Misinformation, government propaganda, hyperbole and irrelevance!

by Appalled Landlord

17:36 PM, 5th February 2018
About 9 months ago

Misinformation, government propaganda, hyperbole and irrelevance!

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Misinformation, government propaganda, hyperbole and irrelevance!

Dear Ms Beddoes

The Economist’s recent article below has just been brought to my attention.  It is a mixture of misinformation, government propaganda, hyperbole and irrelevance.

Struggles of the landed gentry

Britain’s buy-to-let boom is coming to an end

New regulations and a cooler market are causing landlords to sell up

My comments on excepts from it follow.

“The years since then have seen frenzied growth (see chart).”

The chart does not show “frenzied” growth, at all, it shows steady growth.

“The rent from buy-to-let properties, which we estimate at £55bn-65bn ($73bn-87bn) a year, is equivalent to the salary bill for the financial and insurance industries, in which over 1m people work.”

The PRS houses more than 10 million people.  What has their rent got to do with the salary bill of 1 million people?

“Young folk who would prefer to own a house than pay rent to their elders complain that the buy-to-let boom is one of the great injustices of modern Britain.”

It is only an injustice if you feel that owner-occupiers have more right to the accommodation than tenants.

“The Conservative Party is worried. Over half of private renters voted for Jeremy Corbyn’s Labour Party at the general election in June, a higher share of private renters than voted for Tony Blair when he won by a landslide in 1997.”

A lot of the private renters were students or graduates who voted for Corbyn because he told a music magazine that he would “deal with” student debt.  Now that he has clarified that he won’t be writing off their debts he may suffer the same reduction in support as Nick Clegg who promised to abolish tuition fees.

“the government …..in April began tightening the rules on how landlords write off interest costs against income tax.”

The government did not tighten the rules, it changed them.. Tightening the rules suggests that landlords were exploiting loopholes in the rules, but there were no loopholes.  They just applied generally accepted accounting principles, like any other enterprise in the country, by including mortgage interest in the calculation of taxable profit.

In 2015 George Osborne announced that this deduction would be phased out for landlords who bought the properties in their own names (as opposed to landlords who bought through companies).  Instead they will be able to deduct up to 20% of their finance costs from the tax calculated on their total incomes, which will include fictitious rental profit.

He thus adopted, but adapted, a policy that Irish governments implemented twice – and had to repeal twice because of the increase in rents and homelessness.  Osborne’s adaptation is more draconian than either of the Irish experiments.  The first time they only applied it to subsequent purchases.  The second time they only disallowed 25%.

“Property investors buy when prices are rising but sell when they are falling, making house prices more volatile.”

No, that’s what shareholders do.  Landlords do not sell into a falling market, they wait for the inevitable recovery.

The BofE’s warning was baseless.  It was a political intervention, timed to coincide with Osborne’s attack in the July 2015 Budget..

It was expressed in its Financial Stability Report Issue 37 of July 2015: http://www.bankofengland.co.uk/publications/Documents/fsr/2015/fsr37sec4.pdf

This report ended with: “Buy-to-let lending could pose a risk to financial stability. The actions of buy-to-let investors affect the broader housing and mortgage markets as individuals compete to buy the same pool of properties. ……. And in a downswing, investors selling buy-to-let properties into an illiquid market could amplify falls in house prices, potentially raising losses given default for all mortgages.”

The last paragraph read “HM Treasury will consult on tools for the FPC related to buy-to-let lending later in 2015, with a view to building an in-depth evidence base on how the operation of the UK buy-to-let housing market may carry risks to financial stability. The FPC will continue to monitor this sector closely.”

This was a dead giveaway.  It reveals that the Treasury, and the Bank, had no evidence as to how there may be a risk, if any.

There are a couple of other things wrong with that report.  Firstly, “individuals compete to buy the same pool of properties”.  There is some overlap, but relatively few owner-occupiers buy derelict buildings and re-habilitate them, or buy houses that are too big for families and turn them into HMOs, or buy off-plan and wait a year or two for the property to be built.

Secondly, “in a downswing, investors selling buy-to-let properties into an illiquid market could amplify falls in house prices, potentially raising losses given default for all mortgages.” Experience after the credit crunch in 2007 showed that landlords did not choose to do this.  They would not sell at a loss.  If the market was illiquid, there would be no finance for a buyer.  If prices were falling, aspiring buyers would not buy something that would lose value.

This section is so shallow and inaccurate that it screams propaganda.  It is noteworthy that this report was issued just as George Osborne was preparing to announce the disallowance of finance costs.. (Osborne also used the Bank for supporting propaganda during the EU referendum campaign, for which Mark Carney was taken to task by Jacob Rees-Mogg.)

