Buy-to-let is danger to UK economy, warns Bank

N1AK

Thrugelmir wrote: »

People move with the herd. That's ok until the lions spook the herd and cause a stampede.

Absolutely, and often moving with consensus is a low effort way to get an adequate/good result. It has become conventional wisdom now that housing is a safe and lucrative investment.

wotsthat

Thrugelmir wrote: »

People move with the herd. That's ok until the lions spook the herd and cause a stampede.

Tell that to the oh so clever wildebeest who looked down on his dumb herd mates and went to live on his own. There's a reason why herd mentality evolved.

Herds don't prevent wildebeest being eaten by lions but reduce the chances of being eaten and limit it to the unlucky, weak and vulnerable.

The best time to be with a herd - when the lion turns up.

padington

Uk property has increased 105 fold since the last 60 years.

Anyone that is calling now as being the moment to bet against that form is a brave man.

Still anything can happen, the world is arguably crazier now than it ever was.

Here's the crazy stats ....

http://www.thisismoney.co.uk/money/mortgageshome/article-2144226/Average-house-price-risen-100-times-Queen-crowned.html

I would take the graph to mean only one thing, hold onto your hats, the next twenty years will be the really crazy years, up or down.

sebadee

cells wrote: »

I can't see how BTL is more risk than owner hones.

A BTL purchase is usually 75% or less LTV while an owner can easily get a rate of 85-90%.

A BTL purchase also potentially has other assets the bank can sell off to recover any loans.

The biggest risk to banks are the surveyors. If they don't over value the security Property there is almost nil chance of a loss as you would need a crash in prices in excess of 20-25% to cause a loss to the lender

The other key factor is that owner occupiers will ride out market down turns, as the property is home and not an asset. They will tighten belts and go without to keep their home. Investors don't have this association with the property, they will want to get out quick should prices start to fall or BTL is no longer financially viable.

kinger101

sebadee wrote: »

The other key factor is that owner occupiers will ride out market down turns, as the property is home and not an asset. They will tighten belts and go without to keep their home. Investors don't have this association with the property, they will want to get out quick should prices start to fall or BTL is no longer financially viable.

I think that's the crux of the BOE's concerns. More property is now in the hands of people whom might be more inclined to liquidate their assets if there were a downturn. If you miss the boat though, you might as well just hold onto the investment as the price will recover. Selling at the bottom of the trough isn't smart.

Thrugelmir

kinger101 wrote: »

I think that's the crux of the BOE's concerns. More property is now in the hands of people whom might be more inclined to liquidate their assets if there were a downturn. If you miss the boat though, you might as well just hold onto the investment as the price will recover. Selling at the bottom of the trough isn't smart.

Holding onto poorly performing investments of any kind is a classic investor mistake. Not just asset values that matter. Also whether the asset is generating a positive return after tax. For all that gets written about shares. 60% of returns are generated from reinvesting the income.

chucknorris

CLAPTON wrote: »

sometimes the lions gets trampled

They certainly got trampled last night by Australia at Twickenham.

kinger101

Thrugelmir wrote: »

Holding onto poorly performing investments of any kind is a classic investor mistake. Not just asset values that matter. Also whether the asset is generating a positive return after tax. For all that gets written about shares. 60% of returns are generated from reinvesting the income.

I agree, but even if the market value of the property has dropped though, it might still be generating a good income. Indeed, income as a percentage of asset value has actually increased.

If the housing market crashes, there would be a window where it might be sensible to sell (not least so you'd be able to buy more properties when it bottomed). Near the bottom though, all you're doing is potentially crystallizing a loss. And knowing how one asset might perform compared to another in the future is largely crystal ball territory, as evidenced by the very large number of actively managed funds which underperform trackers.

Generali

kinger101 wrote: »

If the housing market crashes, there would be a window where it might be sensible to sell (not least so you'd be able to buy more properties when it bottomed). Near the bottom though, all you're doing is potentially crystallizing a loss. And knowing how one asset might perform compared to another in the future is largely crystal ball territory, as evidenced by the very large number of actively managed funds which underperform trackers.

Given the costs of buying and selling in the market, the basic impossibility of picking either the top or the bottom and market illiquidity I reckon that this is a better stratagem in theory than practice.

When selling you have solicitor's fees, probably estate agency fees, plus you have triggered a capital gains tax event (and hopefully you'd have a bill!) if selling as an individual or a Corporation Tax liability if selling within a company.

When buying back in to the market you have legal costs again plus SDLT which unless you are a slumlord is unlikely to be a trivial amount.

The gross profit you'd gain on the turn would have to be, depending on circumstances, somewhere between considerable and huge to be able to make money on the turn. You'd be better off taking a spread bet position on the HBOS Index assuming you can still do that. No CGT, no SDLT, highly liquid and you can take a lot of leverage.

BTL, if it works at all on a relative basis, only works as a very long term buy and hold strategy.

Thrugelmir

kinger101 wrote: »

I agree, but even if the market value of the property has dropped though, it might still be generating a good income. Indeed, income as a percentage of asset value has actually increased.

If the housing market crashes, there would be a window where it might be sensible to sell (not least so you'd be able to buy more properties when it bottomed). Near the bottom though, all you're doing is potentially crystallizing a loss. And knowing how one asset might perform compared to another in the future is largely crystal ball territory, as evidenced by the very large number of actively managed funds which underperform trackers.

You are assuming that the property is generating a good income. For some investors it won't be.

as evidenced by the very large number of actively managed funds which underperform trackers.

There's also high statistical evidence that stock market investors overrate their own ability to pick winners. When it come to BTL it's not only a question of investing but running a business, and all that goes with it. I find the notion that one simply buys a property, collects rent and watches the asset rise in value somewhat lacking.