Landlords could be a threat to banks and wider financial stability

Thrugelmir

cells wrote: »

This is true typically BTL has a 5-6% rental cover at 125% required. Owners are at 7% interest rate requirements. However it ignores that fact that it is rare for a BTL to get a mortgage with less than 25% down and most BTL will invest a good £5-15k doing up the place post purchase increasing its value and achievable rent. Also in my experience surveyors tend to be quite conservative on the rent typically guessing ~10% than what is actually achieved

A huge amount of assumption for what is a highly fragmented business sector. Ignores the fact that most BTL owners are employed people. Loss of their main income will impact their ability to service the BTL mortgage. Many BTL owners spend as little as possible on a property due to lack of cash and in attempt to maximise their profit. Nor do BTL owners maintain properties at the same level as owners. This impacts resale value. Surveyors will know the achieved rent for similar properties in the locality as it's their business. Far better than people who chat to their mates down the pub. No sensible business will ever base financial decisions on future incomes rising. 10% is one heck of a hike in these tough times for many.

Given the unprofessional nature of LL's in general. Easy to see many struggling. As have been drawn in by the UK's obsession with property and the easy money to be made. Trouble is by the time the herd joins the party , the party has ended. Those with any sense are heading for the door. Off to the next one.

Generali

Thrugelmir wrote: »

Given the unprofessional nature of LL's in general. Easy to see many struggling. As have been drawn in by the UK's obsession with property and the easy money to be made.

I agree with this. Lots, although far from all, LLs seem to have gotten into BTL as a result of the dot com boom bursting and the Equitable Life debacle eroding confidence in asset managers to fund retirements or because they saw those people doing well and fancied a bit of the same. There has been no serious downturn in the market since the BTL boom got going, it'll be interesting to see what happens when there is.

I suspect that if you spoke to most BTL LLs and asked them about risk management or how they managed concentration risk they'd look at you like you were an idiot.

Crashy_Time

cells wrote: »

obviously i was being a bit sarcastic with the four horsemen statement but anyway...

I don't think 60% of new BTLs would be under water in a 3.5% base rate situation for multiple reasons.....

Most BTL mortgages are fixed for a period 2/3 years. So rents will be 5-10% higher by the end of the fix when new interest rates are to impact on their mortgage vs rents

A lot of landlords have multiple properties so they will be more concerned by the total rent and total mortgages. For myself +5% base rates instantly would be survivable. Of course +5% over say 5 years would be no problem as rents will be higher in 5 years

The landlords who have only 1-2 properties will likely be willing to continue paying the mortgage and sub the difference with their own wages/savings. Generally these people are not poor

Surveyors in my experience under-estimate rents so what the data the BOE are getting and actual rents achieved is different

a lot of landlords will invest into the property right from the beginning (eg spending £5-10-20k doing it up which increases the value somewhat and the rent achievable)

and most importantly of all, most landlords have a buffer of savings. If a landlord buys a £500k BTL in London they will soon be handing over £30,000 simply for stamp duty. Clearly if they have £30k to pay for stamp duty they are going to have some reserves to pay for the fraction of the ~£900pm more in interest that the rents dont cover if rates go up 3%

Clearly ...:rotfl: Makes you wonder why there is so much debt riding on BTL if these "landlords" are all so flush? When Lord Willets says "Houses cost too much" on the Daily Politics (yesterday) you know the direction of travel that is coming round the bend....don`t you?

CLAPTON

Thrugelmir wrote: »

Given the unprofessional nature of LL's in general. Easy to see many struggling. As have been drawn in by the UK's obsession with property and the easy money to be made. Trouble is by the time the herd joins the party , the party has ended. Those with any sense are heading for the door. Off to the next one.

is there any evidence the professionals with all the jargon and millions of computers models, do any better?

The people of the UK don't have an obsession with property : rather they have a fairly rational appreciation of its value.

Crashy_Time

CLAPTON wrote: »

is there any evidence the professionals with all the jargon and millions of computers models, do any better?

The people of the UK don't have an obsession with property : rather they have a fairly rational appreciation of its value.[/QUOTE]


Tell that to all those in the North of England, Scotland and elsewhere who are in Negative equity :T It was the property obsession that put them there.

chucknorris

Crashy_Time wrote: »

Clearly ...:rotfl: Makes you wonder why there is so much debt riding on BTL if these "landlords" are all so flush?

Well we have about £675,000 mortgage at an average rate of just under 1%, we could pay it off right now. But that would be foolish, the capital is much better placed in equities, earning between 3 and 4% from dividend income.

antrobus

Generali wrote: »

...Some people seem to think that the BoE makes this stuff up or does it for a laugh because it's Friday afternoon and they can't think of anything better to do. The Bank of England has stated that they feel that BTL lending is a big risk because:

1. They've seen banks' books as a result of stress testing'
2. They've got a plan as to where interest rates are likely to go over the next couple of years
3. They can see what could happen to banks as a result of interest rate rises....

The BoE (or at least that bit of it known as the PRA) will have seen the banks' books as a result of perfectly standard regulation, irrespective of stress testing.

All the banks that matter have their own risk models from which they derive the risk asset weights which are then used to calculate their capital ratios. Therefore, for example, they will all have a risk asset weight which they apply to their BTL book, and the historical 'credit loss' on that book is fundamental to working out what that the risk asset weight should be.

So the BoE knows, to the last penny, what credit loss any bank has suffered on any part of its lending book. Thus, when the BoE says that the rates of credit loss on BTL are twice that on OO lending, they say that because they have actually seen the numbers.

mayonnaise

Crashy_Time wrote: »

When Lord Willets says "Houses cost too much" on the Daily Politics (yesterday) you know the direction of travel that is coming round the bend....don`t you?

Gordon Brown, 1997: "I will not allow house prices to get out of control".
You probably knew the direction of travel coming round the bend back then and decided to sell? :rotfl:

http://www.bbc.co.uk/news/special/politics97/budget97/live/housing.shtml

michaels

I don't understand how CGT is a risk to the bank.

They reposess, they sell, at that point the reposessed lanlord may have made a taxable gain - but that tax is a debt of the landlord not of the bank.

Alternatively perhaps the reposession counts as a transaction triggering a tax liability, not sure what valuation is used to assess this but again the liability belongs to the landlord and as the asset now belongs to the bank there would seem to be no recourse against the asset value for the revenue.

cells

Generali wrote: »

Firstly most of the Government's debt is issued at a fixed rate. Secondly the Government can simply print money to pay its debts or simply force people to buy bonds (this has been done many times in the past both openly and via the means of enforced risk management).

I thought most of it was issued at short term fixed rates. so a 3 month government gilt is indeed 'fixed' but for all intents its virtually a floating rate with the added headache of refinance risk (could they do longer term paper but at floating rates to reduce refiannce risk, eg a bit like a 25 year tracker mortgage?)

and if the government was to print to pay off its debt then surely house prices and rents would respond positively to that in nominal terms (if not in real terms)