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Weekend reading: Buy-to-let market showing signs of retreat

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What caught my eye this week.

When former Chancellor George Osborne announced he was raising stamp duty and reducing tax relief on mortgage interest for landlords, there was some scoffing.

“We’ll just raise rents!” the less sensitive cried. “Generation Rent can pay our taxes!” 

Well it turns out that riding one of the greatest asset price booms the UK has ever known doesn’t make you an economic wizard. Rents are falling across much of the UK. Now there are signs some landlords are selling up.

A graph in today’s Financial Times [search result] shows that:

“… growth in outstanding buy-to-let mortgages is failing to keep pace with new mortgages being granted, in a reversal of the broad relationship between the two over the past decade.

This strongly suggests some buy-to-let mortgages are being redeemed as investors sell rental properties.”

Here’s the graph:

Graph that suggests landlords are beginning to cash out of buy-to-let sector.

Source: FT/Savills

I can add my own anecdotal observations to what this graph seems to be suggesting. One of the several reasons why articles on Monevator have been a bit thin on the ground recently is – wait for it old-timers – I’ve been looking to buy a property!

(What’s that? Oh yes, I agree. If there was ever a sign the bubble is about to burst, the last bear in town turning is surely it. Expect a long post on why I’m embarking on such madness in due course.)

I can confirm landlords are thin on the ground right now. One agent told me that in the area of London where I’m looking, 50% of sales used to go to landlords! Now they’re lesser spotted.

This is good news for first-time buyers, who have struggled for a decade to cope with the landlords’ trifecta of interest-only mortgages, tax relief, and deeper cash reserves.

I’m not someone who thinks landlords are evil (far from it – and mine have all been great) nor that there is no case for tax relief, say.

But I do think owner-occupiers should come first on our property-starved island.

On balance then, I am all for the changes to the attractiveness of buy-to-let, and the impact they seem to be having. Prices will probably stall or fall as the effect of higher taxes kick-in, and the economics of land-lording will be reset at a lower level.

Property has been a great windfall for the forty-plus demographic, but I suspect it’s time to look for new opportunities.

News

Note: Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber.1

‘$300m in cryptocurrency’ accidentally lost forever due to bug – Guardian

Gas and electricity fuel price have risen at triple the rate of inflation – Guardian

Investors shun UK markets to shelter in bonds – Telegraph

Budget could end valuable tax perks for investors [Search result]FT

UK can ignore Brexit and stay in EU, Article 50 official says [Search result]FT

How Nationwide got annual pension contributions to 23% of staff salaries – Guardian

UK market has been more expensive, but expected returns still low – Value Perspective

Products and services

The online brokers taking the misery out of mortgages – Guardian

Paragon Bank’s new easy access account tops tables with 1.31% rate – ThisIsMoney

Get an extra £100 if you invest £5,000 with Ratesetter via my affiliate link – RateSetter

Evaluating funds using Morningstar’s new style box – Morningstar

Investment trusts’ discounts narrow as demand rises [Search result]FT

NS&I boosting Premium Bonds prize fund rate to 1.4% from December – ThisIsMoney

Barclays admits posting out pin numbers with new cards – Guardian

Comment and opinion

Considerations for cashing out of the stock market – A Wealth of Common Sense

How good decisions and compounding can lead to huge results – Of Dollars and Data

Mean vs median vs mode life expectancy for retirement planning – Oblivious Investor

Merryn: Paradise Papers reveal a turning tide on tax avoidance [Search result]FT

The truth behind three common indexing questions – Vanguard blog

Bond investors are stock investors’ latest concern – Bloomberg

What order to use savings in retirement to reduce your tax bill – ThisIsMoney

How the top 1% really feel about paying tax – Guardian

Stock pickers, where’s the line between speculation and investing? – Gannon on Investing

