19 May 2016, 5:35pm
housing
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  • Buy to let is a rich person’s game – shock alert.

    Aw, diddums. The Torygraph is spitting bricks about the unprecedented assault on private buy to letters in the Budget. Apparently buying houses to rent out to people too poor to buy them themselves is becoming a rich person’s game. Colour me flabbergasted. You’re buying extra copies of the single most expensive thing most Brits ever buy, just because you can, so you can fleece some of your fellow countrymen for an essential good. Of course BTL is a rich person’s game. The amazing thing is that we permitted, nay subsidised, non-rich but still extremely well-off people to borrow cheap money to give poorer people the shaft for so long, and indeed it’s another rum thing that it was a Labour government that aided this stiffing in the first place and a Tory government that applied the brakes, ever so gently.

    Obviously if you’re rich enough to buy more houses outright, well, go for it. But the one thing that the British housing market doesn’t need is more cheap borrowed money chasing a limited stock of houses, so it’s about time that these leveraged ‘landlords’ got run out of town, particularly at the moment when interest rates are low.

    Now it’s been a very long time since the Ermine rented a place, but my experience of private landlords was that in general they were thieving scum that wanted all the profit for themselves and spent as little as possible on their properties. Now part of that was my own fault – I had bought into the collective mantra the pollutes the British psyche that renting is fundamentally A Bad Thing. I was Monevator’s sister, probably before she was born 😉

    “I am just throwing money away by renting.”

    I combined this with another toxic tendency, one I still struggle with at times, which is if it’s something I don’t feel a passion for, I buy cheap. And often buy twice 😉 Now with renting I avoided the buy twice, but I did buy cheap. Not because I had to – I could have afforded to pay twice as much. But I was tight. Because I am throwing money away by renting, I tried to throw as little money away on that. Not to do something else clever like save for a pension but to spend it on beer and travel and music and shit like that. I was in my 20s FFS. The downside of this of course is that I was drawn to cheapskate landlords, because I was a cheapskate. I’m sure there are good landlords. I never ran into them. I never rented houses, either – only rooms – well and got together with others to rent a house but we each occupied a room. The only decent landlord I had was the work colleague I rented a room from for six months before I stupidly threw money away on buying a house at the top of the market.

    So when the Torygraph wheels out some dude called Craig Scott-Dawkins, ten years younger than I am who  owns five buy-to-let properties in Leamington and Warwick, the Ermine heart of stone chills to his plight

    He said: “I voted Conservative because I thought they were going to take a steady approach. But they’ve knifed us in the back. These changes are making it more difficult for those of us who want to prepare for retirement. 

    Let’s bottom out what is actually happening here. Let’s take a look at Maslow’s Hierarchy of needs, what the human animal focuses on

    1402_Maslow's_Hierarchy_of_Needs.svg

    A house sort of goes in the red bit. Since we’re not snails or tortoises, we need a roof over our heads to keep the rain off, and hairless wonders that we are walls keep the wind off us so we don’t freeze in these cold Northern climes. There’s no fundamental need to own houses, true, and in many other European countries renting is a perfectly good alternative. There is a strong argument to make that renting suits modern employment patterns better, at least until having children, but that’s a different issue. So our poor Craig isn’t rich enough to actually afford to buy the capital base of his evil empire, and he’s bitching about losing his subsidy. Well excuse me Craig, but you aren’t a landlord because guess who owns these damned houses – that’s the bank. You are a lord of jack shit, you are a bank worker making their money work for them. You are also exposing your unfortunate tenants to the risk of you getting taken out by rising interest rates on your overleveraged farrago. How do I know it’s overleveraged? Because you’re a subsidy junkie. If you really had the money you wouldn’t take the hit on the tax changes, because you were charging interest against tax, something that the poor bastards who actually want to buy a house to, y’know, actually live in the darned thing, haven’t been able to do for over 25 years.

