 2.9% so you most definitely can levergage up, more than when buying a house, when you can only borrow on your earnings not on savings (200k in a margin account for example). Stock market bubble/ Housing bubble…….Happy days:0(

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  • Khards, agreed your 1) subsidies via housing benefit and 2) An acute shortage of housing in some areas are the prime reasons.

    But……wiithout the drop in interest rates I doubt that a studio flat in a mediocre London area would have reached £200.000. If such a place was let’s say a far from cheap £100,000, the £800 per month rent would not be tolerated, it would be completely out of kilter with the price.

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  • The landlord usually ends up owning the place outright, at which point the yield becomes massive and it stays that way come rain or shine

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  • RTL 4, it’s not a theory, it’s observed facts. They never fit the model cleanly 100% but there are plenty of bits of research that show this, such as the stat’s showing rents as % of wages – the % is low in low wage areas and high in high wage areas. If you deduct the rents from wages, you end up with the same net disposable income everywhere in the UK.

    And no, of course most people aren’t very willing to move around the country, but rents and selling prices are set at the margin, it only needs a few hundred young mobile people to move to an area to push up rents (or prices), even if there are thousands of people in that area who stay put (or a few low earning tenants to be squeezed out or low earning Poor Widows In Mansions to cash in and move away), thus reinstating the basic relationship between average wages and average rents.

    BW 7, that’s a false comparison. Average rents are a bit higher than that anyway (£9,000 a year I believe), and on the whole, it is cheaper homes which are rented. The simple average selling price of all homes is indeed £240,000 – £250,000 but the median price of £160,000 – £170,000 is far mroe representative of rented homes.

    Further, having looked into this in infinite depth on a huge representative sample (down to postcode district level), average gross rents are pretty close to 6% of selling prices for most homes, i.e. everything worth up to about £700,000. For the top few per cent, the yield flattens off markedly, and is about 2% of the excess of selling prices above £700,000. I do not know or care why this is so, it just is.

    So places where a semi sells for £600,000, rent is £36,000 a year = 6%. Places where a semi sells for £1,000,000, rent is £36,000 + £8,000 a year = £44,000 = 4.4%. Rental yields on stupid super prime show off nonsense selling for £10 million is just over 2%.

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  • MW have just sent you e-mail

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  • Timmy T,

    I make that point in my post.

    Bystander,

    Leveraged accounts of the sort you mention cost a small fortune in interest, and way more than any yield you might ever hope to get. I should know I’ve got one.

    Flash,

    The yield on a lot of mid range – prime property is poor compared to alternative investments. There are also considerable costs to holding the asset.

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  • Mark I missed you.

    You said “BW 7, that’s a false comparison. Average rents are a bit higher than that anyway (£9,000 a year I believe), and on the whole, it is cheaper homes which are rented. The simple average selling price of all homes is indeed £240,000 – £250,000 but the median price of £160,000 – £170,000 is far more representative of rented homes.”

    (1) 12 x 740 = 8880 – £9k more or less.

    (2) I make the point regarding cheaper homes being rented at better yields!

    (3) What are median rents then?

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  • (3) What are median rents then?

    They’re what you hope for under one administration…

    …and what you wished you’d shut up about under another.

    Stay lively, my complacents.

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  • BW,

    1) Oops, good point.

    2) They’re not actually better yields, the gross yield seems to be close to 6% all the way up to houses costing £600,000 to £700,000.

    3) I do no know. I can tell you that the median semi-detached house cost around £185,000 and it would cost around £11,000 to rent it. But we are told that average rents are £9,000 a year, so we can assume that on the whole, rented homes are cheaper than owned ones.

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  • @Mark Wadsworth – “RTL 4, it’s not a theory, it’s observed facts. They never fit the model cleanly 100% but there are plenty of bits of research that show this, such as the stat’s showing rents as % of wages – the % is low in low wage areas and high in high wage areas. If you deduct the rents from wages, you end up with the same net disposable income everywhere in the UK.”

    I was giving your theory some thought this morning, I was in agreement yesterday but I am not today.

    I you modeled the entire housing market as a game of monopoly then you are correct.

    Where I live in the west of Ireland there is an oversupply of houses therefore rents do not reflect as a percentage of wage, they reflect whatever the landlord can get (which admittedly is what a tenant is willing and able to pay).
    For example the lowest rental properties around here are €350pcm. I would think they arrived at this price as it would not be worth letting it at less than €4k per year.
    Rents tend to peak out here at €1000 for student houses in the city and €700 for family homes in easy walking / commuting distance as that is what people can afford. Of course you can rent the odd mansion for €1200pcm if one comes up.

    The break the monopoly like rent collection you can either build an adequate supply of housing or apply LVT to the broken system *uk as a whole). I think that your LVT proposals would work well in cities and large towns, but outside of that small villages (like Glastonbury which is a classic) would benifit from building

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  • mark wadsworth says:

    Khards, if there are more houses than people, then there will be lots of marginal houses for low rents. That stands to reason.

    And it’s not a question of being “in agreement with a model” or not, those are the facts, we establish the facts first and then simplify it and call it a “model”.

    The same general rules apply to Ireland as anywhere else, rents are highest in and around Dublin, cheaper in small towns and probably quite low in the countryside.

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  • Mark,

    If houses are being rented on average at a 6% yield up to £800k, then prices to buy are significantly undervalued, and only rational move for you is to immediately borrow on a 5 year fixed at 3% and buy. I mean house prices are not just a little bit undervalued, they are hugely undervalued.

    It’s not the picture here in Scotland. Big yields (10%+) on the absolute cheapest property, but quickly dropping to 4% or below at around about £150k.

    The problem is incomes. They didn’t constrain a bubble forming in house prices because (of course) lenders weren’t really caring about income, but incomes really do constrain what people can pay in rent.

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  • mark wadsworth says:

    Bellwether, yes, the 6% figure is surprisingly high. But that’s the gross yield, you can knock of a third for running costs/risks.

    I took selling prices for England & Wales for the whole of 2012 from HM Land Reg, I took local rents from home.co.uk and then I did a representative sample of 100 postcode districts.

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  • Thanks Mark. On that basis why then are you not a buyer?

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  • BW, because I am still assuming that prices will fall once the HTB Bubble pops. A stopped clock is right twice a day.

    That 6% quickly nets down to 4% if you knock off a third for running costs, risks, big repairs, non-paying tenants, general hassle etc, and I doubt whether you can borrow money long term for only 4% (ignoring introductory special offers).

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  • But viewed from a tenant perspective, isn’t a 6% yield a bullish sign.

    As a punter I have 2 choices. Either I rent and pay 6% PA to a landlord, or I buy and borrow money at 3% on a 5 year fixed. Even if I can’t get those sorts of rates based because my deposit is insufficient I can tap the government up for 20% free money for 5 years, and rock bottom interest rates on the rest.

    Also if yields are currently 6% and there is even the sniff of a house price crash than the BTL business model suddenly becomes way more attractive and “investors” pile in and support prices.

    Where does the house price crash come from? I could see it in 2006/7, but having averted it there seem to be so many market forces mitigating against it- including population grown and an economic cycle which is turning up.

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