Patrick Collinson “Guardian of Housing Ignorance”

by Appalled Landlord

7:54 AM, 21st August 2017
About 4 years ago

Patrick Collinson “Guardian of Housing Ignorance”

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Patrick Collinson “Guardian of Housing Ignorance”

The 1,400% returns figure for Buy-to Let was grossly inflated

In fact it was both gross and inflated.  It was also fictitious, and contained errors.  It may have led George Osborne to introduce Section 24.

In a recent article purporting to criticise Guardian readers for vilifying a woman who had told them in an earlier article how much profit she had made on selling her only rental property, Patrick Collinson stoked their rage with a fake statistic.  He wrote “Financially speaking, buying to let has been probably the best thing anybody could have done with their money since 1997, with gains averaging more than 1,400% since then.” LINK

This implied that the average capital gain was 14 times the purchase price, that prices were 15 times higher now than 20 years ago.

The statistic was overstated by 493%.  In other words, it was nearly six times too big.

The national increase was 236%.

LINK to Telegraph article

Patrick Collinson’s figure appeared in the headline of a Guardian article in 2015 LINK

“On average, £1,000 invested in a buy-to-let asset in the final quarter of 1996 was worth £14,987 by the end of last year, according to analysis by economists at the Wriglesworth Consultancy for lender Landbay, published on Saturday. This was more than four times than the equivalent investment in commercial property, UK government bonds or shares and seven times the return on cash.

Years of rising house prices mean that despite the slump after the financial crisis, property investors who bought 18 years ago are still sitting on large capital gains.”

This implied that prices had increased by a factor of almost 14, in 18 years.

The figure came from a report by the Wriglesworth Consultancy in April 2015 called Buy-to-Let Comes of Age which can be downloaded from the section White Papers at https://landbay.co.uk/reports

This report made it clear that the figure was not the price increase percentage, it was the return on investment (ROI) from mortgaged property.  The calculation combined the gross capital gain with the before-tax profit from 18 years of rentals, and was divided by the deposit (thus ignoring the purchasing costs).

Because the deposit was only 25% of the purchase price, the return was much greater than it would have been without a loan.  That is why mortgaged properties outperform passive investments – as long as prices are rising.  Because of the high cost of property most buyers need to borrow – only a minority of people can afford to buy property without a loan.  The magnification of the return results from this.  The fact that the deposit was a quarter of the purchase prices is the reason why the return was “more than four times than the equivalent investment in commercial property, UK government bonds or shares”.

And it is thanks to landlords’ability to borrow that the stock of dwellings in the PRS increased by 2.5 million between 1996 and 2013 in England alone.

“From 1996 to 2013, the total number of dwellings in England increased steadily from 20.3 million in 1996 to 23.3 million in 2013. Much of this was due to the notable growth in private rented housing which more than doubled in size from 2.0 million to 4.5 million over this period.”

Thus 2.5 million out of the 3 million increase was thanks to the PRS.  That is 83%.

Link to evidence on .Gov.Uk

Landlords did this by financing new builds, by rehabilitating run-down properties or by converting large residential or commercial buildings into flats or houses in multiple occupation (HMOs).

In 1996 the UK population was 58.2 million. By 2013 it had increased by 5.9 million to 64.1 million, while the number of dwellings only increased by 3 million.

The younger generation owes BTL a debt of gratitude because if landlords had not increased the supply, both prices and rents would have been even higher than they are now.   Instead they vilify landlords because they have been indoctrinated against BTL by a number of ignorant people, some of whom have articles published in the Guardian.

Contrary to the common belief, BTL did not cause much of the rise in prices. .  The National Housing and Planning Advice Unit (NHPAU) stated in 2008 that the BTL sector was responsible for increasing average house prices by 7% between 1996 and mid-2007 (when the housing market ground to a halt) but that average house prices rose by 150% in real terms during this period.

It stated “Between 1996 Q3 and 2007 Q2 the overall impact of BTL on house prices was relatively modest and illustrates the point made by others that movements in house prices are largely determined by fundamental economic and demographic factors (Meen etc).” LINK

So BTL was responsible for only one-twentieth of the increase.

