Landlords could be a threat to banks and wider financial stability

cells

Generali wrote: »

I did mean that, Typo Alert!!!

well let me put forward my reason for why interest rates wont go back up to "normal". First of all there is only a short period of history on which to look back at maybe 50 years and more likely 25 years when the iron curtain fell...so there is not really a normal to look back on we are making the normal.

The reason real rates wont go back up imo is life expectancy of institutions and states

How can real interest rates be 5% if a single dollar invested at 5% return becomes the size of the worlds GDP in less than 700 years?

I think real interest rates will be at most 1% which results in 2800 years to turn a single dollar to a trillion dollars (eg a single dollar exceeding the value of most nations GDP).

As time goes on we will see real interest rates for the assets deemed the safest of the safe to go from ~15% towards the end of the cold war towards 0-1% now.


of course there is a counter to this argument in that real rates can be positive maybe even over 5% for short periods of time but then there would have to be periods when real rates are negative so as to maintain rates at a level so in the long run eg 100-1000 years so that a dollar invested does not result in more than the output of the world

Generali

cells wrote: »

well let me put forward my reason for why interest rates wont go back up to "normal". First of all there is only a short period of history on which to look back at maybe 50 years and more likely 25 years when the iron curtain fell...so there is not really a normal to look back on we are making the normal.

The reason real rates wont go back up imo is life expectancy of institutions and states

How can real interest rates be 5% if a single dollar invested at 5% return becomes the size of the worlds GDP in less than 700 years?

I think real interest rates will be at most 1% which results in 2800 years to turn a single dollar to a trillion dollars (eg a single dollar exceeding the value of most nations GDP).

As time goes on we will see real interest rates for the assets deemed the safest of the safe to go from ~15% towards the end of the cold war towards 0-1% now.


of course there is a counter to this argument in that real rates can be positive maybe even over 5% for short periods of time but then there would have to be periods when real rates are negative so as to maintain rates at a level so in the long run eg 100-1000 years so that a dollar invested does not result in more than the output of the world

I think that real interest rates will return to their very long-term average ~2%. As inflation in a fiat money world tends to be ~3% that implies an average base rate of ~5%.

antrobus

cells wrote: »

You need to look at net yield not gross.

For example if you are getting £5k a year for a flat in Manchester bought for £63k or £50k for a flat in Kensington bought for £1.7 million. That gives your 2.87% vs 7.98% gross yeild. But say both the flats have £1.5k a year service charge and also £1.5k a year in other costs (eg maintenance repair your time).

The Manchester flat then falls to a 3.2% net vs 2.7% net for the flat in Kensington. Much closer to each other.

Why would anyone assume that a flat in Manchester had the same costs as flat in Kensington?

Besides, it doesn't change the fact that property yields (net, gross, or whatever) are lower in London, than elsewhere in the UK, and therefore London appears expensive on the basis of yield compared to the rest of the country.

Or to put it another way, you were wrong. Again.:)

antrobus

Generali wrote: »

I did mean that, Typo Alert!!!

Defaults will rise with rates IMHO.

And in the opinion of the FPC.:)

Assessed against relevant affordability metrics, buy-to-let borrowers appeared more vulnerable to an unexpected rise in interest rates or a fall in income.

Generali

antrobus wrote: »

And in the opinion of the FPC.:)

Assessed against relevant affordability metrics, buy-to-let borrowers appeared more vulnerable to an unexpected rise in interest rates or a fall in income.

I guess most BTLers rely on rental income to pay the mortgage. An unexpected loss of that income (e.g. because the tenant can't or won't pay) can see the LL in trouble quickly. Also, most of us aren't used to commercial loans where the amount of forbearance on offer in case of trouble repaying is about nil.

Generali

antrobus wrote: »

Why would anyone assume that a flat in Manchester had the same costs as flat in Kensington?

Besides, it doesn't change the fact that property yields (net, gross, or whatever) are lower in London, than elsewhere in the UK, and therefore London appears expensive on the basis of yield compared to the rest of the country.

Or to put it another way, you were wrong. Again.:)

Presumably if you're in [Northern Hell Hole] then the costs of things like plumbers are less to reflect the cost of living in [Northern Hell Hole] as opposed to London.

getmore4less

Generali wrote: »

I guess most BTLers rely on rental income to pay the mortgage. An unexpected loss of that income (e.g. because the tenant can't or won't pay) can see the LL in trouble quickly. Also, most of us aren't used to commercial loans where the amount of forbearance on offer in case of trouble repaying is about nil.

In most cases they are just paying the interest and there is no room to restructure on failure to pay


For OO many will be on repayment so although arrears potentially build up quicker the lenders have options to restructure to make payments affordable to avoid a repo.

cells

antrobus wrote: »

Why would anyone assume that a flat in Manchester had the same costs as flat in Kensington?

Besides, it doesn't change the fact that property yields (net, gross, or whatever) are lower in London, than elsewhere in the UK, and therefore London appears expensive on the basis of yield compared to the rest of the country.

Or to put it another way, you were wrong. Again.:)

it will be marginally lower cost.

For me I think investing in 5-6% yield flats/homes in inner London at the £400-600k mark is much better than investing 8-10% yield £70-100k property in cheaper parts of the country. Owning and managing 5 x more property in cheaper areas will be 5 x more time consuming and complex

Also the more expensive property has relatively much cheaper overheads. Eg insurance maintenance service charges finance and time are not 5 x as much.

The net yield especially if you factor in your own time as a cost will be a lot closer and maybe London would even win out


Also most people probably do not realise that finance costs are lower for more expensive property. This makes sense as it takes similar times and costs to process applications so a person borrowing less is charged more

cells

getmore4less wrote: »

In most cases they are just paying the interest and there is no room to restructure on failure to pay


For OO many will be on repayment so although arrears potentially build up quicker the lenders have options to restructure to make payments affordable to avoid a repo.

There are ways to control and mitigate risk.
All the landlords I know have cash buffers so that non payment of rent would not be an issue for paying mortgages. Those who do not have a sufficient cash buffer could purchase rental insurance.

Going forward I think the additional stamp duty (plus simply the higher prices now) will make BTL less attractive for the would be landlords that would be on the edge. In London five years ago you could buy a flat for £250k and pay £2.5k stamp duty. After april the same flats trading for ~£500k are going to have ~£30k stamp duty. A jump from £2.5k stamp duty to £30k stamp duty will surely put off a lot of landlords and weed out a lot of the cash poor landlords. Then the changes for april the year after will imo see landlords opt more for 40% down mortgages rather than 25% down mortgages as the finance cost tends to be a lot lower eg closer to 2% vs 3.5%.

So although I think right now the sector is quite sound and will cause no problems to the banks clearly the changes in april and next april are going to make it a whole lot more secure and lower risk

antrobus

Generali wrote: »

Presumably if you're in [Northern Hell Hole] then the costs of things like plumbers are less to reflect the cost of living in [Northern Hell Hole] as opposed to London.

I would have though that was obvious.

But apparently not.:)