The Next Nail in the Coffin

mwpt

cells wrote: »

BM the biggest uk BTL lender

2.24% 2-year-fix £2k fee 60% LTV
3.04% 2-year-fix £2k fee 75% LTV

TMW I think the second biggest BTL lender

1.94% tracker 2 years 65% LTV £2k fee
2.19% 2-year-fix £2k fee 65% LTV
2.79% 2-year-fix £2k fee 75% LTV

Those fees are surprising to me. I'd thought that BTL rates were around 5% or higher. I go back to my claim that low interest rates drive the asset price upward, particularly relevant in the BTL investor case where the rate is fundamental to the yield.

Generali

cells wrote: »

In fact I think the regulators should push the mortgage companies towards offering term trackers for most their products. Not everyone is very MSE and im sure there are possibly millions of BTL and Owner mortgages which revert to expensive SVR rates and the borrower is none the wiser.

Is it for regulators to save people from themselves? It's an interesting road to go down.

Where does it end? Does The Savoy have to charge the same for a bottle of Schweppes as Tesco? What about a corner shop?

chucknorris

michaels wrote: »

I don't by this, I think this is just a manifestation of the mortgage industry following the 'new customers only' model that is now so prevalent in the pricing of almost everything. IE there will be no attempt to have competitive 'svr', those looking for such a product will choose a lifetime tracker, everyone else will start on a 'teaser' rate, the savvy will remortgage regularly, the lazy and those hit by a change in circumstances will end up on the cash cow svr.

I'm not hung up over the SVR, the point that I am making is that when the base rate reaches 3%, there will be mortgages available that are well below 6.6% (i.e. below a mark up over the base rate of 3.6%). I was originally responding to Crashy's assertion that when the base rate goes up, mortgage interest rates will rocket and crash the housing market.

Generali

westernpromise wrote: »

Unless any such rise in interest rates pushes down house prices. The last couple of times UK house prices went down, rents went sharply up, and it's not hard to see why.

Is that because both times general inflation rose sharply?

economic

the risk that everyone seems to be missing is the risk (perhaps tail) of a severe downturn in london/uk economy meaning rates stay low, house prices fall and rents fall. this is a possibility no one has looked at. with unemployment low perhaps its reached a low and could rise from here?

Brock_and_Roll

economic wrote: »

the risk that everyone seems to be missing is the risk (perhaps tail) of a severe downturn in london/uk economy meaning rates stay low, house prices fall and rents fall. this is a possibility no one has looked at. with unemployment low perhaps its reached a low and could rise from here?

I think you are right. I don't think this risk is particularly high at the moment but of course macro economic risk always has the potential to upset the micro calculations, whether property, antiques or whatever.


How the property market is affected depends on the nature of the "economic shock" - for example there might be a situation that leads to a run on the pound - which would result in interest rates being raised.


Let us not forget that QE is probably the greatest economic experiment since communism and the jury is still out as to whether it will save the world economy from recession...or just kick the can down the road leading an even bigger bust.

cells

Generali wrote: »

Is it for regulators to save people from themselves? It's an interesting road to go down.

Where does it end? Does The Savoy have to charge the same for a bottle of Schweppes as Tesco? What about a corner shop?

I dont know, I haven't spent the time or effort to know

However if you are selling a product that the person does not really understand you probably have a moral duty to either explain it to them until they do understand or at least not take the !!!! and offer them a reasonably competitive deal.

The regulators have already put into place standard forms so comparing should be easer but I still feel the majority of the population probably have little or no idea about it

having said all that, the current system makes MSEs get better deals so its not in my interest that things change

westernpromise

Generali wrote: »

Is that because both times general inflation rose sharply?

Not general inflation so much as the cost of owning property. If a £100k house is falling at 10% per annum, then you either own it and wear the £10k loss, or you rent it from someone else who’s going to wear the loss for you and will expect to get paid for doing so. His chances of achieving this are improved by the fact that rental demand rises as people rush to avoid capital losses. The issue is that nobody knows what the loss is actually going to be, so there’s a negotiation around what the renter’s going to be charged for the next 12 months.

What then seems to happen is that apprehension about possible capital losses persists for quite a long time after they’ve actually stopped. Rents are set in advance of course so if price falls stop the day you agree the rent, you’re charged something close to the previous year’s rent, set when house prices were still falling, even though they no longer are.

This, in the mid-90s, was how BTL got going. You could buy somewhere on mortgage finance and instantly let it out at a profit, to some loss-averse renter prepared to pay you more to rent it than buying it on a mortgage would cost. This renter did so thinking house prices would fall forever, because they hadn’t noticeably gone up in 8 years. So in 1996, that was what made BTL possible. Fast-forward to 2008, when house prices fell, and of course rents went up. It was worth it to not have the capital loss. Another BTL boom duly followed.

In the 1990 case we had house price falls triggered by high interest rates, and in 2008 we had house price falls and low interest rates, yet rents rose on both occasions. The common factor was falling house prices. This all tends to suggest several things to me.

First, it’s house prices rather than mortgage rates that drive rents.

Second, If this is indeed the case, this model predicts that rents should fall (or, at least, not go up much) when house prices are rising. And broadly, that is what we observe. Crashy’s rent hasn’t gone up because buying is more attractive than renting, so rental demand is muted. I rented a place in 1998 for £275 a week. I now own it; the rent has doubled but its value has quadrupled. In fact, static rents are probably a buying indicator in themselves, albeit maybe a lagging one.

