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Is Britain sitting on a £200bn buy-to-let time-bomb? Landlords borrow vast sums to fund property empires
By Simon Watkins for the Daily Mail
Published: 01:50, 5 July 2015 | Updated: 16:43, 5 July 2015
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Right now, there is no hotter topic at Middle England dinner parties or saloon bars than the dreaded buy-to-let conversation
Joe Kennedy, millionaire investor, businessman and father of the powerful American political family, knew precisely when to run like hell from an ‘investment opportunity’. He famously said: ‘When the shoeshine boys are giving you stock tips, it’s time to sell.’
Right now, there is no hotter topic at Middle England dinner parties or saloon bars than the dreaded buy-to-let conversation. It seems we are suddenly a Monopoly-playing nation divided into two tribes: those who have a gleaming, shimmering BTL property, and those who do not.
It’s not hard to tell them apart. One group look appallingly smug. In a world where pensions are being capped or slashed to ribbons and savings return virtually nothing, they boast happily about their little £200,000 three-bed nest-egg: it’s rocketing in value, they hoot. It will be collecting rent into their old age to fund their holidays in the Algarve. And monthly payments on the mortgage they had to raise to buy it are pennies! (As indeed they would be, with interest rates virtually horizontal.)
And facing them, there is the rest of us (yes, me, your City Editor included). We sink into the soup of our FOMO – Fear Of Missing Out – horribly anxious that we have failed to buy into A Sure Thing; and that surely now, as property prices go up faster than our salaries, we are now too late… and forever doomed to be the have-nots living off thin gruel in our 70s and 80s as our wise friends live a glorious retirement high on the hog.
But wait. I’m far from the only one profoundly fearful about the buy-to-let boom. To the question of what could go wrong with buy-to-let, there is a very simple answer: an awful lot. And I despair of how much damage may be wreaked both on hundreds of thousands of amateur investors – and our economy as a whole.
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LET’S start with the sheer scale of Britain’s great buy-to-let buy-in. The figures wouldn’t just make Kennedy run – he’d be jumping on an express train out of Disastersville.
More than two million people are now private landlords. That’s up by 600,000 since the financial crash. In 2000, less than two per cent of mortgages in Britain were buy-to-let. Now there are an astonishing 900 BTL mortgages available, and they account for 15 per cent of all home loans.
That’s roughly – wait for it – £200 billion of borrowing. That’s close to the national debt of Greece. And it’s borrowed by private individuals to buy not a home for their family, but to speculate on house prices.
And it’s still growing. New buy-to-let mortgages account for 18 per cent of all new mortgages. What’s more, it’s given a helping hand by the tax system – it allows the interest payments on a buy-to-let property to be tax deductible. You pay tax on the rental income you receive, but MINUS what your mortgage payments cost you. That costs the Treasury about £5 billion a year. It is, in effect, a subsidy to landlords which people just trying to buy a house to live in do not enjoy.
The Bank of England - led by Mark Carney - last week to raise its own red flag about the BTL bonanza
It’s all aided the boom, which prompted the Bank of England last week to raise its own red flag about the BTL bonanza.
In its Financial Stability Report – designed to highlight early the potential risk to the financial system that could fuel a 2008-style crash – the Bank said buy-to-let ‘could pose a risk to financial stability’.
One sign it highlighted was ‘a growing appetite for risk’ among lenders. Days later, reports emerged of a new price war among banks, cutting mortgage rates to lure new landlords.
The significance of this is clear, and it doesn’t take a highly paid financial expert with a Powerpoint display to explain the obvious problems of the BTL bubble.
As matters stand, punters put down a deposit on the BTL (often they borrow this – perhaps they draw it early from their pension) and borrow the balance with a cheap, low interest-rate mortgage, then rent out the property. The rent covers the mortgage payments. The landlord has a bricks and mortar investment.
But even without the spectre of rising borrowing rates, the arithmetic is tighter than the tales of easy wealth might suggest. Let’s imagine a BTL landlord with a £50,000 deposit, who buys a £200,000 property, with, as is typical, an interest-only mortgage.
Having fuelled faster house price rises on the way up, the buy-to-let boom could drive faster house price falls on the way down
Simon Lambert explains the attraction of buy-to-let
BTL rates average about five per cent. Let’s be generous and say they pay just four per cent. The landlord needs to find £6,000 a year to cover the mortgage payments. The yield on residential property (the rent it can earn as a percentage of its price) is typically about five per cent. So the landlord could make £10,000 a year in rent. However, tenants come and go, and the advice to landlords is they should assume their property will be empty for one month a year. That’s more than £800 gone. Then there are other costs – remember, it’s down to you to replace a boiler when it blows up. Maintenance will cost a typical property owner one per cent of the value each year. In our example, that’s £2,000.