    The trouble is that the government in the UK had made regulations about renting so bad for both landlords and renters that it’s a deadly embrace that isn’t much fun for either when it goes wrong. The renters have little security of tenure, but if they dig their heels in the landlords seem to have to jump through some odd legalistic hoops too kick ’em out. It’s something made for people with deep pockets who can play a long game, not the ‘my BTL is my pension’ brigade, who believe in housing as an asset class because they can touch it as opposed to things like shares or bonds. That’s religion, and it shouldn’t be subsidised by the taxpayer, particularly when it puts our young people at such a disadvantage compared to our old gits who have suddenly got pension lump sums to splurge from Osborne’s pension freedoms.

    I thought you’d decided not to give any more headspace to this kind of clickbait?

    Ah, you know what they say, the spirit is willing but sometimes not strong!

    23 May 2016, 9:56am
    by Playing with Fire

    reply

    Please don’t stop the rants Ermine. They’re the only thing stopping me getting riled up when friends explain that they know best because the DM said so.

    19 May 2016, 7:41pm
    by Underscored

    reply

    Let us not confuse Buy-to-let with Borrow-to-let πŸ˜‰ I never understood the thinking behind having failed to save enough for a pension – and then compounding it by taking out a whacking great mortgage or ten!

    It’s the lack of diversification too – both asset class and indeed the quite big individual lumps.

    Buy-to-let always was the posterchild for inequality, but people ultimately inevitably get the rulers they deserve. From an investment viewpoint though, even devoid of ethics, buy-to-let may well be on a gentle decline from now on, because [although housing is kept deliberately in short supply to shore up house prices] how can average people pay rent once robots & outsourcing have gobbled up most of the remaining jobs?
    That’s a key flaw in the whole modern day rentier economic concept ……the gravy train will roll on for quite a while longer though, eking out the last drop of profit for the establishment. Soon, even the uninterested majority will be forced to realise by a threshold level of impoverishment & disenfranchisement that frugality-based financial independence has become a matter of survival, not a choice.

    19 May 2016, 8:30pm
    by The Rhino

    reply

    …and relax

    I never have quite got my head around the fact that most of the US blogs about early retirement that I have come across say renting makes much more sense than owning, but most UK bloggers seem to feel the exact opposite.

    I’m with Survivor – renting is such a grisly experience in the UK compared with other countries, and also at least in the US the housing crash was allowed to happen so it’s probably less expensive. I was amazed looking at realtors when I was on a business trip over there in 2007 to see that I could pretty much buy a house over there from savings – they were much cheaper than here. OTOH you have to watch property taxes, which seem high compared to our council tax and a static load which is tough for FI.

    My understanding is that in the US, individual state laws can make owning vs renting quite different financially, as opposed to the straight-forward tax-break skewed to any homeowners generally in the UK – where renters also have little security protecting them from having to move at a month’s notice.

    More interesting is that here, most people don’t understand the concept of opportunity cost. So, if you are a seriously astute investor like TEA, getting 12% ROI/year, what does it matter that you don’t have all your eggs in one basket with a buy-to-let getting a net yield of up to 5%. The amateur army of buy-to-let investors would be happy to be guaranteed even that …..& also have no less risk – given the housing market is still subject to crashes. [as well as individual bad luck which is all it takes to hurt with one rental unit]

    As a renter and a landlord I can confirm that landlords are often crap. Typically they seem to want you to pay their mortgage and get outraged if you suggest they spend a few quid and fix anything (tax-deductably of course).

    On the other hand I (like many others) run my rental like a business. If the tenant requires something fixing I send someone round to do it immediately. If you have a good tenant you hang on to ’em.

    Which makes me wonder why there is such bile posted on here about BTLers in general? Genuine landlords (i.e. the ones that spend money as well as taking it) are providing a service.

    But I do accept that as much as tenants can be a nightmare, so can the army of amateur landlords. Proper regulation of landlords would help to raise the profile of landlords by sifting out the shysters.

    So what is the more acceptable way of investing? Isn’t speculating on financial market crashes just capitalising on others misfortunes?

    the difference with housing is everyone needs to live somewhere, so the previous tax privilege on the BTL mortgage was unfairly skewed against people buying an essential need. The current situation is much better balanced IMO, where at least both pay tax on the loan interest.