FANG futures – The Macro Tourist

Why I’ve sold my Rio Tinto shares – UK Value Investor

Feeling giddy (and greedy?) with markets at all-time highs – SexHealthMoneyDeath

The bank of Mum and Dad: ‘A huge amount of money. And guilt’ – Guardian

Off our beat

Animation: The rapidly aging Western world – Visual Capitalist

Being a Startup Founder is a minimum wage job – Medium

The tension between creativity and productivity – Kottke

And finally…

“Are you going to be okay?” I said to Debbie. We were in the bedroom, Debbie sitting on the bed watching me pack for London. “I’m leaving you with all the animals, and Kylie in a strop. It’s all a bit unknown. The enclosures should be fine, but to be honest, if Ziggy and I built it, it only comes with a 24-hour guarantee, which runs out, um, about lunchtime. After that we can’t be held responsible.”
– Simon Dawson, Pigs in Clover

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{ 28 comments… add one }
  • 1 Matt November 11, 2017, 1:39 pm

    I’m largely in agreement. I think a healthy private rental sector is a good thing – there are always going to be people who want or need to rent – students, people who expect to move around with their job, for example. But that doesn’t mean that the outsized profits for the last 20 years have been justified. Hopefully this will lead to poor quality landlords selling up leaving the good ones in place.

  • 2 Wephway November 11, 2017, 1:57 pm

    It looks like rents are decreasing in London, the South East and South West, but that is to be expected really – I do think there was a bubble in those areas (in rents and house prices) and that will hopefully slowly deflate. In other parts of the country rents are increasing though, especially in the East Midlands where I live.

    The changes George Osborne brought in will slow down BTL landlords for sure and people with aspirations of investing in the housing market. They wont affect the people who already have large wealth in the housing market though, ie the rich. I’d expect that of Osborne though, he wouldn’t want to do anything to affect his rich chums.

    I’m not convinced first time buyers have really been helped over the last 4 or 5 years – Help to Buy seems to have increased prices of your typical starter property by about 20%.

    The reality is that if the housing supply could keep up with housing demand then we probably wouldn’t even be discussing this. I read on the BBC this week that only 5.3% of the UK is actually built on. Maybe now Charles and Elizabeth Windsor have their money offshore they don’t need that 20,000 acres of land?

  • 3 Simon November 11, 2017, 2:37 pm

    @Wephway

    I suspect the reality is that housing supply will never keep up with housing demand unless the country is concreted over to the point where people do not want to live here. The overall UK BBC statistic looks misleading because it includes eg all the Highland tundra where you probably could not physically build houses. If you look at counties like Surrey, you can see that they already seem heavily over-built.

  • 4 Mathmo November 11, 2017, 2:47 pm

    Are there any other asset classes that you think should be prioritised for owners vs those who rent them out? Gold perhaps. That’s limited and scarce. Can I have some please, ahead of – say – err – those evil people who don’t use it to brush their teeth? And how does that work, exactly? Is it about people having the right to buy places they live in from the owners? Perhaps I could have the right to own my train seat instead of having to rent it daily from Chiltern Railways? Or a price / taxation differential for occupiers (oh wait — there’s a massive one of those already in PPR).

    The moral argument gets really dangerous where we start demonising one class of economic participants over others — it justifies all sorts of behaviour: taxation, seizure etc that might not be consistent with – say – principles of fairness, property rights and other underpinnings of civilization.

    So we’d need an argument that was economic or similar. I’m afraid I can’t think of one.

    The economic “good” appears to be occupation, not ownership. I think everyone should have somewhere to live. In fact in my bleedier heartier liberalier moments, I think that everyone should have that as a free basic right, part of a UBI/UBS.

    But I get a bit wary of interventions in functioning markets because I don’t know where they lead. And in any case, isn’t this particular set of changes just swing away from private landlords towards corporate landlords?

  • 5 Hospitaller November 11, 2017, 3:41 pm

    I wish you well in your house-hunting. It is a good thing to own your own place, not so much for profit (after all you live in it and if you sell are likely to buy somewhere else and will have no spendable profit) but for security, a general sense of well-being. The baby boomers moved heaven and earth to get their own places and endured unimaginable hardship keeping up the payments – they made that sacrifice because they were brought up in the dark shadows of war and felt the value of security.