The Wriglesworth report was written just after the change in pension rules in order to drum up business for its client Landbay, which allows ordinary investors to lend directly to landlords,, as it explained on page 9.  Landbay were offering interest at 3% above BoE base rate. LINK

So a report boasting of 1,400% returns was issued to encourage people to put their money into something that paid 3.5%.

But the 1,498.7%.statistic is, literally, fictitious, despite its ostensible accuracy.  It is the result of pretending that someone bought a property at the average price in 1996 and let it at the average rent until 2014, paying 25% in operating costs and interest at BofE Base Rate plus 1.75%, with 3 weeks of voids or arrears each year.  The capital gain was taken from a price index that excludes BTL properties.

Apart from that, there were various errors of principle.  It ignored income tax on rental profit,  pretending that the gross profit could be paid to the lender every year to pay down the mortgage.  It ignored the selling costs that would be incurred for the capital gain to be realised and, more importantly, it ignored the tax on the capital gain.  And, although purporting to measure the returns over 18 years, it ignored the effect of general inflation in that period.

Rob Thomas, Director of Research at Wriglesworth Consultancy wrote the report.  He took what he called the average price for the UK as a whole at the end of 1996, £55,000, and put it into the Nationwide’s calculator.  He selected a calculation of the value in the last quarter of 2014, and got the result of £188,421, which he rounded up to £189,000. LINK to Nationwide report

The returns were described as arising from “an average buy-to-let property”, but buy to let and cash purchases are explicitly excluded from this index.

For rents he took the average level from rental data for December 2014 provided by LSL Property Services, and extrapolated this all the way back to 1996.  He assumed that the costs of buying and furnishing the property average 3% of the purchase price.

No details of rents or rental profit are shown, so there is no way to check them.  But income tax was ignored.  On page 10 he states “As is standard in such comparisons, the returns have been calculated gross of tax as different investors face different tax rates.  Income is reinvested in the asset.”

To follow this principle he deducted the annual rental profit from the loan, which paid it off in 13 years, thus making the last 5 years interest-free and the profits higher.  In the real world, income tax of between 20% and 45% would have been due, making the loan last longer and the interest-free period shorter.  This means that profit was overestimated.

But a landlord is more likely to use the after-tax profit to live on, rather than pay it down.  So the interest payable would have been higher still, and the profit lower..  .

His table on page 10 shows that the theoretical rental profit (called net income) worked out to be 28.6% of the total return, making it about £59,000 over 18 years, or on average about £3,280 a year before income tax.

The remaining 71.4% of the total returns of 1,489.7% came from capital gain, i.e. 1,063.7%.

But the capital gain is wrong.  Instead of deducting the purchase price, he deducted the loan amount.  So the capital gain is overstated by the amount of the deposit, in this case £13,750.

There is no deduction for the capital gains tax liability that arises from an increase in prices, or for the selling costs that would be incurred in realising the gain.

However, the most striking omission was the failure to adjust for 18 years of general inflation, which averaged 2.9% a year. £1,000 in 1996 would have inflated to £1,677 by 2014.

I have used his purchase costs, and assumed some selling costs, and calculated the CGT.  Then I adjusted the result using the BofE’s inflation calculator, assuming that the loan had not been paid down at all.

Tax calc’n Return
£ £ £
Sale value 189,000 189,000
Purchase price from deposit 13,750
Purchase price from loan 41,250 41,250
Purchasing costs 1,697 56,697
132,303 147,750
Selling costs:
Estate agent’s fee 2,268  
Solicitor 800  
Lender admin 250 3,318 3,318
128,985 144,432
CGT @28% 36,116 36,116
Net, in 2014£, re-stated as 108,316
real, in 1996£ 64,604
Deposit plus costs 15,447
Return 49,147
Return on deposit plus costs 318%
Return on total cost 87%

The inflation adjusted return from the capital gain was £49,1497, or 87% of the cost, about 4.8% for each year of ownership.  It represented inflation-adjusted ROI of 318%.  That is less about three-tenths the figure claimed in the report.

Adjusting the (overestimated) £59,000 rental profit for inflation brings it down to £46,000 in real terms.  Applying income tax merely at the base rate reduces it to £36,800.  This is 65% of the cost, or 238% ROI.

