2012 and onwards Predictions

MrRee_2

dtsazza wrote: »

That's true, for as long as those preconditions continue to hold.

To imply that 7% is some sort of universal constant seems shortsighted. If greater returns become available in other asset classes, then the return demanded from BTL will rise accordingly. For instance, if you could get 6% from an instant-access savings account (not saying that will happen next year!) you'd be an idiot to take on the liabilities of owning a property for just 1% extra return.

The 7% yield I quoted was today's yield - I don't think I implied that was a constant.

You are quite right, if interest rates are 6% on a savings account then yields may need to be higher.

In this case of higher interest rates, either house prices would need to fall - or, rents increase. This scenario would also created a lot of forced sales and repo's ..... which would feed the BTL buying frenzey - holding prices above a 'new' floor (maybe 10% yield?).

The point I was trying to make is that there will always be a floor to property values - it would take a quite remarkable collapse of massive proportions in the economy to upset this balance.

dtsazza wrote: »

(If a two-bedroom flat rents out for £700 p/m and the local DFS puts up the price of new beds by £42, that'd cause a 15% drop in house prices by itself, if the landlords replace the beds each year.).

I have read this again and again and cannot fathom where your logic is with the statement.

Landlords do not replace beds annually ..... that never, ever, happens.

Let's wander into looney land for a moment then .... DFS increases the price of a bed by £42 and the Landlord buys 2 a year, that's an increased cost of £84. You are saying that £84 increase will trigger a 15% drop in the house price? So, it drops from £100,000 to £85,000?

Where in the world of fanciful accounting do you equate an annual increase in costs of £84 to a £15,000 loss in value of the assett? That's a frightening claim and one every Landlord should be aware of!

julieq

When base rates are 0.5% and the FTSE has been essentially flat since 2000 and hugely volatile in between times, 7% yields on an investment looks pretty attractive. You can fantasise over a future when base rates shoot up, but there's no obvious likelihood of that happening.

And what happens if rates go up? Well that implies inflation, and therefore inflation in rents, and therefore increased rental income even ignoring the inflationary effects we're seeing from supply and demand. So it self corrects. In any case most investors would be happy to have a good chunk of 7% in their balanced portfolio. Real investors aren't obsessed with having the winning magic investment bullet as many appear to be here.

Or put it another way. If in early 2009 you'd been offered a 5 or 7 year bond offering 7% pa, would you have taken it? Because that was essentially what was on offer at that point via BTL under very conservative assumptions - I pointed it out at the time.

The only way BTL starts looking unattractive is if you fix the supply/demand issue underlying the market. As I believe I may have mentioned before.

IronWolf

I predict that by the end of 2012 most people will know where they stand with the Greek crisis and things will start getting back to normal (for us anyway)

julieq

There's a good rule which is that things always look at their worst when they're actually at their worst, where many extrapolate downwards further. I'm USUALLY optimistic on this basis, but in this situation I'm not. Because ultimately we're relying on Germany and France - centre left governments both - to force Greece to do something their own electorates wouldn't accept.

I hope Greece gets nailed up to be quite honest. They've failed to collect tax properly, and they're attempting to use their debt as a lever to get someone else to pick up the tab. But it really is anyone's guess how this will develop. I'm glad I'm not Greek though.

IronWolf

julieq wrote: »

When base rates are 0.5% and the FTSE has been essentially flat since 2000 and hugely volatile in between times, 7% yields on an investment looks pretty attractive. You can fantasise over a future when base rates shoot up, but there's no obvious likelihood of that happening.

And what happens if rates go up? Well that implies inflation, and therefore inflation in rents, and therefore increased rental income even ignoring the inflationary effects we're seeing from supply and demand. So it self corrects. In any case most investors would be happy to have a good chunk of 7% in their balanced portfolio. Real investors aren't obsessed with having the winning magic investment bullet as many appear to be here.

Or put it another way. If in early 2009 you'd been offered a 5 or 7 year bond offering 7% pa, would you have taken it? Because that was essentially what was on offer at that point via BTL under very conservative assumptions - I pointed it out at the time.

The only way BTL starts looking unattractive is if you fix the supply/demand issue underlying the market. As I believe I may have mentioned before.

In 2009 there were corporate bonds of very strong and reputable companies selling for yields of almost 7%, with yields in excess of that if you looked hard enough. Comparatively BTL is a poor investment over a no effort investment like corporate bonds.

pwllbwdr

Realmoney wrote: »

When inflation went over 2% the target was lower.

Basically the BOE have always been wrong lately with their targets for inflation and saying it will come back down.