    I am not clear that ensuring purchaseable housing supply is necessarily any business of government. The unfortunate truth of the matter may be that the supply cannot be increased and that we look instead at lowering the demand side. This means in effect lowering the size of the population and may include modest economic incentives for poorly capitalised folk to emigrate. We are, if you like, a wealthy small island – albeit on a larger than usual scale. The normal historical process for such islands has been for the less wealthy to leave by default and that may be what happens with us.

  • 6 Rob November 11, 2017, 3:42 pm

    “eg all the Highland tundra where you probably could not physically build houses.”
    What? Like here?
    https://static1.squarespace.com/static/53cbc77ce4b0f4361f8a7fbd/t/57a1d1c3b3db2b02a17b1c36/1470222819969/Contemporary+timber+clad+house+on+the+west+coast+of+Scotland+%7C+Design+Hunter
    Some of the most dramatic human-scale architecture is currently being practised in the Highlands. Don’t want too much though…

  • 7 The Investor November 11, 2017, 3:44 pm

    @Mathmo — I get the principle of what you’re saying, but I think it’s a bit of a straw man really. 🙂

    Throughout the tax code and with all sorts of incentives and disincentives, from marginal rates to welfare payments to tax reliefs, and on through regulation, and further on and on, the government sets the playing field for how the economy functions.

    Property is no different.

    Once there was one set of rules for home ownership (e.g. mortgage interest relief for home buyers and onerous regulation for banks lending to landlords and the landlords themselves) and then there was another set of rules (scrapping relief for residential owners but not landlords, and far more landlord-friendly rental regulation).

    The pendulum swung over 2-3 decades from an entry-level market dominated by owner-occupiers to one in large part dominated (especially where young up-and-comers live, in cities where the good jobs are) by landlords.

    For a period this was good — I saw the condition of rental property improve in London from the early 1990s to the mid-2000s, but I personally think it clearly overshot.

    It’s not ideal changing the rules, not least because it pulls up the drawbridge (e.g. many BTL landlords in their 50s and 60s will have benefited from favourable owner occupier regulations and cheap house prices in their early years and the BTL bonanza from the late 1990s onwards). But sometimes it has to be done.

    I think a good litmus test to your rhetorical query is: “Are successive generations now being systematically locked out of an asset that they must consume in some way at the cost of a significant portion of their income — an asset that they like their parents nearly all aspire to own — to the extent it is impoverishing them relative to previous generations and is a regular of every television phone-in and newspaper front page?”

    Home ownership passes that test. Gold doesn’t, and nor does your seat on the Chiltern railways.

    I do agree with you that there are massive tax benefits for those who own their own home. But IMHO that’s another reason to look to widen home ownership versus landlord ownership — a democratic one — or else change the rules (tax capital gains on principle places of residence).

    Anyone comparing home ownership to owning gold might try a little harder to empathize with the younger generations, IMHO.

    Everyone I know in their 20s and early 30s in London without access to huge gifts from their parents have simply ruled out owning forever, even when they’ve saved up the equivalent of their annual salaries (which is not easy when you’re paying 40-60% of you take home in rent).

    This is an utterly different situation to 20-30 years ago, when you could easily buy a starter home in London for 3-4x your salary, and it was actually cheaper than renting. (Too good to last, true, but there’s somewhere in the middle. 🙂 )

    I just don’t think it’s equitable, and I find those arguing that renting is fine from their comfort of their own large and comfortable own houses that they paid maybe 15-25% the value of 15-20 years ago — two decades over which salaries barely budged in comparison to house prices — fairly unconvincing. 🙂

  • 8 Survivor November 11, 2017, 4:15 pm

    Most people who’re Ok with the rental lifestyle situation in it’s current form in the UK aren’t subject to it – I know those even in their 40’s who can’t fully relax because they can be moved on with a few months notice. Add the tax injustice & [therefore with respect to accommodation which is a necessity vs choice] you are effectively a second-class citizen; many have disposable quality belongings in case they have to lose them.

