Trying to buy a house in this area is near impossible

[Jeremy]

I think that's it, SJ... people are looking for appreciation (despite CGT). Investors would need to be cash rich to make it work though.

[Blackcurrant]

StraferJack Wrote:

-------------------------------------------------------

> ". These figs make no sense to investors "

>

> what about the asset price once the mortgage is

> payed off?

No problem if the bank rate stays at 0.5% for 20 years or so. If mortgage rates rise above rental yields, highly leveraged investors are in a tight spot. Those exiting the market will push up supply. A rise in supply then puts downward pressure on prices - not good for asset prices.

It's inevitable that the imbalance between prices and rental yields will correct. There are two ways it can happen: prices fall, or wage inflation takes off and tenants bid up rents. Or a mixture of the two. The greater the disparity between yields and prices, the more likely the correction will happen suddenly through price falls. A rise in the bank rate is one possible trigger.

Note that all this can happen even with a housing shortage.

[Penguin68]

If mortgage rates rise above rental yields, highly leveraged investors are in a tight spot

Interest payments are an allowable cost when calculating your tax position as a letter of property(s). I do not know whether these can also be offset against other (non-rental) income, but if so someone who does not just rely on a leveraged property portfolio could still look to capital increases to justify being in the market - as the interest charges offset tax liabilities. With current huge increases in capital values at least in London and the SE a buy-to-let purchaser whose portfolio is of any age will certainly have seen a huge capital increase in values, and can probably 'ride' some amount of fall/ re-balancing if it occurs. Only those last on the merry-go-round (buying at the top of the market) may be significantly hurt.

[Mick Mac]

StraferJack Wrote:

-------------------------------------------------------

> ". These figs make no sense to investors "

>

> what about the asset price once the mortgage is

> payed off?

IMO best way to do buy to let is interest only - all interest is tax deductible and as the capital is not reducing then your tax deduction does not decrease over time.

As regards Interest rates rising - then yes you can have a cash flow loss - but the tax loss on one property is set off against any profit you may have on another property, or failing that carried forward until a profit arises, which it will do eventually when rents increase over time.

If it's a long term investment, it should work, eventually.

[Earl Aelfheah]

how depressing

[StraferJack]

Totally by coincidence, my boss (himself a small time BTL investor) just told me of his experience trying to buy a flat for his son in Shadwell area

He popped into an estate agent in Canary Wharf and he was looking at some off-plan flats. The estate agent has offices in Singapore and he said that just one guy over there bought 400 of off-plan flats in London last week

Of course the agent might having being BSing him, but why?

[lane lover]

StraferJack Wrote:

-------------------------------------------------------

> Totally by coincidence, my boss (himself a small

> time BTL investor) just told me of his experience

> trying to buy a flat for his son in Shadwell area

>

> He popped into an estate agent in Canary Wharf and

> he was looking at some off-plan flats. The estate

> agent has offices in Singapore and he said that

> just one guy over there bought 400 of off-plan

> flats in London last week

>

> Of course the agent might having being BSing him,

> but why?

A Real Estate BSing him? Gee, must be a first!

[LondonMix]

The general consensus is that there is an artificial land shortage created by govt policy that keep prices high. On top of this, in London, there is a speculative bubble. People are pricing in future growth expectations. Without a fundamental change in land policy, rents will justify current purchase prices over time, which is what most investors are betting on.

The entire system needs major reform.

[Blackcurrant]

Penguin68 Wrote:

-------------------------------------------------------

> If mortgage rates rise above rental yields, highly

> leveraged investors are in a tight spot

>

> Interest payments are an allowable cost when

> calculating your tax position as a letter of

> property(s). I do not know whether these can also

> be offset against other (non-rental) income, but

> if so someone who does not just rely on a

> leveraged property portfolio could still look to

> capital increases to justify being in the market -

> as the interest charges offset tax liabilities.

> With current huge increases in capital values at

> least in London and the SE a buy-to-let purchaser

> whose portfolio is of any age will certainly have

> seen a huge capital increase in values, and can

> probably 'ride' some amount of fall/ re-balancing

> if it occurs. Only those last on the

> merry-go-round (buying at the top of the market)

> may be significantly hurt.

This was all true in 2007 but landlords still got stung the following year. Those who'd invested in new build apartments offering "executive lifestyles" in inner city locations like Manchester and Belfast suffered capital losses of 40-60%. East London was comparable. But people have short memories..

