Friday, Jul 03, 2015

Another reason BTL should have been discouraged

Telegraph: Buy-to-let could pose a threat to UK economy, warns Bank of England

"In a downswing, investors selling buy-to-let properties into an illiquid market could amplify falls in house prices, potentially raising losses given default for all mortgages." Those risks could be amplified as Britain prepares to raise interest rates for the first time since the financial crisis, as a small rise in rates could wipe out the income from a property.

Posted by quiet guy @ 12:32 AM (6961 views)
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11 Comments

1. bidin'matime said...

It beggars belief, doesn't it. Do these people live in a sealed room, or are they wilfully blind to the bleedin' obvious?

As an accountant with an every growing number of 'shoeshine boy' landlord clients, I was writing to the Bank of England and the FSA to warn them of this risk nearly 10 years ago (when Eddie George was still at the helm (Baron George, as he now is) - and got a pat on the head and was told to run along...

Now they finally see the light. Mind you, the worry is that they'll 'solve' it as they did back then - just print more money.

Friday, July 3, 2015 08:19AM Report Comment
 

2. cornishman said...

"While scientists have no clear understanding of the mechanisms that prevent the fact-resistant humans from absorbing data, they theorize that the strain may have developed the ability to intercept and discard information en route from the auditory nerve to the brain. “The normal functions of human consciousness have been completely nullified,” Logsdon said."

http://www.newyorker.com/humor/borowitz-report/scientists-earth-endangered-by-new-strain-of-fact-resistant-humans

Friday, July 3, 2015 10:08AM Report Comment
 

3. mombers said...

BTL mortgages typically require at least a 25% deposit and under normal interest rates, a FTB 10% deposit repayment mortgage would be a lot closer to a 25% interest only one. But under stupid low interest rates, the gap between the two is huge and the availability of interest only becomes a huge advantage. Consider a £200k house. FTB needs £180k mortgage, BTL needs £150k. FTB repayment mortgage is £1064.28 at 5% and £861.41 at 3%. BTL is £886.90 at 5% and £375 at 3%. In the first case, BTL interest only payment is 83% of FTB repayment but is only 44% at 3%. Interest only mortgages are a terrible idea all round but if one type of buyer has access to them and another doesn't, it's no surprise who is winning...

Friday, July 3, 2015 04:43PM Report Comment
 

4. Rob Mk said...

It is totally broken, the system is still trying to feed itself, what society do we have coming?
Why worry about anything when no matter what you try it is never enough?
Rent control is now needed as landlords simple bump the rent to compensate for cost rises, by the short and curlies......
One thing I note is that Cars and Motorcycles are getting silly expensive new and all the owners are grey haired or getting there. What happens to houses and economy when those working have to use wages to pay for things? Oh dear not so much money around.....sorry I spent all my wages that I worked for on rent and bills....don't have free money source...but then who does?

Friday, July 3, 2015 04:58PM Report Comment
 

5. Dharmin said...

As long as immigration is high BTL properties are safe.

Friday, July 3, 2015 05:10PM Report Comment
 

6. reticent said...

@3 your maths is out. 1st LL figure is for a repayment mortgage. For IO, it should be £625, which is 59% of the FTB repayment not 83%.

But your general point still stands obviously.

Interesting development. Perhaps public opinion is finally turning against BTL?

Flashman used to say that he had done regression analysis and found no link between IRs and HPs, which surprised him. I can imagine that most IR moves don't affect HPs measurably as they presumably take so long to work through to prices, plus they move pro-cyclically and so do HPs, so the negative relationship between them is offset by concurrent effects in the wider economy (ie economy is over - heating, so they raise IRs, HPs confinue to rise because of the economy doing well in spite of higher IRs etc.).

I don't know how to perform regression analysis yet but
1. Clearly 1989 and 2009, when the IR swings were bigger, they had a massive effect on prices.
2. Investors are clearly more IR-sensitive than OOs. A greater proportion of small-time speculators in the market increases the IR-sensitivity of the market.
3. When IRs are so unprecedentedly low, the affect IR rises have on the market is more pronounced.

The upshot of this announcement is that the BoE wants to raise rates but is especially wary of point 2.

Saturday, July 4, 2015 07:49AM Report Comment
 

7. taffee said...

Bearing in mind rates were slashed to near zero purely to stop a crash in prices which would
Likely mean lloyds for instance would have gone bust....it seems a pointless discussion point.

Saturday, July 4, 2015 07:55AM Report Comment
 

8. bidin'matime said...

@5. Except that the cut has encouraged even more to take the plunge, based on wholly unsustainable low interest rates; so even if the 'early' BTL landlords have been spared the pain, there are yet more who have followed, on yet more risky grounds - and having paid even more silly prices, are doubly exposed to the risks.

Saturday, July 4, 2015 08:11AM Report Comment
 

9. libertas said...

The simple solution is to ban all letting agents from renting out ANY property they have had an interest in selling in the past two years.

Estate Agents presently DEFRAUD vendors, manipulating sales to BTL investors who often pay less, with prices manipulated DOWN. The Agent's kick back for the arrangement is the ongoing commission from the rental contract. Whole areas of London have been cornered by this scam, despite buy to own investors often having more cash to spend.

Outlaw this fraud, and proper competition in the market place will reduce BTL to a more sustainable level.

Saturday, July 4, 2015 04:13PM Report Comment
 

10. letthemfall said...

reticent @4
I don't think said individual's grasp of statistics was as he would have us believe. Any single analysis is unlikely to reveal too much in such data - other variables, reaction time as you say, and so on. Prices go up when lots of people want to buy, and this is surely dependent on availability of cash, which certainly has something to do with interest rates.

Saturday, July 4, 2015 04:36PM Report Comment
 

11. mombers said...

@4 thanks for the maths check! Just goes to show how low interest rates are totally counter-productive and have unintended consequences. I mean intended consequences

Monday, July 6, 2015 10:50AM Report Comment
 

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