    A lifetime of this gets tedious & while the wealthy might see it as a sacrifice they’re prepared to make (ignoring the sullen underclasses on a daily basis) it does actually affect them in ways they may not realise. I’ve lived in a couple of countries as an expat where there was noticeable social injustice & the rich were as anxious as the poor, they lived in fear of attack, so suffered as much as the poor living in their fear of economic pain.

    You may have creature comforts in your heavy security-protected, gated safe havens – work, homes & entertainment complexes – but can’t let down your guard because you can never know when someone desperate enough has figured out a way of getting at you. Certainly there are many societies like this around the globe, but peace is perhaps the most under-rate quality of life variable & it’s surprising how quickly anger can explode. Who predicted the timing or scale of the last London riots …..& who believes the causes have gone away?

  • 9 Guido Maluccio November 11, 2017, 5:35 pm

    Thanks for the interesting perspective, looking forward to hearing more about your journey into the world of property ownership.

  • 10 Gadgetmind November 11, 2017, 6:16 pm

    Well done on getting off the rental treadmill. Daughter bought (with some help, but loan at commercial rates and not gift!) her house as a student, and with two lodgers (those she previously rented with) was covering “mortgage” interest and living rent free.

    If we increased density and did a *lot* more brownfield development, we wouldn’t have a huge issue TBH. I do a lot of cycling that takes me off the beaten path, and there are huge areas even close to major city centres that are massively under built.

  • 11 Steve November 11, 2017, 6:26 pm

    @ Survivor

    I never underestimate the potential for civil unrest; you do not have to go back too far to find that we live in a country with an astonishingly violent history. That said, the underclass could never win such a conflict. I think that people would regard it not at all as a cause to change their views on property, but rather as a revolt which needed to be comprehensively put down.

  • 12 Chris November 11, 2017, 6:35 pm

    @ Simon
    “If you look at counties like Surrey, you can see that they already seem heavily over-built.”

    It is reliably reported (research by Savills, IIRC) that more of Surrey is covered by golf courses than homes. I cannot see anything wrong with compulsory purchase of 1 golf course in 10 to build new homes. For one thing that would be 10% fewer offensive sweaters and silly caps. Don’t get me started me on the trousers.

  • 13 William III November 11, 2017, 6:52 pm

    Re Macro Tourist post.. I’ve looked at my broker platform and thank god I cannot find an easy way to short FNG.

  • 14 Mathmo November 11, 2017, 7:35 pm

    Thanks for the thoughts, TI (and thanks for the links – forgot to post earlier). Not intentionally a straw man.

    Of course houses are expensive in income terms: that’s what low interest rates mean — and also London has been an international city (until Brexit?) and all that means for prices. Millenials fantasising that they can have a house in Mayfair can have their dreams shattered like mine are in that regard. The solution which we’ll allcome to eventually is building more accommodation, regardless of who owns it.

    Does this generation really want to trade its flexibility for ownership?

    And this generation has it amazingly good: but journalists don’t write about that. What I think they should be livid about is the pensions that the older generation got and that they are paying for. The housing is going to look like a minor pickpocketing compared with the great bank robbery of pensions…

  • 15 FIRE v London November 11, 2017, 7:35 pm

    @TI – buying a property, eh? Is there a +1 involved 😉 ? In London, dare I ask?

    I enjoy the thread between @Mathmo and @TI. I am on @TI’s side of the argument. I find the ‘rent vs buy’ nuance to property does confuse my simple supply vs demand brain somewhat, but generally suspect it is a red herring – renting costs roughly what buying costs, or ought to in equilibrium at any rate.

    I like John Kay’s FT piece this week about housing. He outlines the supply vs demand argument very clearly. UK HH numbers are growing by 250k+ HHs per year and on top of that there is migration from grim places to nice places (like London, naturellement), so we need to build/create c.300k HHs per year. We haven’t managed this for 40 years. I find this argument compelling and suspect if we built *400k* HHs per year then all the arguments about BTL, PPR, etc would fade quickly amidst a lot of teeth gnashing about falling property prices. Then the youngsters would be put off owning property by the falling property prices, mind…..