Even if the future growth of BTL mortgages did pose a risk, that is no justification for bankrupting people who bought property in previous years or decades by introducing a tax with retroactive effect.  If Osborne really wanted to influence future behaviour he should have made the change apply to future purchases only.  That is the normal “grandfathering” procedure for tax changes.

“Buy-to-let landlords are also more likely to default than owner-occupiers.”

Statistics from the council of mortgage lenders show this claim to be the opposite of the truth.

“Another [reason for BTL defaults] is that buy-to-let mortgages are more likely to be interest-only (ie, where the principal is not repaid), which means that monthly repayments can go up sharply if interest rates rise.”

The repayments for an owner-occupier with a 95% mortgage would go up even more “sharply” than for landlords whose loan to value ratio is not allowed to be as high.

“All things considered, a smaller buy-to-let sector may come as a relief to regulators”

Regardless of how regulators may feel, councils will be increasingly inundated by people who are being made homeless as a result of Osborne’s policies.  Landlords are either increasing rents or selling up, and tenants on benefits are being evicted.  The cost of providing “temporary” accommodation for them will be enormous. It is economic and social madness..

“Lately the buy-to-let boom has been correlated with galloping house prices, which have made it harder for youngsters to get a foot on the housing ladder. One study suggested that more than ten percentage points of the 150% rise in real house prices between 1996 and 2007 was caused by increased lending to landlords. ”

In fact the study by the National Housing and Planning Advice Unit stated up to 7%, not 10% .  But even 10% would show that BTL is NOT correlated with “galloping house prices”.  The  NHPAU report stated “For instance, since 1996Q3 house prices increased in real terms by 150 per cent and, even without the estimated effect of BTL, they would still have been expected to increase by more than 130 per cent.”

This is because the increase in housing supply failed to match the increase in the population.

The report also said “In term of affordability it is an open question as to whether a 7 per cent increase in house prices in 2007 Q2 represents a significant additional cost.”  Indeed. 7 percentage points out of 150 is less than one-twentieth of the total increase.

In fact it is Help to Buy for first-time buyers which has been correlated with higher house prices – and higher profits and higher share prices for builders, e.g Persimmon.

“The future for buy-to-letters will not get much brighter. In January a tweak to the rules on taxing capital gains will increase the liabilities of landlords who register as businesses”

The clause “landlords who register as businesses” does not mean anything.

“Institutional investors are moving on to buy-to-letters’ turf, hoping to benefit from their economies of scale to offer better housing to tenants. It was good while it lasted, but the golden age of the amateur landlord may be over.”

Institutional investors will charge much more than individual landlords.  The writer is suggesting that people who buy in their own names are amateurs, even if they have large portfolios.

I do not see the point of this article.  It is not informative – on the contrary it repeats misinformation.  I seems to be an expression of Schadenfreude, damage-joy  but  damage will be caused to more tenants than landlords.

Tenants will suffer through higher rents from institutional investors, through increased rents from their current landlords, or through simply being evicted and even being made homeless.

“This article appeared in the Britain section of the print edition under the headline”Struggles of the landed gentry”

I am surprised it did not appear in the Guardian.  It is not worthy of The Economist which is supposed to provide expert analysis.  In fact it weakens the magazine’s credibility.

To describe BTL landlords as the landed gentry is absurd.  Does the writer know the meaning of the phrase?

Kind regards



Comments

Mark Alexander

18:17 PM, 5th February 2018
About 9 months ago

Another fantastic response to the Economist article. If Dr Ros Beck is asked by the Economist to write an article for them, maybe the two of you should exchange ideas?

In regards to the Economist writers reference to “register as a business” I can only assume that comment was meant to relate to being a Limited Company and the withdrawal of indexation allowances as of Jan 2018.

Jamie M

20:29 PM, 5th February 2018
About 9 months ago

Perhaps this is evidence that the Economist isn’t an objective reporter of news fact checked by sound journalism practices, but an insecure member of the political elite prepared to tout any old propaganda in order to remain in the club. This propagandist rubbish isn’t worthy of a third rate porn mag, let alone a British informative institution commenting on an essential industry that houses some 15,000,000 people most of whom are contented.

Mandy Thomson

10:14 AM, 6th February 2018
About 8 months ago

Excellent analysis and rebuttal. I would just add one fact, most members of "the landed gentry" are people of average means who only own one rental property, often their former home.
Several more are in fact struggling to simply make ends meet; for example, the landlord who was forced to give up work to look after his seriously ill father, and an acquaintance of mine who lost her job, got cancer and so let out her flat and moved back in with her elderly parents - I can provide many more examples.
That the Economist didn't even put "landed gentry" in inverted commas speaks volumes about the absolute ignorance and prejudice of the author and the Economist in general for allowing that piece to go out without proper editing.
BTW, the irony is I can only read the headlines of the article as I'm not a subscriber (and not likely to become one, after seeing this rubbish).