[Loz]

In London, LondonMix? Where is all this land inside the M25 that the government is sitting on?

[????]

Loz - City AM said today take a mile off the greenbelt surrounding all of London= housing building boom - with related economic benefit, and house price stabilisation. I tend to agree,

[Blackcurrant]

LondonMix Wrote:

-------------------------------------------------------

> The general consensus is that there is an

> artificial land shortage created by govt policy

> that keep prices high. On top of this, in London,

> there is a speculative bubble. People are pricing

> in future growth expectations. Without a

> fundamental change in land policy, rents will

> justify current purchase prices over time, which

> is what most investors are betting on.

>

> The entire system needs major reform.

The "general consensus" is probably the most dangerous element in all of this as it's really just a reflection of sentiment and not a result of rational analysis. The best indication of the severity of the shortage is average rental yield. Rents in London are currently very high because of the property shortage - tenants are forking out around 40% of take-home pay on rent. But rental yields are very low, which tells you that capital values have run away, driven up by factors other than the shortage. If rents and values moved in parallel above the rate of inflation, there would be no evidence of a bubble and everything could be explained by the shortage. But that's not the case - they are on wildly divergent trajectories.

Foreign buyers are one factor, but the low bank rate is the big one, as that's what's supporting the resurgent first-time buyer market. It makes sense to first time buyers to pay these high prices when mortgages look like good value compared to rent. Put up the base rate and everything changes, as we've seen before.

Saying that, I think it will be a couple of years before rates begin to revert to mean, and in the meantime prices are going to carry on rising 20% a year or so. I've no doubt the Bank of England is privately very alarmed about it.

[LondonMix]

Loz, not in London. London has very little brownfield even but a natural release valve for London prices is the Home Counties commuter belt. If homes were cheaper there which they would be with more land released for residential planning, London prices would be lower.

[LondonMix]

Black currant if you read my post, I agree with you that a speculative bubble exists.

However, that is only part of the story. Speculating that rents will grow due to a housing market that isn't keeping pace with household growth isn't irrational from landlords.

Interest rates are not as influential as you think on first time buyers. First time buyers in London are still only borrowing on avg 3.7x their income which is an increase but not such an increase to suggest that with higher interest rates they would not buy. The low interest rate is probably having more of an impact on investors. Interest rates were low for years without any real increase in first time buyers.

[Blackcurrant]

LondonMix Wrote:

-------------------------------------------------------

> Black currant if you read my post, I agree with

> you that a speculative bubble exists.

>

> However, that is only part of the story.

> Speculating that rents will grow due to a housing

> market that isn't keeping pace with household

> growth isn't irrational from landlords.

>

> Interest rates are not as influential as you think

> on first time buyers. First time buyers in London

> are still only borrowing on avg 3.7x their income

> which is an increase but not such an increase to

> suggest that with higher interest rates they would

> not buy. The low interest rate is probably having

> more of an impact on investors. Interest rates

> were low for years without any real increase in

> first time buyers.

I didn't mean to come across as disagreeing, I was basically agreeing with you.

3.7 x income sounds high to me. First-time buyers were shut out by deposit requirements, but lending has become more relaxed, partly due to help to buy. 95% mortgages are common again. A lot of current first time buyers are taking a big risk, buying sub-prime, poor properties in increasingly poor locations.

Speculating on future rents would be rational if the projections didn't mostly come from estate agents like Savills with an interest in talking up the market. Lots of things can happen to change supply. Developers are currently falling over themselves to cash in, so clearly any relaxation in planning could dramatically alter price predictions as new-build blocks spring up everywhere. I think a rise in base rates will prick the bubble first though.

We've been here before. This kind of mania has happened twice since I moved to London and led to a crash both times. Each time, people were convinced prices couldn't fall. That conviction is part of the reason prices become disconnected from reality.

[LondonMix]

I agree lower deposit mortgages have brought first time buyers back to the market.

While the lending ratio may sound high its not wildly above historical norms. This only means that if interst rates increased back to recent highs (last 10 years) you wouldn't immediately anticipate a huge defaults to occur.

I am not a residential property investor but you don't need to read an estate agent's report to believe rents will grow in future. When house building doesn't keep pace with new household formation in London (which its not and hasn't done for decades) then rental growth is what has happened and what would be expexted in future.

Prices can always fall and could fall in London for a number of reasons. The long term trend though without reform on a number of fronts though is continued growth.