BUT what happens when rates go up? The Bank of England’s report last week warned that buy-to-let landlords are ‘more vulnerable to rising interest rates’.
We have all forgotten that the current 0.5 per cent rate is the monetary equivalent of life- support. Most economist expect rises to begin next spring.
So in our example, if interest rates rose from 0.5 per cent to just 1.5 per cent (still rock- bottom by historic standards) our landlord would see his annual interest rate bill rise from £6,000 to £7,500. It would to all intents and purposes wipe out the profit. And if rates go higher, they are dead in the water. Many might be tempted – or forced – to sell.
Investors are in negative equity at best; at worst, unable to sell, they have to sell their principal home instead, or cash-in more of their pension. Their nest-eggs, and possibly their pensions are gone, replaced with debts they cannot service.
Now consider what happens next. A glut of properties floods the market. Prices collapse.
Investors are in negative equity at best; at worst, unable to sell, they have to sell their principal home instead, or cash-in more of their pension. Their nest-eggs, and possibly their pensions are gone, replaced with debts they cannot service.
The Bank of England spelt out its concerns last week. ‘In a downswing, investors selling buy-to-let properties into an illiquid market could amplify falls in house prices…’
In other words, having fuelled faster house price rises on the way up, the buy-to-let boom could drive faster house price falls on the way down.
Deciding to sell a buy-to-let property entails none of the sentiment involved in your own home. Meanwhile, banks may be less likely to be patient with customers in arrears when what is at stake is not the borrower’s own home, but an investment.
And it is this that could be the explosion of the £200 billion buy-to-let time-bomb.
Naturally, nothing is certain. Optimists will insist that these fears are exaggerated. I don’t think so. But even if the buy-to-let bubble really can inflate for ever and house prices never fall, this is no reason for cheer. Because in that case Britain is heading into a new era of social division, between those who own their home and a buy-to-let property, and those condemned to a lifetime of renting. The end of the home-owning dream.
I began with a quote from a wise – and wealthy – sage. Here’s another. Warren Buffett, the billionaire investment guru, says: ‘Be fearful when others are greedy and greedy when others are fearful.’
One thing is very clear. Whether we jump in or not, we will never be able to say we weren’t warned.
Read more: http://www.thisismoney.co.uk/money/a...#ixzz3f2LzG6U7
Follow us: @MailOnline on Twitter | DailyMail on Facebook
By Simon Watkins for the Daily Mail
Published: 01:50, 5 July 2015 | Updated: 16:43, 5 July 2015
65 shares
224
View
comments
Right now, there is no hotter topic at Middle England dinner parties or saloon bars than the dreaded buy-to-let conversation
Joe Kennedy, millionaire investor, businessman and father of the powerful American political family, knew precisely when to run like hell from an ‘investment opportunity’. He famously said: ‘When the shoeshine boys are giving you stock tips, it’s time to sell.’
Right now, there is no hotter topic at Middle England dinner parties or saloon bars than the dreaded buy-to-let conversation. It seems we are suddenly a Monopoly-playing nation divided into two tribes: those who have a gleaming, shimmering BTL property, and those who do not.
It’s not hard to tell them apart. One group look appallingly smug. In a world where pensions are being capped or slashed to ribbons and savings return virtually nothing, they boast happily about their little £200,000 three-bed nest-egg: it’s rocketing in value, they hoot. It will be collecting rent into their old age to fund their holidays in the Algarve. And monthly payments on the mortgage they had to raise to buy it are pennies! (As indeed they would be, with interest rates virtually horizontal.)
And facing them, there is the rest of us (yes, me, your City Editor included). We sink into the soup of our FOMO – Fear Of Missing Out – horribly anxious that we have failed to buy into A Sure Thing; and that surely now, as property prices go up faster than our salaries, we are now too late… and forever doomed to be the have-nots living off thin gruel in our 70s and 80s as our wise friends live a glorious retirement high on the hog.
But wait. I’m far from the only one profoundly fearful about the buy-to-let boom. To the question of what could go wrong with buy-to-let, there is a very simple answer: an awful lot. And I despair of how much damage may be wreaked both on hundreds of thousands of amateur investors – and our economy as a whole.
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LET’S start with the sheer scale of Britain’s great buy-to-let buy-in. The figures wouldn’t just make Kennedy run – he’d be jumping on an express train out of Disastersville.
More than two million people are now private landlords. That’s up by 600,000 since the financial crash. In 2000, less than two per cent of mortgages in Britain were buy-to-let. Now there are an astonishing 900 BTL mortgages available, and they account for 15 per cent of all home loans.
That’s roughly – wait for it – £200 billion of borrowing. That’s close to the national debt of Greece. And it’s borrowed by private individuals to buy not a home for their family, but to speculate on house prices.