Third, over-leveraged landlords at the margin won’t be able to raise rents to recoup the tax hit. It’s not their costs that determine rental prices.

Fourth, the BoE is probably right to be concerned about the impact of BTL on wider house prices. There are quite a few straws in the wind that suggest BTL started the house price recoveries in both 1996 and 2010. If BTL investment can end a crash, BTL divestment must logically also be able to trigger one.

Policywise, it looks to me like the fourth point above is being taken by the BoE to mean that large landlords need to be coaxed out of their holdings gradually - or at least, that the very leveraged ones do. Someone who is leveraged and has 20 properties will rarely be in a position of needing to sell just one or two to make ends meet. If exposed to rising rates, they’ll need to bale out of the whole lot, which risks trashing the market. So you ease those out first, and then you transition to a corporate lettings model in which corporations do most of the letting. Of course there is no sign of the latter happening because the climate is so unfriendly to them as well.

westernpromise

economic wrote: »

the risk that everyone seems to be missing is the risk (perhaps tail) of a severe downturn in london/uk economy meaning rates stay low, house prices fall and rents fall. this is a possibility no one has looked at. with unemployment low perhaps its reached a low and could rise from here?

When house prices fall rents go up, as a rule, and vice versa.

cells

westernpromise wrote: »

Not general inflation so much as the cost of owning property. If a £100k house is falling at 10% per annum, then you either own it and wear the £10k loss, or you rent it from someone else who’s going to wear the loss for you and will expect to get paid for doing so. His chances of achieving this are improved by the fact that rental demand rises as people rush to avoid capital losses. The issue is that nobody knows what the loss is actually going to be, so there’s a negotiation around what the renter’s going to be charged for the next 12 months.

What then seems to happen is that apprehension about possible capital losses persists for quite a long time after they’ve actually stopped. Rents are set in advance of course so if price falls stop the day you agree the rent, you’re charged something close to the previous year’s rent, set when house prices were still falling, even though they no longer are.

This, in the mid-90s, was how BTL got going. You could buy somewhere on mortgage finance and instantly let it out at a profit, to some loss-averse renter prepared to pay you more to rent it than buying it on a mortgage would cost. This renter did so thinking house prices would fall forever, because they hadn’t noticeably gone up in 8 years. So in 1996, that was what made BTL possible. Fast-forward to 2008, when house prices fell, and of course rents went up. It was worth it to not have the capital loss. Another BTL boom duly followed.

In the 1990 case we had house price falls triggered by high interest rates, and in 2008 we had house prices falls and low interest rates, yet rents rose on both occasions. This all tends to suggest several things to me.

First, it’s house prices rather than mortgage rates that drive rents.

Second, If this is indeed the case, this model predicts that rents should fall (or, at least, not go up much) when house prices are rising. And broadly, that is what we observe. Crashy’s rent hasn’t gone up because buying is more attractive than renting, so rental demand is muted. I rented a place in 1998 for £275 a week. I now own it; the rent has doubled but its value has quadrupled. In fact, static rents are probably a buying indicator in themselves, albeit maybe a lagging one.

Third, over-leveraged landlords at the margin won’t be able to make rent rises to recoup the tax hit stick. It’s not their costs that determine rental prices.

Fourth, the BoE is probably right to be concerned about the impact of BTL on wider house prices. There is quite a few straws in the wind that suggest BTL started the house price recoveries in both 1996 and 2010. If BTL investment can end a crash, BTL divestment must logically also be able to trigger one.

Policywise, it looks to me like the fourth point above is being taken by the BoE to mean that large landlords need to be coaxed out of their holdings gradually - or at least, that the very leveraged ones do. Someone who is leveraged and has 20 properties will rarely be in a position of needing to sell just one or two to make ends meet. If exposed to rising rates, they’ll need to bale out of the whole lot, which risks trashing the market. So you ease those out first, and then you transition to a corporate lettings model in which corporations do most of the letting. Of course there is no sign of the latter happening because the climate is so unfriendly to them as well.

I dont buy the idea that landlords will panic sell pushing down prices more so than they otherwise would go down.

I can only see two types of seller. The forced seller (cashflow negative) and the panic seller (sells because prices are falling)

I dont think there will be many panic sellers as transaction costs are high and a lot of people will be locked in with fixed rates with early repayment charges and simply most people hold a confirmation bias of 'it will recover sometime' and 'im not selling it for less than its worth'

The forced sellers. Unless there is a really big upswing in interest rates I dont see that happening. My last purchase was this year and it has a rent of £2200 and a mortgage of £950 it would take mortgage rates to exceed 6-7% before cashflow approaches break even.

And there are ways to manage the cashflow risk.
Have landlords hold a buffer of cash say 1 years mortgage payment. That will allow a buffer of 2 years before a forced sale by which time most likely things have improved. And that assumes the landlord does not have other income to cover any shortfall which in most cases they will have.


overall i simply dont see landlords posing more of a risk of making a hpc worse than owner occupiers especially with some simple cashflow risk managment. and like you say there is evidence to suggest that landlords help prices recover faster post crash which should reduce the risk for all