So the overall return in real terms was 152% of the cost, and the total ROI was 556%.  The report’s 1,389.7% was two and a half times this figure.

The report had a disclaimer, but it was not that the past is no guide to the future.:

“Disclaimer: This material is for informational purposes only. It is not intended as investment advice and we are not soliciting any action based on it. The material is based on information that we consider reliable, but we do not represent that it is accurate or complete and it should not be relied upon as such.”

Unfortunately, people did rely on it.  It was featured in several national newspapers, always with something like this comment in the Daily Mail “But they will alarm campaigners concerned that buy-to-let landlords are pushing up house prices and making it even more difficult for young people to get on the property ladder.”  Somebody must have added this propaganda to Wriglesworth’s press release.

Natalie Bennett of the tiny Green Party quoted the figure in the the TV debate before the 2015 general election.  The BBC’s fact checker said it was correct, based on the Wriglesworth report!

Under the heading Private landlords, it stated “Natalie Bennett said that private landlords had made 1,400% profit since 1996, far more than investing in other areas.

This figure comes from a report produced by Wriglesworth Consultancy, which was sponsored by buy-to-let lender Landbay.”

http://www.bbc.com/news/election-2015-32342177

A few weeks later Osborne stole her party’s manifesto commitment and disallowed finance costs, and broke David Cameron’s widely televised manifesto pledge that income tax would not go up if he were re-elected PM.

The trumpeting of 1,400% returns from BTL (to induce people to lend money at 3.5%) probably led to Osborne’s decision.

The theoretical rental profit is modest.  Most of the return is due to capital gains.  The latter are the result of politicians failing to ensure that the supply of dwellings increased to accommodate the population increase, especially in London.  But landlords are being punished for the growing imbalance between demand and supply which caused prices to rise.

Patrick Collinson’s article continued  “But the losers are the younger generation, who are now unable to get on the property ladder in large parts of the country, particularly in the capital.”  No, they were winners because BTL increased the supply of dwellings  significantly.

He went on “Tax hikes on buy to let and changes to lending criteria have taken the steam out of the market, but more needs to be done – higher rates of capital gains tax on rental properties, changes to the AST to give proper protections to tenants and stricter lending criteria are just a few of the options.”

CGT on the sale of rental properties is already higher than on any other type of asset.  Stricter lending criteria have already been introduced.  If by “proper protection” he means reforming what he calls the “no fault” eviction, and going back to the era of lifetime sitting tenants, that would also discourage landlords from increasing the supply of dwellings, which would not be in the interests of the younger generation.

His “remedies” are based on ignorance and prejudice.  They are the opposite of what is required.  Prices would be even higher if it were not for BTL.  The way to help the younger generation is to encourage BTL to increase the supply of dwellings, not discourage it.  The solution is to reverse the tax hikes on BTL and the CGT differential.

Comments

Appalled Landlord

18:18 PM, 23rd August 2017
About 4 years ago

He can well afford the levy of £412.50 a year from full implementation of Section 24 which his unnecessary report helped to bring about.

Rob Thomas

19:13 PM, 23rd August 2017
About 4 years ago

Appalled Landlord. Your comment includes so many inaccuracies it is hard to know where to start. You have libelled me by calling me incompetent making yourself look foolish in the process, so I would like to put you right.

Let's start with capital gains. I said "So my initial investment of £30,000 is now worth £727,500 (that's £810,000 less a mortgage of £82,500) not including the very health rental income I've enjoyed in the meantime." Where did I say what my capital gains was? I didn't. Yet you seem to insist that I'm claiming the capital gain was £727,500 - I'm not. You said "You cannot include the £27,500 as a gain on the £27,500 you started with. In your words that is “completely illogical”."

The returns shown in the document are exactly the same as my simple example above. They show how much an initial investment would have grown into by 2014 - THEY ARE NOT STATING THE CAPITAL GAIN (which is of course the final figure less the initial figure). Learn to read carefully.

Next point. You claim I am being disingenuous because investors are well aware of how leverage magnifies the returns from BTL. Did they know the details of how much leverage has added to returns? No they did not. And you claim the report "was not aimed at people who might become landlords. It was issued to induce people to lend to Landbay for 3.5% a year, so that landlords could borrow from Landbay instead of from members of the Council of Mortgage Lenders". How do you know? It seems very odd to me that a report showing that buy-to-let investors get great returns issued by a buy-to-let lender wouldn't have been issued to encourage buy-to-let investors.

