If house prices fall rents will rise. Why don't crashtrolls get this?

westernpromise

A common refrain among those who don't own property is a gleeful "just wait until..." aimed at those who do. Usually it's "just wait till interest rates rise", but whatever the just-wait-until is about, they then go on to predict a collapse in house prices after which they themselves will step over the wreckage and snap up a bargain.

If you are wondering who I am talking about, well, try housepricecrash.co.uk or look at the comments under any Daily Telegraph property article.

Now what strikes me as odd is this. I was a property owner in 1989 when the crash happened. Interest rates went up and house prices fell. And you know what happened to rents? They went through the roof.

Why? Well, it's obvious. If it's a choice of buying a £100k house at 15% interest rates and the price is falling 20% a year, or of paying £20,000 in rent a year to rent it instead of your current £10,000, what are you going to do? Er, you're going to pay more rent, because £20,000 rent is cheaper than a £20,000 loss plus a £15,000 interest bill.

This seems to have been completely forgotten in the last 25 years. Crash trolls (lovely DT term) seem completely unaware that this happened and seem to think, quite delusionally, that their rent will remain unaltered. Wrong. Their rent will rocket, and will wreck any chance of tenants' amassing a deposit.

This is why, when the market recovered from 1995, it was homeowners who moved in on the bargains. Rents were so high that tenants couldn't buy, so homeowners with equity bought using the new BTL mortgages that cost less than you could charge in rent. That is how BTL got going.

Oh, but rents are already as high as the market will stand, goes the reply. Well, no. what the market will stand isn't static. In my example above, the market will stand £10k a year rent when prices are flat but it will stand up to £20k when they're falling. If you haven't got £20k, you downsize to somewhere the landlord will take £10k for. Your old flat gets let to somebody downsizing from a £30k rent flat. And so on.

Yes there are more flats to let now than in 1990, but there are also more people.

Why don't crashtrolls get this?

Graham_Devon

westernpromise wrote: »

This seems to have been completely forgotten in the last 25 years.

Probably due to the fact that your post describes such a short term issue.

Crashy_Time

westernpromise wrote: »

A common refrain among those who don't own property is a gleeful "just wait until..." aimed at those who do. Usually it's "just wait till interest rates rise", but whatever the just-wait-until is about, they then go on to predict a collapse in house prices after which they themselves will step over the wreckage and snap up a bargain.

If you are wondering who I am talking about, well, try housepricecrash.co.uk or look at the comments under any Daily Telegraph property article.

Now what strikes me as odd is this. I was a property owner in 1989 when the crash happened. Interest rates went up and house prices fell. And you know what happened to rents? They went through the roof.

Why? Well, it's obvious. If it's a choice of buying a £100k house at 15% interest rates and the price is falling 20% a year, or of paying £20,000 in rent a year to rent it instead of your current £10,000, what are you going to do? Er, you're going to pay more rent, because £20,000 rent is cheaper than a £20,000 loss plus a £15,000 interest bill.

This seems to have been completely forgotten in the last 25 years. Crash trolls (lovely DT term) seem completely unaware that this happened and seem to think, quite delusionally, that their rent will remain unaltered. Wrong. Their rent will rocket, and will wreck any chance of tenants' amassing a deposit.

This is why, when the market recovered from 1995, it was homeowners who moved in on the bargains. Rents were so high that tenants couldn't buy, so homeowners with equity bought using the new BTL mortgages that cost less than you could charge in rent. That is how BTL got going.

Oh, but rents are already as high as the market will stand, goes the reply. Well, no. what the market will stand isn't static. In my example above, the market will stand £10k a year rent when prices are flat but it will stand up to £20k when they're falling. If you haven't got £20k, you downsize to somewhere the landlord will take £10k for. Your old flat gets let to somebody downsizing from a £30k rent flat. And so on.

Yes there are more flats to let now than in 1990, but there are also more people.

Why don't crashtrolls get this?

Doesn`t work in the zero interest rate, bubble price, peak debt, no wage rise world I`m afraid, you need to have a re-think. My rent is the same as it was 15 years ago, and I don`t think it will be rising any time soon, it might even be falling.

Physics

If house prices fall, rents rise?

So with house prices going up, we should be seeing falling rents?

Here's another thought: rents and house prices are actually pretty uncorrelated. One is determined heavily by available credit and alternative investment opportunities, the other is determined by wage growth.

N1AK

Physics wrote: »

So with house prices going up, we should be seeing falling rents?

Here's another thought: rents and house prices are actually pretty uncorrelated. One is determined heavily by available credit and alternative investment opportunities, the other is determined by wage growth.

Arguably not, the issue is that house prices and rents aren't directly correlated. Obviously there tends to be a relationship, but fundamentally they are both decided by other factors.

House prices, especially in the South East are heavily influenced by expected capital value increases; rental income is seen as a useful ancillary perk by some.

I agree entirely that wages, and thus wage growth, has a large impact on rents. However, rents can increase regardless. Most people renting aren't going to stop entirely if rents increase by 5% for example, so clearly the supply of rental property has considerable impact as well.

Crashy_Time

Physics wrote: »

If house prices fall, rents rise?

So with house prices going up, we should be seeing falling rents?

Here's another thought: rents and house prices are actually pretty uncorrelated. One is determined heavily by available credit and alternative investment opportunities, the other is determined by wage growth.

Agreed. If house prices fall they fall, rents outside London have gone nowhere in over ten years, they won`t be rising in a deflationary environment.

westernpromise

Crashy_Time wrote: »

Doesn`t work in the zero interest rate, bubble price, peak debt, no wage rise world I`m afraid, you need to have a re-think. My rent is the same as it was 15 years ago, and I don`t think it will be rising any time soon, it might even be falling.

So This Time It's Different?

I don't think so.

There won't be a crash, but a correction would be a nice buying opportunity.

westernpromise

Physics wrote: »

If house prices fall, rents rise?

So with house prices going up, we should be seeing falling rents?

No, the reverse need not follow. House prices rise as a consequence of excess demand for housing. This is likely to continue, in London.

The only thing that would drive rents down is an excess of supply. There is an excess of house supply outside London because nobody wants to live there.

StevieJ

westernpromise wrote: »

No, the reverse need not follow. House prices rise as a consequence of excess demand for housing. This is likely to continue, in London.

The only thing that would drive rents down is an excess of supply. There is an excess of house supply outside London because nobody wants to live there.

Don't be ridiculous
This guy ownes half of London but chooses to live just outside Chester.

Dr._Shoe

OMG. If rents double does that mean I'll soon be paying £50 a week?

Thrugelmir

Physics wrote: »

I

So with house prices going up, we should be seeing falling rents?

If house prices fall rents will rise

:doh::doh::doh: