I’ll address the points as they appeared in the original letter.
The buy-to-let (BTL) market is dead
Your BTL market might be dead, but my clients and I couldn’t be more excited about the future of residential property investing.
Rents are too low
Many of clients have 100 per cent finance on their BTL purchases so they are used to making revenue losses on an annual basis. Many of my clients will have no tax to pay on rental incomes for a good 10 to 15 years because of this strategy.
They treat this cost as an ‘investment’ contribution – like any pension plan would be – and they are happy to be ‘saving’ in this way because they want capital gains over 20 and 30 years and not over one, two or three years.
And before anyone starts, you know I don’t mean 10 to 15 years of revenue losses – I mean that long for brought-forward losses to be used up before tax on net profits become payable.
Prudent to put money into bonds
But mortgaged property has the benefit of gearing. Remember how that works? Do you not teach that to your clients? I reckon that buying and owning property, even your own main residence, would be pointless if there was no such thing as inflation.
But we have wage increases fuelling inflation and council tax, food, and petrol occasionally increase. If we continue to have RPI and AEI both at, say, 3 per cent per annum, is there a very good chance that properties in the UK could also grow at 3 per cent per annum over the next 10, 20 or 30 years as an average?
Now, invest £25,000, including initial costs, into a property valued at £125,000 and you have five-fold gearing. If the house grows in value by 3 per cent the capital return is 15 per cent. Bonds versus property – tricky question.
Property prices will crash
Reminds me of the ‘paper’ a professor at Warwick University wrote in 2002, predicting the ‘Great Property Crash of 2003-2005’ (it’s the top item if you do an online search for it). I know the argument about the longer it doesn’t happen, the sooner it will – that holds about as much water as suggesting that the FTSE 100 index, which was touching 7,000 in December 1999, will cut that barrier again in the future – it hasn’t in nearly eight years.
You do know about the fundamentals in 1988 and beyond that caused the last major recession? You do remember that the worst of the high interest rates for a period were caused by the strength of the deutschmark?
Do you know that there are no precedents for crashes to happen – the combination of events 20 years ago cannot be replicated in any future economic climate.
A crash today can happen as a result of lack of confidence, loss of buyers across the property market, landlords not wishing to expand their portfolios and Base Rate sitting for a while higher than pre-1993 levels – we are still 0.35 per cent lower than the average experience from 1993 to 2001.
Apartment values dropping like stones
Tell us something we didn’t know was going to happen. We know some of the property ‘clubs’ were overselling the virtues of these purchases. However, leading up to 2006, we had seen values hold up but the properties were never going to reach the rentals that were being talked about and we could see that would have an impact on values when the amateur landlord started to struggle.
Every single experienced adviser in our industry knew that interest rates were going to increase back up to ‘normal’ levels so we all knew that a two-year deal would look astonishing and fantastic – we were telling our clients what to expect after the two years ,when deals came up for renewal.
We teach our clients well enough to take them out of the amateur bracket very quickly and many of my clients are shouting ‘bring it on’ to the prospect of a crash because they know that them picking up bargains will put a cap on the falls and then support average house prices.
The predicted levels of repossessions and the proliferation of buy and lease-back deals in 2007 and 2008 has to lead to average house prices falling at the lower end of the market – that still won’t make it a crash. That’s down to all manner of people taking advantage of the average Briton having made mistakes. Believe me, their financial education will improve if it’s the last thing I do.
Frank Jurga
Swindon Mortgage Services
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