'BTL Landlords go long'

MrDT

boinging wrote: »

I'm still shocked that people are not in favour of lower house prices and don't see them as a positive thing.

I'm not sure if this is a general comment, or if it's directed at anyone in particular.

I'd just like to say I am certainly in favour of lower house prices, see it as inevitable (as is the next boom-bust cycle, and on and on), and figure it will benefit far more people than HPI ever did. Me (a prospective ftb) included

My parents are trying to sell, they want to downsize from a 4 bed to a 2 bed, it's just the two of them now, they don't need a big family home. They will lose out in a falling market (well, they'll lose some of their paper gains), but they'd still be happy to see a correction. They bought their house for 50k about 7 years ago, it has recently been valued at around ~170k I think. They agree that this is insane. They'd rather take a hit on their 'unearned' profit and see their kids have the opportunity to buy their own places.

Sadly, other parents may take the opposite view - pray house prices remain high, sell at a silly inflated price, gift some of the gains made to the kids so they can then buy a flat/house at a stupidly inflated price... Nobody really gains in this scenario. In fact, the kids probably suffer from having to dedicate a higher percentage of income to mortgage repayments. They probably don't see it though.

I'd be more than happy to see prices remain level forevermore once they've dropped to a sane level (well, an inflation(/deflation) adjusted kind of 'level' of course, REAL day to day inflation too, food, energy, salary etc not ipod/plasma/tat corrected figures). I don't want to buy a house to be super rich selling at the top of the next bubble, I just want to eventually own a home mortgage free.

If lending had been limited by a few basic prescriptive rules such as minimum 20% deposit and maximum 3x salary things could never have become this ridiculous surely? Course, the government would have to back these lending 'rules' with some laws/fines for them to hold any sway with the lenders, and I doubt that would have been in their best interest for the last ten years.

Sorry, bit of a ramble this post

edit:

Gorgeous_George wrote:

Yes, lower prices are almost always a good thing.
If I buy another house to let to somebody who chooses to rent, that is a good thing.
BTLers did not cause the problem. Without doubt that was the lenders who relaxed the borrowing criteria.
Time for a pint. Back later.

Agreed, agreed, agreed, and chance'd be a fine thing maybe tomorrow night for me - enjoy!

Buy to letters aren't all bad news to ftb's. Some people seem to think in black and white, I'm glad I think in shades of grey Without landlords and landladies I'd either be living on the street, or at my parents house... Neither option I look upon favourably!

WTF?_2

LillyJ wrote: »

When did I say I didn't think prices were going to fall. NEVER. When did I say that BTLs will keep the market up. NEVER.

Do not put words in my mouth. All I have said is that

BTLs are NOT GOOD FOR FTBs. IF anyone disagrees with that, then fine, but I doubt you do.

Sorry, but your last few posts imply that you think that BTL people are going to jump in and make houses inaccessible to regular people even if prices fall.

That isn't the case. You need to learn how markets work.

The tightening of credit will restrict borrowing to buy and cause prices to fall to a much lower level.

There aren't enough BTL buyers with ready cash to hold the market up and nor will they jump in until prices have bottomed. Plus they'll be leveraging anyway so they will be just as affected by tighter credit conditions.

There's no easy lunch. Lower prices come hand in hand with harder to get credit. Easier credit leads to higher prices. But I'd rather have the situation where it's possible to save money and get a home with a minimal loan without plunging myself into penury over one where banks are lining up to lead me into a life of debt-slavery where I'm at the mercy of interest rates and I'm leveraged up to my armpits.

EdInvestor

!!!!!!

There will be some smart landlords out there who cashed in on their older properties with a lot of equity and who will swoop back in when they reckon the market has bottomed out.

IMHO you are seriously out of touch with the realities of the letting business. Landlords are interested in yields.So they will start buying in when prices drop to give what they regard as a profitable yield.( They will have their own view on the likely outcome for capital values long term - the current arrangment is just a blip of course.) The desired fall may be quite small in some areas, certainly some landlords are already reportedly buying in.

They will not wait for any "bottoming out" - they don't have crystal balls - but rather they will create one by moving in at the relevant yield level. Because they will be ahead of FTBs in the queue on risk grounds, they will get any available funding first.Most professional landlords are not highly leveraged.

It's quite possible IMHO that the private rented sector will expand quite a lot over the next couple of years.

You lot need to be careful what you wish for.

LillyJ

EdInvestor wrote: »

!!!!!!



IMHO you are seriously out of touch with the realities of the letting business. Landlords are interested in yields.So they will start buying in when prices drop to give what they regard as a profitable yield.( They will have their own view on the likely outcome for capital values long term - the current arrangment is just a blip of course.) The desired fall may be quite small in some areas, certainly some landlords are already reportedly buying in.

They will not wait for any "bottoming out" - they don't have crystal balls - but rather they will create one by moving in at the relevant yield level. Because they will be ahead of FTBs in the queue on risk grounds, they will get any available funding first.Most professional landlords are not highly leveraged.