  • 16 The Rhino November 11, 2017, 8:37 pm

    Nice one on the property. Hope it doesn’t use up all of your capital. I’ve just got out of the BTL game. Now have the issue of where to put the proceeds

  • 17 Survivor November 11, 2017, 9:47 pm

    @ Steve, Agreed. I once read a poignant quip but can’t remember who coined the expression: ”the rich will always win because they can pay one half of the poor to fight the other half – if you equate that to the elite pitting the middle classes against the working classes in contemporary times, it makes sense…..” Divide & rule is always so reliable.

  • 18 Learner November 12, 2017, 12:14 am

    Another consequence not often mentioned, people unable to buy a home until their mid 40s are unlikely to start a family at all. Increasingly the economics of housing are running into biological hard limits – fertility and lifespans. With changing models of employment that 45 y/o may not be offered a 25 or even 20 year mortgage, taking on a shorter term with higher repayments leaving even less remaining for retirement. TI’s comment on acquaintances who have no expectation of ever owning and Suvivor’s suggestion of two classes in society ring true. I wonder if we’ll see a dramatic correction, or another 20 years of tepid growth until wages catch up with prices, by which time at least one generation will be doomed.

    @Mathmo: going to take that Mayfair jibe as tongue in cheek rather than sincere ignorance or trolling! Though the flexibility comment makes me wonder :s

  • 19 hosimpson November 12, 2017, 12:36 am

    I’ve added Pigs in Clover to my reading list.
    Before I did that though, I went to the book’s Amazon page and read the 1-star reviews (just a weird thing I do before I buy books), which was quite entertaining. So thanks for the link 🙂 . There are two 1-star reviews; the first is written by someone who sounds like a farmer and is dissatisfied by what he deems the author’s agricultural failings, poor choices of equipment, to say nothing of anthropomorphising the stock. The second one is from a vegan who (bless him) expected the author to turn vegetarian and adopt his animals as pets, but had to put the book aside after what I gather was a graphic/ emotional account of committing a free range chicken to a soup pot.
    I look forward to reading the book.

  • 20 John November 12, 2017, 1:21 am

    Hi TI. Looking forward to the full post on this subject. If you think it’s a good investment then especially interesting. If you’ve changed your mind about it not being an asset then moderately interesting. If you’ve succumbed to the base instinct to own then Shane on you. We’re supposed to be about that!

  • 21 Steve November 12, 2017, 9:49 am

    @Survivor
    Yes, divide and rule is very effective. A more subtle example is the Brexit referendum. Here we had a choice of questions where one alternative was fairly well moored in reality (stay in the EU) and the other was not (leave but with no definition of manner of leaving, with respective benefits or costs). The presence of an unmoored alternative allowed the Leave campaigns (note plural campaigns; it matters) to assemble a strange coalition of people who fundamentally disagree with each other: We had free market enthusiasts voting with protectionists, people who wanted a more outward-looking Britain voting with xenophobes, people who expected savings right now voting with people prepared for the country to incur very large sums to exit, and so forth. It is like asking people if they want the status quo or “change” but not defining the change – of course change would then win – because people can always think of something they might like in a world not constrained by reality. But later, reality hits, each method of Leaving has very different effects and the meaningless of the result becomes clear. Gosh, what a mess we are then in. The good statesman would then identify the problem and hold a clarifying vote; that is what the Swiss did when they ran into this exact problem. Instead, one very particular interpretation is forced upon us by a PM who tells us her personal interpretation is in fact the “will of the people”, thus leaving the country in a state of deep disagreement which will continue for decades.

  • 22 Grand November 12, 2017, 11:36 am

    I’d just like to thank you all for the comments, it’s good to see that this site can be a place for a healthy debate.

