What caught my eye this week.
According to a report in the Financial Times [search result], just a handful of interest rate rises could eat up all the profits of higher rate tax paying landlords.
The FT cites research by the upmarket estate agent Hamptons, which sent freedom of information requests to HMRC. The data collected enabled Hamptons to estimate the pain points for landlords:
Landlords paying the 40% income tax rate would see their annual profits on a mortgaged buy-to-let home wiped out if UK interest rates rise by another two percentage points […] underlining the tightness of margins maintained by property investors.
For a higher-rate taxpayer with an average two-year fixed rate and a 75% loan-to-value interest-only mortgage — a common type of buy-to-let loan — a rise of two percentage points would eradicate their profits, while a single percentage point rise would halve them.
These are dramatically low margins of safety.
CPI inflation is already running at 7% and it is likely to rise further before it falls.
The Bank of England has barely started its rate-rise campaign in response, having taken Bank Rate to 0.75%.
More interest rate rises seem nailed-on. The buy-to-let business could thus be about to be become unprofitable for many wealthier landlords.
Of course, those feeling the pinch have options.
Paying down an increasingly costly mortgage will look more attractive as rates rise and cheaper fixed-rate deals expire. Assets and income can be reshuffled.
Some landlords may choose to just eat the pain and subsidize their properties, trusting that eventually rents will catch up or rates fall. Property is a long-term game, after all.
The maths will also make buying rental properties through limited companies more attractive thanks to their more favourable tax treatment – even for those not yet paying higher rate taxes, considering how the income tax bands have been frozen. May as well be prepared.
How much sympathy you have for buy-to-let landlords will mostly depend, I imagine, on whether you are one.
But it’s another canary in the coal mine. Higher rates aren’t just bad news for disruptive growth stock investors who’ve seen their shares crash or – at the other end of the spectrum – for those who owned too many long-dated bonds. There will be knock-on effects all over the place.
It’s a process we need to go through to return financial conditions back towards normalcy.
Everyone hated the near-zero-interest rate world. But escaping its feeble gravity will be bumpy.
Have a great long weekend!
A book review of Just Keeping Buying – Monevator
Inflation hedges: what does and doesn’t work – Monevator
From the archive-ator: Vanguard LifeStrategy funds review – Monevator
Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1
House prices up 12%, but rises expected to slow says Nationwide – BBC
US economy shrank by 1.4% to start the year as pandemic recovery takes a hit – CNBC
Most of UK’s extra inflation “caused by Brexit”, says former BOE official – ThisIsMoney
…and Brexit losses are more than 178 times greater than trade deal gains – Independent
Boris Becker jailed for two and a half years for flouting the terms of his bankruptcy – Sky News
The growing importance of intangible assets – Validea
Products and services
The best regular savings accounts are now paying between 2% to 3.5% – ThisIsMoney
Tech expert slays myth of energy-guzzling ‘vampire devices’ – Guardian
Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor
State pension top-up system [reportedly] in ‘chaos’ – ThisIsMoney
“A mysterious stranger has trashed my credit rating” – Guardian
Will Virgin Media Stream save you money? – Be Clever With Your Cash
Homes for sale near wild swimming spots, in pictures – Guardian
Comment and opinion
I don’t know – Compound Advisers
The Bogleheads have launched a podcast [Podcast] – via Jon Luskin
Why aren’t rich people happier? – AWOCS
The pros and cons of market cap weighted index funds [Tax bit is U.S.] – Morningstar
A stock is not an index – Of Dollars and Data
Six reasons why high earners don’t get rich – Banker on FIRE
The rich and the wealthy – Morgan Housel
The second rule of FI Club – 3652 Days
Inheritance tax: the good, the bad, and what you can do about it [Search result] – FT
Jack Bogle and the spirit of punk – A Teachable Moment
A retiree looks back on the financial ups and downs of her life – Humble Dollar
Crypt o’ crypto
How the crypto market really works [Podcast] – Bloomberg Odd Lots via Apple
Bitcoin is not an investment – The Evidence-based Investor
‘Staggering’ crypto seizures have cops struggling to keep up – Advisor Perspectives
Incoherent doomsters with laser eyes – The Reformed Broker
Naughty corner: active antics
How wide moat stocks can reduce portfolio volatility – Morningstar
Mental health issues in the hyper-competitive investment industry – Institutional Investor
Three questions Warren Buffett won’t answer at this weekend’s Berkshire meeting – B.V.I.
The brutal bear market in disruptive high-growth stocks – The Irrelevant Investor
Market efficiency: active versus passive versus HFT – Klement on Investing
Bireme has re-upped on Netflix after the crash – Bireme Capital Q1 Letter
A soft profile of the British hedge fund legend Chris Hohn – Institutional Investor
Recession or no recession mini-special
Kenneth Rogoff: the growing threat of global recession – Project Syndicate
A groggy global economy has lost its mojo – David Smith
More losses for the British Pound as recession risks burn brighter, says Deutsche Bank – PSL
This doesn’t look very recessionary [US perspective] – TKer
Kindle book bargains
How Not To Worry by Paul McGee – £1.59 on Kindle
Shackleton’s Way: Leadership Lessons from the Antarctic Explorer by Margot Morrell – £0.99 on Kindle
Who Moved My Cheese? by Dr Spencer Johnson – £0.99 on Kindle
The Art of Gathering: How We Meet and Why It Matters by Priya Parker – £0.99 on Kindle
The queen conch’s gambit: breeding an endangered delicacy – Hakai Magazine
‘Relentless’ destruction of rainforest continuing, despite Cop26 pledge – Guardian
Recycling shit – Aeon
Coral workshops help tell wild from farmed Indonesian corals – Reef Builders
Off our beat
As China looks on at a world opening up, can Xi Jinping survive zero-Covid? – Guardian
The right to free speech does not mean a right to AI amplification – David Meerman Scott
Netflix’s bad habits have caught up with it – Vulture
Aging clocks aim to predict how long you’ll live [couple of weeks old] – Technology Review
The greatest solo traveler you’ve never heard of – Afar
Which computational universe do we live in? – Quanta Magazine
The best midweek dinner recipes, according to The Eater’s editors – The Eater
“And then a fan’s ashes were scattered on stage! My night out with Half Man Half Biscuit’s fanatical followers” – Guardian
“A lot of people with high IQs are terrible investors because they’ve got terrible temperaments. And that is why we say that having a certain kind of temperament is more important than brains. You need to keep raw irrational emotion under control. You need patience and discipline and an ability to take losses and adversity without going crazy. You need an ability to not be driven crazy by extreme success.”
– Charlie Munger via Value Investing: A Value Investor’s Journey
Like these links? Subscribe to get them every Friday! Note this article includes affiliate links, such as from Amazon and Interactive Investor. We may be compensated if you pursue these offers, but that will not affect the price you pay.
- Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. [↩]