It's quite possible IMHO that the private rented sector will expand quite a lot over the next couple of years.

You lot need to be careful what you wish for.

Thank you thank you thank you so I am not so stupid and ill informed after all.

Pez2

So why didn't landlords stop the last crash then?

m00m00

SOME landlords are interested in yields
SOME are interested in capital appreciation (else why hang on in a negatively geared environment)

the demand for BTL mortgages in recent years has massively been driven by an expectation of capital appreciation. Take that out of the equation, and the BTL marketplace will shrink quite a lot.

Fred1_2

GavP wrote: »

So why didn't landlords stop the last crash then?

I don't think BTL mortgages were available in the last crash. ISTR they started in 1996 or 1997.

I'm not saying that BTL will save this crash either. I just don't know.

auk

The economics of BTL work like this.


Your total return over any period of time =

(value at the end of the period minus purchase price) [capital appreciation]

+ rent over that time - financing cost (interest on mortgage payments) in that time [the excess yield]

Whether you have an interest only mortgage or a repayment mortgage is simplistically, irrelevant to this.

For simplicity again lets assume you put no money down, i.e. its a 100% mortgage and therefore infinitely leveraged. Removing this assumption just means that you need a higher return to make the economics make sense versus other uses of your initial capital (deposit).

Since you are 100% leveraged if, over the long term, you have a positive excess yield, i.e. the rental payments over the whole period you own the house are greater than the interest payments, then over the long term you will inevitably get a positive return. You will eventually pay off the capital and get a "free" house thanks to the miracle of leverage. How good a return depends on the capital appreciation and the magnitude of the excess yield.

If excess yield is negative, i.e. interest payments are higher than rents, then you will only get a positive return when you get capital appreciation. This is what has driven several BTL investments in the past 2 years. Unfortunately, this is clearly unsustainable. Any asset with this sort of yield profile is, almost by definition, overvalued. If capital appreciation fails to materialise, you lose money.

Judging by the above, you may say "so if my rental yield is higher than the interest payments, I should buy/hold onto a BTL"?

Unfortunately this is incorrect.

The reason is that in my earlier paragraph I didn't mention the fact that you should be comparing the return from buying / holding on to other options, i.e waiting for 3 years or selling out.

If this waiting/selling strategy results in a better outcome, then, although NPV positive, your decision to buy/hold is a VERY BAD DECISION.

This is the situation that BTLers are in now. Even if their rent coming in is higher than their interest payments, not selling is a very bad decision. When prices drop by 30%, then they will have lost 30% of the house price. The fact that they will still be making excess yield is utterly irrelevant. They could have sold and bought back into the market later. The only reason you would not do this is if you believed that transaction costs would be higher than the capital loss (very unlikely), or if your excess yield was so high that it outweighs the capital loss (very unlikely).

Paul_N_4

IMO

If you're not a highly leveraged BTLer, you're likely not to have many properties in the first place, so your impact on the market always was and always will be small. Those that are highly leveraged, which I believe are largely those that rushed into the BTL fade of recent years, obviously have their own concerns right now, like getting a remortgage for starters.

Taking the previous example where someone bought in the 70s and is now worth £140,000. What have they made? Just over £100,000? If with tighter lending criteria BTL loans require min 25% deposits, you're looking at being able to afford two/three more properties in the event of a crash. So if someone who done BTL in the 70s (in their 50s and 60s+ now) really wanted to, they could probably get two or three more properties with the money they had made from selling the first. But in doing so taking on another bunch of mortgages and all the worry.

So the number of people fitting the criteria of being 'able to move in and snap up all the cheap property' is pretty minimal. We're talking those who bought (IMO) pre 2002/2003, are not highly leveraged (probably have few properties), and has sufficient capital in the BTL property to release a deposit for another. Anyone in this position should do great in the event of a crash, and providing mortgage lenders are still favourable to BTL. But we're talking a small proportion of total home buyers here.

If those that bought into BTL over the last few years (a large proportion of total BTLers IMO) want to "ride it out" and are "in it for the long term", then obviously they are going to take a hit on the capital gained on their property. So that's even less capital to release for a deposit to 'snap up the cheap property when it crashes'.

The bottom line is BTLers are still a huge minority of home buyers and still massively small in comparison to FTBers, and BTLers with an availability of cash/capital to put down on more property when they crash is even smaller. If all the BTLers out there were not "in it for the long term" and cashed out last summer, we may have a discussion, but it appears by this thread that they didn't.

Also, I might be wrong here, but if FTBers are more risky than BTLers, why do FTBers only need 5%/10% deposit nowadays and BTLers need a good 20%/25%?

Fred1_2

auk wrote: »

The only reason you would not do this is if you believed that transaction costs would be higher than the capital loss.

Or because you think it's morally questionable to make decent tenants homeless to maximise your financial gain. I'm not saying that anyone should make a loss, but this is not a business like most others - you are providing people with a home - that's a massive responsibility and to bail out when the return is not at its maximum is just reprehensible.