Regarding the tone of my response, I would like to remind you that this online conversation was started by you attacking my report with inaccuracies. So you shouldn't be surprised that I reacted by wanting to point out firmly a few relevant facts and where your figures were wrong.

Now you have libelled me on your own blog by calling me incompetent. Unless I get a full apology you will be hearing from my lawyers.

Rob Thomas

Appalled Landlord

0:00 AM, 24th August 2017
About 4 years ago

Reply to Rob Thomas

In that case I apologise for calling you incompetent. You produced a report purporting to show what £1,000 invested in an average BTL property would have been worth after 18 years - but without adjustment for inflation - based on a price index that excludes BTL properties, assuming that the average owner-occupied property would command the average rent, and pretending that income tax is not due on rental profit, and with no reference to the inherent capital gains tax that would accrue or the cost of disposing of the asset.

What is of interest is the return from an investment, not the return plus the investment. Your table shows the latter; I would have shown the former. Your way, the reader has to do mental arithmetic and deduct £1,000 from each figure before comparing the results. I am used to displaying figures in the clearest way, but your way the result does look bigger.

I do read carefully. Alongside the figures for returns plus the investment you show the percentages for the compound annual return and the return from net income. It was natural to assume that the percentages related to the amounts alongside them, rather than those amounts minus £1,000.

Now that you have drawn my attention to the mistake I acknowledge that I was wrong to say that you had not deducted the deposit of £13,750. It is the 3% purchase costs that you have left out of the calculation of the return, thus inflating it, although you seem to have included them in the unmortgaged example.

It also means that the (overestimated) tax-free rental profit was £55,000, or £43,000 in real terms. Applying just 20% tax brings it down to £34,400. That is 61% of cost, or 223% ROI. So the overall return in real terms was 148% of cost and the total ROI was 541%, less than I originally calculated.

You say that investors did not know the details of how much leverage had added to returns. But you did a similar study for Paragon the previous year. You refer to it in the first paragraph of the introduction to your 2015 report. The earlier report said:
“Every £1,000 invested in an average buy-to-let property purchased with a 75% loan-to-value (LTV) mortgage in the final quarter of 1996 would have been worth £13,048 by the final quarter of 2013, a compound annual return of 16.3%. The same investment in UK commercial property would have grown to £3,654; in UK equities (shares) to £3,082; in gilts (UK government bonds) to £2,924; and in cash to £1,949.”
https://www.braxtons.co.uk/news/buytolet-outstanding-investment-of-the-past-18-years.html

You ask how I know the 2015 report was written to induce investors to lend to Landbay, claiming that it seems very odd “that a report showing that buy-to-let investors get great returns issued by a buy-to-let lender wouldn't have been issued to encourage buy-to-let investors.” You are still being disingenuous. I have already quoted what you wrote “Now, nearly two decades later, a new financing revolution is set to change buy-to-let as peer-to-peer lenders such as Landbay allow ordinary investors to lend directly to landlords, cutting out the traditional bank or building society sitting between the two. This paper should be of value to ordinary investors who want to lend to landlords as it sets out the relative robustness of the buy-to-let returns that help to underpin lenders’ investment as well as those of the landlords themselves.”

Landbay had to borrow the money from investors before it could lend it to landlords. The report was commissioned by Landbay, and is only available from Landbay now - it has disappeared from the Wriglesworth site that the BBC fact checker linked to. But its fictitious 1,400% is still being quoted.

Chris Unwin

8:40 AM, 24th August 2017
About 4 years ago

I am so relaxed today I think I'll have a ramble on Property 118

Disproportionately wealthy?

I am just a guy who left university with nothing but a maths degree and nothing in the bank.
My only set of clothes were getting closer to the bone(Kris Kristofferson said that)

I got a job teaching mathematics (which I did enjoy). When I was a kid I used to love playing monopoly. I loved the risks, the windfalls, the pile of cash growing, the wisdom of reinvesting, the rent collection and the sense of achievment.
I recall even to this day when I once picked up a chance card and was saddled with "Street repairs" how I in that instant I looked into the future and sensed my own reality in the distance. It was prophetic.