[Blackcurrant]

LondonMix Wrote:

-------------------------------------------------------

> I am not a residential property investor but you

> don't need to read an estate agent's report to

> believe rents will grow in future. When house

> building doesn't keep pace with new household

> formation in London (which its not and hasn't done

> for decades) then rental growth is what has

> happened and what would be expexted in future.

I agree that rents will grow in the future, but so far they haven't been growing anywhere near as fast as capital values. The divergence isn't justified by fundamentals, it's speculative. And if you believe that markets are efficient, the future projected growth in household formation is already priced in, so further price rises above the rate of rent inflation can only happen if market expectations are continually revised upwards.

> Prices can always fall and could fall in London

> for a number of reasons. The long term trend

> though without reform on a number of fronts though

> is continued growth.

That isn't saying much as the long-term trend in any price is upwards as long as positive inflation exists. I think you're saying the long-term trend is up in real terms, i.e. above the rate of inflation? I'm not sure I agree as prices and rental yields have become misaligned.

[PokerTime]

There are signs that the rental bubble is stagnating (for now anyway). Buy-to-let acquisitions in London are down and average rental increases have dropped and stayed at around 3.5% for more than 12 months now. As someone above said, rent levels can only go up so far before too many people can't afford them.

There was also a report a few days ago that the end of cheap fixed rate mortgages could be on the horizon.

http://www.dailymail.co.uk/news/article-2609859/The-mortgage-inquisition-Borrowers-face-tough-new-quiz-home-loan-spell-end-cheap-fixed-rates-warns-watchdog.html

Clearly the concerns are there regarding potential interest rate rises.

[LondonMix]

BlackCurrent, what I am saying is that London house prices are increasing for two different reasons.

1. House building is not keeping up with household formation. Allowing more land to be developed for residential purposes in the greenbelt would mitigate against this among other policy changes. This state of affairs would normally lead to price increases of some kind.

2. In addition to the above, there is a speculative bubble forming leading to price increases above and beyond what one would expect solely based on point 1 above. The underlying supply and demand issues have led people to price in future growth expectations in their current pricing

If you buy now, even if your current pricing might be above where one would imagine the market would naturally settle based on rental costs, if the underlying supply and demand issues are not addressed, in time your expectations about growth will materialize.

My only point is that there is an underlying problem that needs to be addressed to bring house prices in London under control.

And as an aside, asset prices don't necessarily grow by inflation. That's not in anyway a given.

[LondonMix]

Also, Pokertime

1. Movement or non movement of rental yields isn't a proxy for changes in rent. Yields are calculated over the current valuation. So if you bought last year and rents increased, the yield in your original investment would be up. However, if house prices increased more than rents the reported yield would be down.

http://www.theguardian.com/money/2014/feb/26/london-buy-to-let-rent-double-uk

However, an increase in first time buyers is having an impact on demand for rentals as renters are shifting to buying. As prices get pushed by buyers one would expect the balance to return.

The new rules are regarding affordability analysis have been used fir a while now but making them mandatory is good policy. The issue around affordability Is an interesting one. Price growth in outer London has massively outstripped prime Central London. Without action growth will continue to ripple out towards the commuter belt.

[Blackcurrant]

LondonMix Wrote:

-------------------------------------------------------

> BlackCurrent, what I am saying is that London

> house prices are increasing for two different

> reasons.

>

> 1. House building is not keeping up with household

> formation. Allowing more land to be developed for

> residential purposes in the greenbelt would

> mitigate against this among other policy changes.

> This state of affairs would normally lead to price

> increases of some kind.

>

> 2. In addition to the above, there is a

> speculative bubble forming leading to price

> increases above and beyond what one would expect

> solely based on point 1 above. The underlying

> supply and demand issues have led people to price

> in future growth expectations in their current

> pricing

>

> If you buy now, even if your current pricing might

> be above where one would imagine the market would

> naturally settle based on rental costs, if the

> underlying supply and demand issues are not

> addressed, in time your expectations about growth

> will materialize.

>

> My only point is that there is an underlying

> problem that needs to be addressed to bring house

> prices in London under control.

>

> And as an aside, asset prices don't necessarily

> grow by inflation. That's not in anyway a given.