Heather G.

17:36 PM, 8th February 2018
About 8 months ago

An excellent deconstruction of a piece of ill-informed, un-checked, un-supported, un-helpful journalistic tosh!

H B

10:21 AM, 10th February 2018
About 8 months ago

Great article. I would like to point out a couple of things from your piece:
“Buy-to-let landlords are also more likely to default than owner-occupiers.”
Statistics from the council of mortgage lenders show this claim to be the opposite of the truth.

*While arrears are lower for BTL mortgages, repossessions are much higher for BTL, suggesting that owner occupier mortgages are more likely to be "cured" and BTL to stay in default.*

https://www.cml.org.uk/news/press-releases/lowest-arrears-rate-for-more-than-a-decade-in-2015/yes,

*Higher LTV would mean a big jump in payments, but on a like for like basis, BTL mortgages are more sensitive to interest rate increases. For the same loan amount, an increase in interest rates increases repayments on a BTL mortgages more, not just as a percentage of the original monthly repayment but as a nominal cash amount too.*

Sorry - wrote this on my phone so looks a mess.

Old Mrs Landlord

12:17 PM, 10th February 2018
About 8 months ago

Reply to the comment left by H B at 10/02/2018 - 10:21I don't dispute your post HB, but this is hardly a fair comparison because buy-to-let mortgages are not given the chance to be "cured". The government has directed mortgage lenders to "exercise forbearance" toward owner occupiers and arrears are allowed to build up whilst a buy-to-let mortgage can be foreclosed the day after the second missed monthly payment. It takes several months to evict a non-paying tenant, repair any damage and install a paying tenant, so of course some landlords default on their mortgages. These figures pre-date the full roll-out of Universal Credit so will probably be more pronounced by now. This explanation of the comparative figures is supported by the fact that buy-to-let mortgages have lower arrears than residential mortgages.

Appalled Landlord

12:49 PM, 10th February 2018
About 8 months ago

Reply to the comment left by H B at 10/02/2018 - 10:21
Hi H B

Your first quotation seems to suggest that my comment about defaults was wrong.
To default is to not pay on the due date, i.e. go into arrears.
Your link, after removing the yes at the end, leads to a report on the figures for 2015.

The second paragraph confirms what I wrote. It reads:

“Beneath the headline figures, the CML quarterly data shows home-owner mortgage arrears running at 1.03% of all loans at the end of 2015, with buy-to-let at a lower rate of 0.31%, continuing the recent trend of a lower prevalence of arrears in the buy-to-let market.”

However, I cannot see either of your quotes on the CML webpage. The first one concerns repossessions, which the Economist article did not mention. Why have you brought them up?

And the logic of the second one defeats me. If the loans are the same amount why does the interest on a BTL go up more in nominal cash amount?

matchmade

15:04 PM, 13th February 2018
About 8 months ago

The Economist claims "Institutional investors are . . . hoping to benefit from their economies of scale to offer better housing to tenants." The writer of this article clearly knows nothing about the BTL market. Institutions very rarely buy the sort of bog-standard two- or three-bed semi or terraced house owned by small BTL landlords, which are the sort of houses that the mass of renters prefer and can afford. Institutions merely cherry-pick - they build and run small expensive on-campus bedsits aimed at overseas students, or expensive city-centre apartment blocks; their cost base for maintenance is naturally higher than a typical "amateur" landlord because they have to pay wages to their employees and generally work with larger VAT-able tradespeople. BTLers, in contrast, put in a lot of unpaid work and box clever with their local contacts to use affordable, reliable tradesmen and women.

I've also yet to see a single REIT or other property investment company run an HMO. Like council housing departments and housing associations, they view HMOs as too risky and too much like hard work. In these institutions' neglect of young single people wanting an affordable rent lies small landlords' opportunity.

Rob Thomas

19:11 PM, 25th February 2018
About 8 months ago

Hi
Just a quick explanation re the point you raise in your final paragraph.
The Economist article makes the point that buy-to-let loans are more likely to be interest only (which is true). When interest rates rise, the monthly payment on an interest only loan will rise by more than the monthly payment on a capital repayment mortgage.

The reason for this is that the profile of capital payments on a capital repayment mortgage is more back-loaded to the latter years when interest rates are higher (as the benefit of repaying capital is greater the higher the interest rate).

I'll give an example. If you take a 25 year £150,000 mortgage at a 2% interest rate, an interest only borrowers would be paying £250 a month (£3,000 a year, 2% of £150,000). The monthly payment on a capital repayment mortgage would be £635.78, including £385.78 of capital. If the interest rate doubled to 4%, the interest only payments would rise by £250 to £500 a month. The repayments on the capital repayment loan would rise to £791.76, a rise of only £155.98.

Hope that makes sense.


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