    Whereas investing in equities isn’t necessary at all, and indeed the majority of Brits aren’t active in that market directly. But it’s also a rich person’s game πŸ˜‰

    Remind me again why it’s ok to own a share of a food or utility company that’s in the business of selling those essential goods, but as soon as you own housing it’s somehow evil and immoral.

    It’s not evil, but you shouldn’t be tax-privileged to borrow money. You should pay tax on the money you pay the interest on just like normal homebuyers, else you are being sponsored to arbitrage your better financial resources. If you’re rich enough to actually buy to let rather than borrow to let, knock yourself out.

    Yes, businesses normally can offset loan interest against tax. They are borrowing to buy productive assets which hopefully will prodcue more goods and services, rather than to corral more control over a limited resource.

    In which case the real problem is limited housing stock, and both landlords and potential owner occupiers should be given favourable tax treatment for the purchase of new builds in order to encourage an increase in the supply.

    Meanwhile supermarkets and water companies for example should not be allowed interest deductibility because it gives them control over a limited resource.

    When I was a student, I had nightmare landlords. The mould in my bedroom and the non-repayment of deposits would not be tolerated these days, as people renting have far more rights and protection.

    As a landlord myself, I’m with fwinter – my BTL is run like a business. Spend money on maintaining the property and a happy tenant is far more likely to pay on time and look after their ‘home’.

    What isn’t considered is that the properties that are currently rented out are not necessarily ones which people actually want to buy to live in, so BTL landlords dumping their properties on the market because they can’t afford the tax might not necessarily help the housing crisis.

    Some good points weenie. I’m both a tenant and a landlord at the same time, and I feel aggrieved that we had to put up with mould in every room of our home for 12 weeks until Environmental Health intervened. Meanwhile I’ve spent thousands maintaining the house I used to live in for the enjoyment of my tenants…. but I digress.

    The other thing that the anti-landlord brigade don’t seem to understand is that a lot of housing is used very efficiently in city centres where 3, 4 or 5 young professionals share one house. If you took those properties out of the hands of landlords and made it easier for owner occupiers to buy them you would soon reduce occupancy density and worsen the housing shortage, driving up rents.

    > What isn’t considered is that the properties that are currently rented out are not necessarily ones which people actually want to buy to live in

    The obvious counter is that Britain had a serviceable rental sector before BTL appeared in the mid 1990s ISTR. You and I as students used it, and I used it in the early part of my working life. Indeed, some of the new pathologies of BTL such as agency fees, credit check fees seem worse that the old issue of landlords running off with your deposit 75% of the time

    There’s also a circularity in your argument because one of the reasons people don’t want to buy in BTL ghettos is BTLers often ramp up multiple occupancy. This happened to the road I bought my first house in – it’s been BTL-ised and tossed mattresses and furniture are much more widespread now, I got out only just in the nick of time, it must have gone to about 25% rental. As a homeowner I’d move once my road has > 10% rental for the exact reason that BTL makes it a place not worth buying in. Multiple occupation makes noise and antisocial behaviour more likely, simply because it packs more people in than the area and houses are designed for, and fills the streets with wheelie bins and trash and nobody can park their cars. It’s obviously great for the BTL owner to do the HMO thing

    HMOs are far more profitable to run than other types of residential lettings with rental incomes often two to three times those of single households.

    but that profitability can come at other residents’ misery. David calls that using housing efficiently, which is all very well but I don’t want BTL landlords to make that decision about my street for me, at least without having the damn pleasure of having to live in the street rather than just milking the profits.

    Credit where it’s due, this government have played a blinder with Clause 24. Although that may be the least of over-leveraged landlords worries. Being down in the Smoke, I’m only too aware of the misery inflicted on peoples lives (and I’m talking well earning professionals) by being outbid by BTL’ers who, so far, have been able to crank up on debt on more favourable terms than potential owner occupiers. There is no shortage of housing supply, there’s an oversupply of credit, as with every boom and bust.

    I am quite amazed, considering how many chips are on the table, all hoping that black will keep coming up, that every BTL’er I know (bar 1) doesn’t understand how Clause 24 works. Quote “It doesn’t affect me because I don’t make any profit” or “I’m only a 20% tax payer so I won’t be pushed into the 40% tax bracket”. I’m wondering if the exit door is going to be wide enough in 2020.