My point is that speculation on the effects of the shortage (what you're calling the underlying supply and demand issue) is irrational given actual data. Rents in London are rising by less than RPI:

http://www.zoopla.co.uk/property-news/renting/london-private-rental-increases-significantly-below-inflation-801690173/

This is the opposite of what you'd expect if household formation were outstripping building. You're right that projections show an increase in the number households, but these predictions are not watertight - they are based more on the questionable assumption that household size is on a long term downward trend than on population projections, though it's true that population is rising. So far, the projections on household size have proved wrong. The number of households isn't growing fast enough to lift rents in real terms, and those speculating on property values are therefore basing their investment entirely on questionable assumptions about a future trend that isn't yet in evidence. This is fundamentally why yields are down: the growing supply shortage isn't growing anywhere near as much as investors are betting. So a correction is on the way.

[LondonMix]

I am not really sure what you are saying. If you are asserting that those speculating on London housing may not make as much money as they think they will then that of course is possible as is losing money. Personally, I wouldn't buy London houses as an investment but that doesn't really matter.

However, if you are saying there is no underlying supply problem that is simply not true. The fact that household formation has outstripped house building is a statistical fact borne out by census data. If that will continue to be the case in years to come is a judgement call but so far for various reasons house building has not kept pace with any future yearly targets but there are a number of variables that could impact this going forward. My opinion is that the situation in future won't be different to the recent past without policy change.

Regarding rents: Rents in London are growing and grew even during the recession. Some pressure has eased as some renters are becoming first time buyers. Your point about inflation however is misguided. Rents are correlated to wages and purchasing power not inflation. So all thing being equal (ie no change in demand or supply) rents would increase in line with nominal wage increases. Rents in London increased despite flat nominal wages and given a decline in real purchasing power of non-housing goods, one would have expected rents to fall. This in and of itself is evidence of supply pressures in the market.

Regarding yields: rental yields are a basic calculation of rent of valuation. Yields are flat when values are increasing at the same rate as rents. It doesn't mean anything else in and of itself. Yields in London are 4.8percent

http://www.ft.com/intl/cms/s/0/e2f40ca8-a476-11e3-9cb0-00144feab7de.html#axzz2zoS42ynZ

In prime Central London they are much lower but that market is small compared to London as a whole. For an investor, buying at an initial yield of 4.8 percent that grows by circa 3 percent per annum (if they feel that will happen) isn't a bad return relative to alternative investments.

Anyhow, I don't know if investors or owner occupiers are more responsible for the speculative component of the price increases. However, the longer it goes on the more dangerous it will be which is why the central bank is taking some action though it's very weak.

[Blackcurrant]

Rents in London are up 1.4% over the last year, which is well below both RPI and wage inflation.

www.ons.gov.uk/ons/rel/hpi/index-of-private-housing-rental-prices/january-to-march-2014-results/index.html

I agree there is a shortage, but the figures don't support the narrative of ever tightening supply. Rents are not correlated solely with demand (which is a function of wages, purchasing power and number of tenants) - they also reflect supply. Tight supply will drive up rents faster than the general level of inflation. But that hasn't happened - rents are stagnant in real terms even over the last decade. The shortage argument has been overstated, and prices are being driven into bubble territory by speculation, not fundamentals. Mortgage affordability based on the low base rate is the key factor missing from your analysis.

[LondonMix]

I?m not sure why you keep mentioning inflation as an indication that there isn?t growing demand relative to supply.

I?ll put it this way. When average prices of consumer goods are rising faster than your wage, do you generally feel you have more or less money to spend on housing? The fact that the cost of other items in the economy are going up, does not mean that housing costs should go up but quite the opposite.

For the last 5 years, real wages have been falling as inflation has outstripped wage growth. In these circumstances, all things being equal, one would expect rents to fall as a greater proportion of take home wages is used for essential items with inelastic demand (food / heating/ transport) that are increasing in cost. This is effectively what happened during the recession in most of the UK?inflation of essential items was higher than wage growth and rents declined.

However, in London rents grew and continue to grow despite continued declining real wages. The cause of this is increased demand relative to supply.

Edited to clarify that housing is also an essential item. However food and fuel prices are set on the global market and What happens in the UK doesn't materially impact on their cost. For rents this is not the case.

[Blackcurrant]

In real terms rents have fallen in London over the last 8 years, not risen. It's stretching credibility to call that growth. Your argument hinges on rent inflation exceeding wage inflation over a significant period, but you haven't demonstrated that. The housing shortage appears to be driving up prices in real terms but not rents, and the divergence between the two rates of inflation is substantial. There's no better evidence that prices have risen above long-term sustainable value.