    Being in my very early 30’s, i’m one of those individuals who feels as TI put to Matho,

    ‘Is being systematically locked out of an asset that they must consume in some way at the cost of a significant portion of their income”.

    When you think you’ve got enough the yardstick moves, and with no help from the bank of mum and dad, aspiring to continue to live in London, to get on the property ladder today, just continues to feel like a losing battle… but yet I continue to save.

    The Government really needs to do something as things are only going to get worse… I know it’s been mooted here once or twice, but there should be some kind of Government fund that is set up with the sole intention of funding a national house builder. Maybe we should lobby Elon Musk to come up with an idea to solve this inherent problem.

    Grand

  • 23 Survivor November 12, 2017, 11:46 am

    @Steve, agreed again – apart from being beautifully written, your analysis of the Brexit referendum is thoughtful, fair & decent as well as eloquent – I’ve seen few that considered….. if more people communicated like this, the country could actualy heal. As you say, that is what states(wo)men are supposed to do, instead of the cabal of individuals we have seeking maximum improvement of their own circumstances.

    I think this country faces severe challenges that Brexit only exacerbates, the dysfunction was already entrenched, with the property fiasco one of the worst symptoms. Even nominal winners on closer examination are paying a price as alluded to by @Learner – I’ve worked with people who bought only with such handicapping mortgages that they literally can’t afford to take time out to have kids.

    Scaled up to national level that creates the demographic overhang of so many old people with nobody to look after them and too few young people working to hold the whole edifice up. My personal politics are an eclectic mix that averages out as centrist, but social breakdown at family unit level can only end badly …..the Japanese are our warning.

  • 24 The Rhino November 12, 2017, 12:57 pm

    @john if the last 20 years teaches us anything it’s that you’ve got to have a bit of skin in the property game. Long term you’re prob going to be better off for it. Certainly shifts control of your own destiny a bit towards you which is good. But ideally you want to get in without gearing up to the eyeballs. This could all be true for TI so is most likely a sensible long term move.

    @survivor could I borrow your rose tinted spectacles. I need a dose of your boundless optimism to get over some gruesome surgeries I have recently endured. On the plus side I am now part bionic!

  • 25 Grislybear November 12, 2017, 5:19 pm

    @Steve on the subject of Brexit and change http://www.dw.com/en/pro-brexit-grimsby-opportunist-second-thoughts/a-41306632.
    @TI here is one from the blogs that u missed, a sad but true tale of active management https://longreads.com/2017/11/09/ameritor-dead-mans-fund-charles-steadman/

  • 26 Steve November 12, 2017, 7:33 pm

    @Grislybear

    You made my day with that link on Grimsby who voted 70% in favour of leaving the EU (fair enough) but have now asked government for an exemption from Brexit consequences. Thank you. They will not be the last. Time for government to organise that clarifying referendum before we end up down a route only 10-20% of the country actually want.

  • 27 SemiPassive November 13, 2017, 8:56 am

    Both anecdotally and reading the financial press London property seems to have another 12 months of further dips. The drops to date are already rippling out through the outer ‘burbs and just starting to affect outside the M25.
    So possibly I’d hold off in hope of a bigger discount a year from now.
    However if your house budget money is currently sat in equities then buying makes more sense, a lot more value at risk there.
    Plus another year’s worth of rent wasted if you hold off. I guess it depends on your exact circumstances.
    Final factor, the opportunity to lock into a 5 year fixed rate mortgage at still historic lows.

  • 28 Darren November 20, 2017, 2:31 pm

    Social and political opinions aside, I still think that in many circumstances some direct exposure to property is a good move. Perhaps target properties in the north of England or south Wales where good properties can be bought for little, where they still forecast good capital growth for the next 10 years and where rental demand and yields are strong. Ideally you need to be able to take a strategy of buy and hold indefinitely. Whilst not totally passive and not without risk, adding a couple BTL properties to a portfolio adds diversity and over the long term is very likely to perform as well as equities without correlation. Also set it up in a ‘family investment company’ and pass then onto your kids with little or no IHT.

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