    People should always have the choice to rent, but for many it has ceased to become a choice. If GO’s intention is to run the Johnny Come Lately’s out of town and leave the rather important business of housing people (hat tip to Maslow) to the professionals and unleveraged, then I salute that as a “start”. An over supply of BTL’ers provides no service, or if I was to be generous they do provide a “service”, like a ticket tout does, but in a more unsavoury manner.

    Click Bait taken πŸ˜€

    @ Starla, some very good points about the lack of tax knowledge, although I sometimes wonder how many BTL landlords are actually declaring their rental income at all.

    On the financing front, although it was the case in the past, I think the days of “debt on more favourable terms than potential owner occupiers” are probably over. Landlords have to stump up a minimum 25% deposit, pay higher product fees and higher rates for BTL mortgages. The loan amount is also capped at 5.5% x 1.25 of the rent received, even with the most reckless lenders (currently Coventry Building Society). In practical terms this meant I was recently unable to increase my mortgage above 60% loan to value when re-mortgaging my properties, which is probably a good thing.

    Conversely, the would be owner occupiers can still borrow up to 5 times joint earnings in some cases, at ludicrously low rates and with a very low deposit. If and when the crash happens in 2020 I worry that they are the ones who will be hardest hit.

    I had to chuckle at your thumbnail sketch of all landlords being thieving scum. Because my neighbour is one and I’ll be sharing this observation with him over a pint or two tonight. He, however, has some choice words to say about his tenants, especially his more affluent ones who can be complete and utter nutjobs by all accounts. I’ve never been attracted to being a landlord partly because of the responsibilities – I can’t stand my wife telling me to repair the washing machine, never mind some numpty who has overloaded it just because they can.

    I’m with you there – it seems too much like hard work to be, with the extra chance of occasional bile on the side – the landlord-tenant relationship has much capacity for friction on all fronts.

    But I was a cheapskate and it was 30 years ago, the landlords on here tell us they’re lovely people and performing an essential service, perhaps It Really Is All Different Now…

    20 May 2016, 2:18pm
    by Neverland

    reply

    Real estate deals a lot with the government. It isn’t like manufacturing, logistics, home appliances or the auto sector, which deal with consumers.

    Once voting renters > voting home owners; property owners will see their notional legal “rights” ground into dust

    Very true Neverland, it’s not inconceivable that a modern equivalent of the Rent Act could be introduced by a left-leaning government in the not too distant future. Much easier to blame landlords than admit they should have built more houses.

    I wonder how your equation maps out in marginal constituencies. Or perhaps we will have to wait for the Baby Boomers to be outnumbered by Generation Rent, and for the latter to decide it’s a good idea to vote.

    @David >Meanwhile supermarkets and water companies for example should not be allowed interest deductibility because it gives them control over a limited resource.

    I’m kinda with you on water, I don’t think it should ever have been privatised. Supermarkets, well, if you really want to you can perfectly well grow your own food. Nobody gets in your face and jacks up the price of seeds or spades because they have deeper pockets than you. If you don’t want to grow it you have plenty of alternative sources. There’s not really a shortage of food in the UK, indeed of all the essential needs shelter in places where people can work is uniquely in short supply in this country. I see BTL as like ticket touting – it’s perfectly legal but it seriously screws up a once properly working market, by allowing rich people to insert themselves as monopoly middlemen who add little to the market functioning. But I don’t have a dog in the race and fortunately BTL didn’t exist when I entered the asset class. Had it done so I would have been appreciably poorer over my lifetime.

    I don’t think more money itself constrains or would unblock housing in the UK. There’s an argument to be made that it is too much borrowed money which is inflating prices, but the lack of building pretty well correlates with Right to Buy in the early 1980s.

    @Cathy — the big difference between our situation in the UK and the US one is that outside of the big capital cities and prime spots in the US, property appreciation there has, from memory, just about kept up with inflation.

    Whereas in the UK for 30 years it’s been a stupendous money-minting machine (and would have been for @ermine, too, if he’d kept hold of his first property, and was of course for his second).