And it’s still growing. New buy-to-let mortgages account for 18 per cent of all new mortgages. What’s more, it’s given a helping hand by the tax system – it allows the interest payments on a buy-to-let property to be tax deductible. You pay tax on the rental income you receive, but MINUS what your mortgage payments cost you. That costs the Treasury about £5 billion a year. It is, in effect, a subsidy to landlords which people just trying to buy a house to live in do not enjoy.
The Bank of England - led by Mark Carney - last week to raise its own red flag about the BTL bonanza
It’s all aided the boom, which prompted the Bank of England last week to raise its own red flag about the BTL bonanza.
In its Financial Stability Report – designed to highlight early the potential risk to the financial system that could fuel a 2008-style crash – the Bank said buy-to-let ‘could pose a risk to financial stability’.
One sign it highlighted was ‘a growing appetite for risk’ among lenders. Days later, reports emerged of a new price war among banks, cutting mortgage rates to lure new landlords.
The significance of this is clear, and it doesn’t take a highly paid financial expert with a Powerpoint display to explain the obvious problems of the BTL bubble.
As matters stand, punters put down a deposit on the BTL (often they borrow this – perhaps they draw it early from their pension) and borrow the balance with a cheap, low interest-rate mortgage, then rent out the property. The rent covers the mortgage payments. The landlord has a bricks and mortar investment.
But even without the spectre of rising borrowing rates, the arithmetic is tighter than the tales of easy wealth might suggest. Let’s imagine a BTL landlord with a £50,000 deposit, who buys a £200,000 property, with, as is typical, an interest-only mortgage.
Having fuelled faster house price rises on the way up, the buy-to-let boom could drive faster house price falls on the way down
Simon Lambert explains the attraction of buy-to-let
BTL rates average about five per cent. Let’s be generous and say they pay just four per cent. The landlord needs to find £6,000 a year to cover the mortgage payments. The yield on residential property (the rent it can earn as a percentage of its price) is typically about five per cent. So the landlord could make £10,000 a year in rent. However, tenants come and go, and the advice to landlords is they should assume their property will be empty for one month a year. That’s more than £800 gone. Then there are other costs – remember, it’s down to you to replace a boiler when it blows up. Maintenance will cost a typical property owner one per cent of the value each year. In our example, that’s £2,000.
BUT what happens when rates go up? The Bank of England’s report last week warned that buy-to-let landlords are ‘more vulnerable to rising interest rates’.
We have all forgotten that the current 0.5 per cent rate is the monetary equivalent of life- support. Most economist expect rises to begin next spring.
So in our example, if interest rates rose from 0.5 per cent to just 1.5 per cent (still rock- bottom by historic standards) our landlord would see his annual interest rate bill rise from £6,000 to £7,500. It would to all intents and purposes wipe out the profit. And if rates go higher, they are dead in the water. Many might be tempted – or forced – to sell.
Investors are in negative equity at best; at worst, unable to sell, they have to sell their principal home instead, or cash-in more of their pension. Their nest-eggs, and possibly their pensions are gone, replaced with debts they cannot service.
Now consider what happens next. A glut of properties floods the market. Prices collapse.
Investors are in negative equity at best; at worst, unable to sell, they have to sell their principal home instead, or cash-in more of their pension. Their nest-eggs, and possibly their pensions are gone, replaced with debts they cannot service.
The Bank of England spelt out its concerns last week. ‘In a downswing, investors selling buy-to-let properties into an illiquid market could amplify falls in house prices…’
In other words, having fuelled faster house price rises on the way up, the buy-to-let boom could drive faster house price falls on the way down.
Deciding to sell a buy-to-let property entails none of the sentiment involved in your own home. Meanwhile, banks may be less likely to be patient with customers in arrears when what is at stake is not the borrower’s own home, but an investment.
And it is this that could be the explosion of the £200 billion buy-to-let time-bomb.
Naturally, nothing is certain. Optimists will insist that these fears are exaggerated. I don’t think so. But even if the buy-to-let bubble really can inflate for ever and house prices never fall, this is no reason for cheer. Because in that case Britain is heading into a new era of social division, between those who own their home and a buy-to-let property, and those condemned to a lifetime of renting. The end of the home-owning dream.
I began with a quote from a wise – and wealthy – sage. Here’s another. Warren Buffett, the billionaire investment guru, says: ‘Be fearful when others are greedy and greedy when others are fearful.’
One thing is very clear. Whether we jump in or not, we will never be able to say we weren’t warned.
Read more: http://www.thisismoney.co.uk/money/a...#ixzz3f2LzG6U7
Follow us: @MailOnline on Twitter | DailyMail on Facebook
The Federal Reserve has not raised its interest rates in nine years Photo: Simon Belcher / Alamy
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