5.2% inflation now and the base rate is still 0.5%, tick tock, tick tock

? When? According to the BoE website, since the MPC was given the control over the rates,

"The Chancellor restates the inflation target each year. From June 1997 to December 2003, the target was 2.5% for RPIX inflation. The Chancellor, on 10 December 2003 changed the target to 2.0% for CPI inflation."

Or are you referring to the change in measure?

julieq

IronWolf wrote: »

In 2009 there were corporate bonds of very strong and reputable companies selling for yields of almost 7%, with yields in excess of that if you looked hard enough. Comparatively BTL is a poor investment over a no effort investment like corporate bonds.

Hmmm - so into a recession which was completely unpredictible you'd have guessed that a corporate bond was a safe investment?

You'd have to wonder why 7% yields against low base rates were available on that basis really. Maybe they weren't as safe as they look in retrospect?

For BTL, the bet was this: you see prices dropping for a further period of time, 2 years say then rising back to the start point over a further 5 years, and so you have capital returning to start value over a period but bearing income from rent. And if the situation was different (as it was), you have a chance of capital gain. The risk of absolute ruin (loss of the capital) is negligible, even if there's a very long term slump in capital values.

But again, it's not either/or. You balance off safe and risky investments which combine together. Anyone relying on a single strand strategy is just punting on random horses.

dtsazza

MrRee wrote: »

The 7% yield I quoted was today's yield - I don't think I implied that was a constant.

...

The point I was trying to make is that there will always be a floor to property values - it would take a quite remarkable collapse of massive proportions in the economy to upset this balance.

OK, point taken. But if there's a "floor" to the price which changes depending on the situation, I wouldn't say that's much of a floor at all (and certainly not in the context of predicting next year's prices).

I have read this again and again and cannot fathom where your logic is with the statement.

Landlords do not replace beds annually ..... that never, ever, happens.

The reason I picked the beds example was because that's what my landlord did do in between each tenancy (as part of the standard renovation) when I was a student. Since it was a student house the tenancies would typically last a year, so he really was replacing the beds each year. They weren't exactly four-poster beds, though (but they did the job fine).

Maybe he set his bar higher than 7% though to account for this (or rather set the gross yield higher such that the net yield with larger renovation costs still hit 7%-ish).

Let's wander into looney land for a moment then .... DFS increases the price of a bed by £42 and the Landlord buys 2 a year, that's an increased cost of £84. You are saying that £84 increase will trigger a 15% drop in the house price? So, it drops from £100,000 to £85,000?

Where in the world of fanciful accounting do you equate an annual increase in costs of £84 to a £15,000 loss in value of the assett? That's a frightening claim and one every Landlord should be aware of!

You're right, that was completely wrong. The cost needs to go up by 1% of the house price to affect yield by 1%, not by 1% of the rent.

So if the beds went up in price by £500 each it would knock 1% off the yield (£1k less every year from a £100k investment), but not £42. I've pulled that paragraph from my previous post, because as you correctly point out it was rubbish. Mea culpa.

Road_Hog

Realmoney wrote: »

I can not see the proper recovery mode for a long time yet. The question is can the BOE keep base rates so low as inflation gets out of control in years to come?

The answer to that is, yes. We don't have national wage driven inflation any more, we have international commodity driven inflation that UK interest rates can do nothing about. Interest rates are going nowhere for at least a couple of years, maybe 3 or 4.

Interest rates were used to take the heat out of the market, too much money chasing too few goods. That isn't happening, the majority are cutting back, cheaper cars, less journeys, cheaper food shopping. Our money is being sapped by things out of our control, such as ever increasing council tax, VAT, fuel prices, energy (gas & elec), food prices etc. We're not splashing out on this stuff, it is going up for other reasons.

Interest rates will not stop these.

Flight2quality

MrRee wrote: »

In the case of higher interest rates, either house prices would need to fall - or, rents increase. This scenario would also created a lot of forced sales and repo's ..... which would feed the BTL buying frenzey - holding prices above a 'new' floor (maybe 10% yield?).

The point I was trying to make is that there will always be a floor to property values - it would take a quite remarkable collapse of massive proportions in the economy to upset this balance.

Another case of believing what you want to believe.

Why is there a floor under house prices? Yes they can not go to nothing like a paper investment, but in the 90's they almost went to nothing entire rows were for sale for peanuts. The cycle is just repeating once again. Actually in Detroit and other places old houses are being bulldozed which means they did go to nothing.

When interest rates go back up to more normal levels, yes you are right to say "a lot of forced sales and repo's and house prices would need to fall" because all the smart money wants to get out of property just like the last time this cycle happened. But you are wrong to think rents would increase.

As has been said when interest rates are back up to normal levels most would prefer 7% return on savings in building society than a higher return with more risk worry in BTL.