    Now… we’ll each of us have to decide for ourselves if that’s because of (a) some particular internal market differences such as far more land available in the US, or net migration and low building rates in the UK or whatnot or (b) we’re still in an almighty unsustainable bubble and theirs burst.

    I’m a UK blogger who has lost a fortune in foregone gains by betting (b) for more years than I care to remember… πŸ™‚

    So I guess I’ve followed the US route. But without their perks, such as tax deductible mortgage payments and in many States the ability to just toss your keys back to the bank and walk away from the mortgage scot-free. πŸ™

    stupendous money-minting machine (and would have been for @ermine, too, if he’d kept hold of his first property, and was of course for his second

    It didn’t – (long-form version here) I have by now roughly broken even on housing as of about 2013. For sure my second house compensated for the loss on the first. but the sucker punch on that and the time value of money balances. We aren’t talking London here πŸ˜‰

    For all its harsh training in the dotcom bust the stock market has been a far kinder mistress to my finances than housing, although it’s fair to say that I selected pretty much the worst time to buy ever so that’s not a huge ask.

    […] Buy-to-let is a rich person’s game shocker – Simple Living in Suffolk […]

    “Which makes me wonder why there is such bile posted on here about BTLers in general?” I agree. Now that people aren’t allowed to rant on about other races or whatever, they spew all their bile at landlords instead. It’s The Law of Conservation of Irrational Hatred.

    Aw, c’mon. Ticket touts didn’t get much love either πŸ˜‰

    Can’t even point out the simple, neutral fact that landlords have to be by definition privileged in comparison to tenants …..without being vilified?

    Is it political correctness gone mad ?

    https://www.youtube.com/watch?v=bmsV1TuESrc Stuart Lee checks it out.

    Don’t believe the hype.

    I’ve just computed the annualised capital gain on a property I own in the SE of england, supposedly the source of incredibly rampant house price increases if you believe what you read. The city in question has regularly featured in the broadsheets as one of the hotspots for price-rises

    Over the last 9 years its 1.6%. I.e. worse than what I’ve managed to get on cash over that same period in a time of absolute record low interest rates.

    Its all bollocks really… any increases are so ridiculously localised it makes any sort of aggregate measure worse than useless

    24 May 2016, 7:08am
    by Mr Zombie

    reply

    Is that just the annualised return, or is it so much lower due to maintenance costs etc that are often over looked?

    thats just the valuation today compared to the valuation 9 years ago run through that annual % gain formula.

    not getting into imputed rent, actual rent, running costs etc. etc.

    Its definitely not some wildly lucrative racket as everyone makes out and its another liability which weighs on your mind the whole time. hassle factor is significant.

    i don’t think the juice is worth the squeeze for the returns i’m getting

    I’m going to get shot of it in the long run as part of my ongoing life simplification effort

    25 May 2016, 7:18am
    by Mr Zombie

    reply

    We bought right at the bottom, by pure luck. Our house has appreciated by 6% a year, not accounting for any repairs etc. Hardly a mind blowing return.

    The hassle factor is a big part, that makes me thing selling when we move is the right thing to do

    26 May 2016, 2:08pm
    by The Rhino


    yes, and if you think some brokers are expensive, just try running a BTL and you’ll see what high costs really look like. Totally unpredictable as well into the bargain

    @Rhino – agree , that’s my experience also. The annual income from rent was better than a deposit account or return on shares, but the actual capital gain on the asset over the years has only just kept pace with inflation. I have just got shot of it and must admit to feeling unburdened πŸ™‚

    @ The Rhino, I agree. I’m currently both a reluctant renter & landlord. On the one hand my last tenants trashed the place & then bailed, (& I’m still lucky that this’s my first void after 7 years) while the agency are total sharks & I have to watch my back against them screwing me as well as my tenants.

    On the other hand, I’ve been given a few weeks notice to get out of the place I live in because the owner’s desperate to sell, cash out & retire – he thinks the market’s going to crash this year & it’s his last chance to FI/RE.

    My point’s the whole system is broken & only the few at the top are winning – I’d sell my place in a flash & would love to rent/own something, somewhere nice with some basic security, just to be able to plan things in life/sleep well.

