This ghastly expression "The property ladder"

westernpromise

goldbyron wrote:

1. If you remain in a property for a period of time, say 5-10 years, you will also pay off a sum of capital which you do not get to do when you are renting. Thus this sum is no longer included within the next property purchase.

Example - you bought for £100k - paid off £30k capital in 8 years. You sell for £175000 (£75k inflation and £30k capital off) and net a profit (sorry for bringing it down to this!) of £105k.

The trouble with this logic is that if you rent the same property, it will cost less per month than the capital repayment mortgage does, which the renter can invest a lot more flexibly than the owner can.

Eg according to Egg's mortgage calculator, a £100k mortgage over 25 years costs £614 a month. In addition, the buyer is going to have to insure and maintain the property, at a total cost of say 1% of its value per year. So that's another £80 a month.

The interest on a £100,000 mortgage at the same rate is only about £450 a month. So the renter gets to live in the same house, but for £250 a month less.

The renter can invest that. Now the question is, what return could you reasonably expect on £3,000 over 25 years? Well, according to Standard Life (http://uk.standardlifeinvestments.com/content/data/press/press_articles/financial_adviser_06_2006.html), the average returns since 1900 have been 11.6% in equities, versus 6% for cash.

So the renter's £3,000 a year, compounded at 11.6% for 25 years, will produce a lump sum of £442,000!!!

The £100,000 house may be worth 4.4 times as much after 25 years, or it may not. Either way, though, if the buyer wants to trade up, his inflationary "gain" is going to be dwarfed by the even bigger "gain" in the price of the place he wants to buy. He doesn't gain from inflation any more than he'd gain if he traded in a used Corolla for a used Ferrari.

2. You buy in an expensive (gentrified - maybe) urban area (most of London) and later buy in a cheaper but nice rural area (Norfolk/Lincolnshire) - it is very easy to move up the ladder as prices may have risen far more in the urban than rural area.

In this example, you're not moving up any ladder. You're moving down one, if anything. Where you previously had a £200k house and no cash, you now have a £100k house and £100k cash, so your total position is....exactly the same as it was before: you have cash and assets worth £200k.

scorpio_princess

Cannon_Fodder wrote:

To clarify, I am not commenting on BTL from the good/bad landlord angle.
Its the dent they've made in housing supply that has prevented other getting on this ghastly ladder, that I don't agree with.

Cannon, I know what you mean about BTLers damaging market for FTBs. Around here, flats for anything under 120,000 are sold in a matter of hours - a vast majority to investors. Unbelievably, EAs even advertise in the property pages as 'ideal for investors'! This is very unfair on FTBs, most of which are only in the position to buy the lower end properties anyway. And you may say, 'it's first come first served' but I know for a fact that certain property investors in this area are alerted as soon as certain properties come on the market - ahead of ordinary buyers. I used to go out with an EA, so i've seen the amount of bribes, dodgy dealings and the like that go on (and the company he worked for are supposedly very "professional" - although I use that term loosely - not a dodgy cheapo outfit at all). I'm ashamed to admit that I once received a brand new fitted kitchen (well, my ex did really, I just happened to live with him) from a well-known property dealer in exchange for 'helping' him acquire a property by dubious methods.

Sorry if i've offended any law abiding, upstanding EAs - this is just my opinion, formed out of experience!

westernpromise

Cannon_Fodder wrote:

...but surely "Likely savings" to the renters, MUST be "Known costs" to the Landlord...

Actually my point was even simpler than that - rental returns are typically about equal to mortgage interest but buying a property entails repaying the capital too. On a £100k property, the buyer is going to pay at least £100k more than the renter over the mortgage, and all the rest as you've noted.

I wonder if we will see the BTLers squirm and demand some compensation for "irresponsible lending of interest only mortgages" when the crash hits?

I don't know about that, but for a year or two now, I have been predicting a "remortgage mis-selling scandal" in about 10 years' time. People who extended their mortgage every 2 years to buy cars, caravans and holidays will suddenly find they're near to retirement age, they've been making mortgage payments for 25 years, yet the balance is unaccountably bigger than it was when they originally took it out.

westernpromise

manofthemoment wrote:

Does it not make more sense to rent a nice place from a landlord who does not have to charge over the odds to cover his mortgage? This way he is responsible for all the maintenance, you get nice furniture, furnishings and white goods thrown in, all for hundreds of pounds less than the cost of the hefty mortgage you would need to buy such a place, and with none of the expense involved in maintaining the place. You can then invest the difference in equities, aim for as much growth as possible and make yourself rich instead of the mortage lender. You can start investing your money for growth straight away as you only need £20 a month to start investing in the stock market. You need a lot more than this to make a go of being a BTL investor at the moment.

Precisely!

goldbyron

In this example, you're not moving up any ladder. You're moving down one, if anything. Where you previously had a £200k house and no cash, you now have a £100k house and £100k cash, so your total position is....exactly the same as it was before: you have cash and assets worth £200k.


Not sure I see it this way - I would trade a 200K flat for a 200k semi detached house for instance. No more material gain as such but a better quality of life is afforded.

jyonda

Hereward wrote:

If it's an investment for a pension, then at some point the BTL LL will need to sell this property. If property prices continue to rise so that only those with property can afford to buy, who is going to buy the BTL, as most people will be trying to sell their "investment" to realise its gain in wealth. This increase in property to sell would cause prices to drop as the retirees try to find buyers, that is, why buy a property at, £200k if I can get a similar one for £175k? Also you should not forget that any gain in value will be taxable at 40%.

I don't think it's necessary to sell to realise the gains in value.
Well, I'm no expert but if I was a very sneaky BTL LL then I'd only ever pay interest on my purchases using all the extra cash to buy more and more property at auction. Then in many years time when my company was very assett rich I'd move to some tax haven and borrow a load of money against the value of my company, just like Philip Green did, and the UK treasury couldn't touch a penny of it. Or something like that....

Hereward

jyonda wrote:

I don't think it's necessary to sell to realise the gains in value.
Well, I'm no expert but if I was a very sneaky BTL LL then I'd only ever pay interest on my purchases using all the extra cash to buy more and more property at auction. Then in many years time when my company was very assett rich I'd move to some tax haven and borrow a load of money against the value of my company, just like Philip Green did, and the UK treasury couldn't touch a penny of it. Or something like that....

You don't need to more to a tax haven to borrow against your assets; in fact borrowing against them helps you offset any tax payable. In your scenario, you are expecting someone to take a risk on lending you the money, and being able to make the repayments on your new found debt.

jyonda

I own company. Company borrows money. Company gives me money. I live in Monaco so no tax. Company pays interest on loan.

tomstickland

A few months ago I asked someone what they meant by "the property ladder" on another thread.
They replied that it was all about buying a house for £x and then doing it up and selling it for twice as much etc.
I didn't bother replying. Most people don't do houses up; they just buy them and sell them.

Hereward

jyonda wrote:

I own company. Company borrows money. Company gives me money. I live in Monaco so no tax. Company pays interest on loan.

Aren't you allowed to withdraw any capital you have in a company tax free anyway? I believe Phillip Green live in a tax haven to prevent him paying income tax on his dividends; IIRC most of the dividends are actually paid to his wife who isn't a British citizen anyway.