I always won (nearly always).

So when I left college I was consumed with the desire to purchase property and to grow a portfolio. I saved my first £5000 deposit by scrimping and saving. I worked a second job at weekends playing soldiers in the Terratorial Army where for £12 a day I would run around in Norfolk with a rifle taking verbal abuse from over zealous Corporals and Sargents. I dont why but they seemd to pick on me( they didnt like the way I spoke or something). I was having a a good day out happy for I knew I was not frittering my money away at the weekends.

I bought my first house in 1986. Within 6 months I had a second and my destiny was set. I was playing monopoly for real at last.
The point is that I have long since been in a state of semi retirement "doing what I want to do and being what I want to be and nothing means a thing to me at all" (Kristofferson again).
Am I disproportionately wealthy according to that guy in the Guardian? Probably not among the upper echelons of Property118 Landlords but very much so in comparrison to very many people who have stayed in Jobs all their lives. I consider my result even stacks up reasonably against a certain late comedian.

So yes I have got a result.
I am worth it.
I have worked weekends and bank holidays. I have even got off a train on the way home in the evening to paint a kitchen as my final task for the day. I have been into meetings with unsavoury tenants with an iron bar under the settee just in case..... I have had one tenant die. I have run properties at a loss. I have suffered the high interest rates of the late eighties. ( Actually that is where some TA para mentality came in usefull. ie the will to "Dig in and hold a position).

The road has been long and rarely rosey. I persevered and succeded. Whatever I have, I have earned through my own energy and labours.

I wish more people understood this. I think a lot of people are just jealous. I reckon:

"If they new how we do it,
you could bet your life,
They'd be doing it as well"

instead of whinging at the success of others

Have a nice day. I am off on holiday....

Annie Landlord

10:33 AM, 24th August 2017
About 4 years ago

'You will be hearing from my lawyers'. Priceless:-)

Chris @ Possession Friend

22:51 PM, 24th August 2017
About 4 years ago

Reply to the comment left by Annie Landlord at 24/08/2017 - 10:33
You can always tell when a snake is rattled by resort to running or threatening to run to their over-paid legal representatives.
Could be an awfully large solicitors bill 😉

Rob Thomas

0:51 AM, 25th August 2017
About 4 years ago

Reply to the comment left by Chris Unwin at 24/08/2017 - 08:40
Hi Chris

I very much enjoyed reading your piece. It's nice to see someone who isn't afraid to be honest about the success they have earned from their portfolio. I'm sure all the landlords reading this blog have worked hard building up what they have today and deserve success. Good luck to you all.

Rob Thomas

Rob Thomas

1:02 AM, 25th August 2017
About 4 years ago

Reply to the comment left by Chris Daniel at 24/08/2017 - 22:51
Hi Chris

Thanks very much for this comment. I wonder how you would react to being called incompetent and arrogant? Let me know. I think we have now established from the text above, I was correct in my figures on returns in the report. I make a living writing reports mainly in the mortgage and property arenas. So to be called incompetent on a property blog could damage my future flow of business if people believed it was true. I assume that whatever your profession is you wouldn't want people in that business to think you were incompetent.

Rather than attacking me perhaps you should question the professionalism of someone who would resort to a blatantly libellous comment in a blog.

Rob Thomas

16:28 PM, 25th August 2017
About 4 years ago

Reply to the comment left by Appalled Landlord at 24/08/2017 - 00:00
Once again I feel compelled to reply to your comments.

Let me take your points in the order they appear.

You repeat that I haven't adjusted for inflation. As I mentioned to you previously, I have followed the established convention used in total return indices the world over for assets like equities. If you think this is terribly unfair I suggest you write to the firms that compile the FTSE total return indices and the other stock market indices around the world, because they all present the returns in nominal form (i.e. not adjusting for inflation). But why stop there. If you're right, why aren't the Nationwide and Halifax house price indices presented adjusted for inflation? Why aren't rent series adjusted for inflation? Hopefully, you see that adjusting everything for inflation would be hugely complicating. But if you want to adjust my returns for inflation, you are more than welcome to. However, it won't affect the relative performance against other asset classes.