    26 May 2016, 2:05pm
    by The Rhino

    reply

    @survivor – the problem with your setup is your liable for the extra stamp duty if you ever decide to buy a main residence if you don’t flog the existing BTL first.

    My bro is in the same predicament. I think if you are genuinely buying a main residence no additional stamp duty should be payable.

    For me, because I already have a main residence, I can get another under the ‘replacement’ rules and pay no additional stamp duty.

    Bit tough on what must be the tiny niche who own BTL but are themselves renters.

    I suppose it’s possible that the handful of people commenting on this post were especially unlucky and managed — a la Ermine — to dodge one of the most profitable mass-market booms in history, but it’s not been the experience of my friends, nor, frankly, is it reflective of the statistics.

    I know many people living in six-to-seven figure houses in London/SE who bought 10-20 years ago who couldn’t buy a two-bed flat in London on their current salary now, let alone on their equivalent first-time salary to what they initially bought on today.

    As for 6% being a measly return, don’t forget buying residential property is virtually always geared.

    Let’s say you buy a Β£300,000 place with a 10% deposit and get a 6% return for 10 years.

    After 10 years your house is worth Β£537,000.

    That’s, obviously, a gain of Β£237,000.

    But remember you only put Β£30,00 in — which means you’ve enjoyed a 690% return on the money invested!

    Obviously I’m ignoring costs here, but also ignoring imputed rent etc. Call it a wash, or knock it back to a 500% gain if it makes you feel better.

    Roughly nobody gets 500% in a decade from shares.

    Ermine may come along in a moment to tell us gearing can both ways and of course it does.

    But a glance at the house price charts for the past 30 years shows us most people enjoyed that sort of multi-bagging gain, which is exactly why people are still so keen on UK property, regardless of its current valuation (which looks insane to me, but I’ve been wrong about it for years so who knows).

    In London/SE, they’ve seen it make ordinary people rich *compared to those who didn’t buy*.

    In fairness although I haven’t done well out of property in finacial terms I broke even, although the risks I took unwittingly, stupidly and casually in the early part of my working life still bring me out in a cold sweat. I had incredible luck in being in an upcoming industry and surviving the axes swung in the early 1990s, because the only way you survive the leverage in the downswing is to *stay in the asset class* and if I’d had the brains to apply that to equities in the 2000s suckout I’d have been better off. Hindsight, ain’t it a wonderful thing πŸ˜‰

    And I also didn’t have to put up with asshole landlords for over 25 years, and not having greedy landlords in your face for a quarter-century is a quality-of-life intangible that’s well worth having, and probably worth paying a lot of money for, which is just as well because I did.

    And since I discharged my mortgage while still working I was able to knock myself out with the saving hard into pension savings at the peak of my earning capacity, saving the 40% tax plus the stockmarket gain from 2009 which I couldn’t have done had I been renting. Again, a decent slice of luck, I didn’t build that and so need to show some appreciation for the luck in the endgame if I am going to bitch so much about the kicking in the beginning. I wish I could say it had been cleverness.

    As a result if I sold my house and flattened my ISA but left my pesnion alone I could actually buy my parents’ house in London, cash. The trouble is that it’s in Eltham, which is now a rough-as-guts part of the city, don’t believe Metro or Wikipedia, it’s always a nice surprise to find one’s vehicle still there, and a bonus if it still has four wheels. The SE was always the wrong side of the tracks/river, BTL landlords have been packing in the punters in the area and I had two bikes nicked from the drive over the years. I wouldn’t choose to live there if I was paid to. It was a lot better in the 1970s-90s.

    My Dad discharged his mortgage in his mid forties. Ten years later in my own lifetime I could match his outlay, but where he bought a house in a place where people brought up families and tended the gardens I would be getting an island in BTL hell with old furniture in the street and front gardens. On the whole I’ll pass πŸ˜‰

    28 May 2016, 8:37am
    by The Rhino

    reply

    Prob with returns from bricks and mortar is you have no choice but to be the equivalent of a single stock picker. One house on one street is like putting all your money (and all the money you can borrow) on a single company. Even the houses the other end of the road may perform completely differently

     

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