You say that I am "pretending that income tax is not due on rental profit, and with no reference to the inherent capital gains tax". I'm not pretending anything or supposing anything. Again, as I previous said, it is the established convention when showing total returns to show them before tax. Why? Because people's tax affairs are all different so there is no one rate of tax you could apply. If you want to adjust the figures based on some assumed tax rates, that's fine by me.

Next point. You say "Alongside the figures for returns plus the investment you show the percentages for the compound annual return and the return from net income. It was natural to assume that the percentages related to the amounts alongside them, rather than those amounts minus £1,000." Again, I think this suggests that you don't understand the maths. Let me give you a simple example: Suppose you invest £1,000 in 2010 and by 2015 it's worth £5,000. Your capital gain is £4,000. My table was telling you what £1,000 in 2010 would be worth by 2015: the answer of course is £5,000. The compound annual growth rate is 38% a year. It would make no difference to this annual compound figure if the table had shown the capital gain figure of £4,000.

Next point. You say "Now that you have drawn my attention to the mistake I acknowledge that I was wrong to say that you had not deducted the deposit of £13,750. It is the 3% purchase costs that you have left out of the calculation of the return, thus inflating it, although you seem to have included them in the unmortgaged example." I didn't leave out the 3% and I'm not sure how you came to the conclusion that I did. If you are referring to the 75% LTV buy-to-let borrower (in the first line of the table), I can give you the exact figures:
Purchase price: £55,169
Total investment (incl 3% purchase costs): £56,824
Mortgage: £41,377
Invested equity: £15,447
Cumulative net income: £61,311
Cumulative capital gains: £153,367
total increase in value: £214,678
Final value of equity: £230,125

Next point. You say I did a similar report for Paragon the previous year. That's correct: the Landbay report updated the numbers by a year so the figures are unique, not a repeat of those in the Paragon report.

At this point I should add that I think your arguments are contradictory. On the one hand you said that landlords didn't need me to tell them that gearing had added to returns but on the other hand you seem to be saying that George Osborne (with the resources of HM Treasury behind him) needed my report to show him that geared buy-to-let investors had made exceptional cumulative returns since 1996. Flattering but ridiculous.

Next point. You wrote "You ask how I know the 2015 report was written to induce investors to lend to Landbay, claiming that it seems very odd “that a report showing that buy-to-let investors get great returns issued by a buy-to-let lender wouldn't have been issued to encourage buy-to-let investors.” You are still being disingenuous. I have already quoted what you wrote “Now, nearly two decades later, a new financing revolution is set to change buy-to-let as peer-to-peer lenders such as Landbay allow ordinary investors to lend directly to landlords, cutting out the traditional bank or building society sitting between the two. This paper should be of value to ordinary investors who want to lend to landlords as it sets out the relative robustness of the buy-to-let returns that help to underpin lenders’ investment as well as those of the landlords themselves".”

I wrote another report for Landbay entitled Democratising Mortgage Lending. This was explicitly aimed at explaining the safety of an investment using a peer-to-peer lender like Landbay. I'd gladly send you a copy if you want. As for the report on buy-to-let returns, as you'll notice, the paragraph above you quote ends with "as well as those of the landlords themselves". You should accept that as I wrote this, I am ideally placed to understand what it was written for. Common sense should show you that this report is all about buy-to-let investor returns rather than the returns of those who fund buy-to-let loans through peer-to-peer. Indeed, you could argue that why would someone put their money in a peer-to-peer lender when it would seem much higher returns have been available in geared buy-to-let. So the report isn't much of an advert for peer-to-peer investing.

So in summary, you may want to believe that the 1,400% figure is fictitious but it is no more fictitious than any of the other total return indices that the press quote everyday. No single investor would have exactly replicated the returns I showed. But equally, no investor in equities could have exactly replicated the total return index, as for a start it includes no dealing costs. You may want to live in a world where everything you don't agree with is "fake news" but I deal with established facts and work with the (imperfect) stats that we have.

Rob Thomas

Annie Landlord

10:25 AM, 26th August 2017
About 4 years ago

Reply to the comment left by Rob Thomas at 25/08/2017 - 16:28
I think he's getting desperate now:)

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