Patrick Collinson “Guardian of Housing Ignorance”

Patrick Collinson “Guardian of Housing Ignorance”

7:54 AM, 21st August 2017, About 4 years ago 46

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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

by Rob Thomas

22:45 PM, 31st August 2017, About 4 years ago

Reply to the comment left by Jay James at 31/08/2017 - 21:59
I couldn't agree more that some of these posts are unprofessional. For example, if you've followed the full thread - with myself being called incompetent and arrogant by someone who falsely claimed there were errors in the report because he didn't read it properly! I Can't think of a more unprofessional approach.

Hey, Jay James, how would you react if someone in your professional field, whatever that might be, falsely accused you of being incompetent and arrogant? Let me know.

by Rob Thomas

22:51 PM, 31st August 2017, About 4 years ago

Reply to the comment left by Appalled Landlord at 31/08/2017 - 22:03
And you protest that you're not obsessed with my report!

by Rob Thomas

22:57 PM, 31st August 2017, About 4 years ago

Reply to the comment left by Appalled Landlord at 31/08/2017 - 22:03
PS - In the table you mention (Table 4) the column showing returns is headed "Value at end 2014 of £1,000 invested at end 1996" - that couldn't be clearer. It's obviously not a capital gain, it's what the initial investment grew into.

by Rob Thomas

23:25 PM, 31st August 2017, About 4 years ago

Reply to the comment left by Appalled Landlord at 31/08/2017 - 22:07
If this is true you should spend more time lobbying against the unreasonable tax changes introduced since 2015 rather than your pointless attacks on my report.

You say my report is extremely damaging. Why? Because it was used by the likes of Patrick Collinson? Well I've been reading articles on property118.com that I'm sure Patrick Collinson would gladly pick up on. For example, the tax advice on Section 162: "How Angie and Dan Could Have Saved £280,000" when incorporating their buy-to-let business. This could so easily be presented by Collinson as greedy advisers telling greedy landlords how to avoid paying the taxes they rightfully owe. And we all know what the government thinks about legal tax avoidance - they talk like it's akin to child murder (unless it's them doing it themselves).

So my advice to you is to go and find all the articles on property118.com that could be used to beat up buy-to-let and get them to take them down. Only there might not be much left worth reading.

by Annie Landlord

1:06 AM, 1st September 2017, About 4 years ago

Rob, you really must learn to accept criticism and roll with the punches. You make pathetic 'threats' of legal action when someone challenges you, yet you continue to make assinine, juvenile comments about others in the conversation. Grow up man! We all know what we are talking about and we are entitled to share our opinions and experiences. You have become obsessed with defending your article, when what you need to do is simply accept that many landlords feel the reporting was one sided and painted an overly optimistic picture of the state of the buy to let business for ordinary landlords.

by Rob Thomas

11:39 AM, 1st September 2017, About 4 years ago

At least I've got you to actually make a sensible point. Your last two comments were (and I quote):

I think he's getting desperate now:)

Yup, He's even more desperate now:)

In the context of my statements to which you were responding, which were reasoned arguments to Appalled Landlord, your comments were simply trolling. I will respond to juvenile trolling in a similar fashion. If you want reasoned debate make reasoned arguments, do not troll me because I will respond in kind.

I also notice that when others chip in it's to attack me (for example calling me unprofessional), never to criticise you for trolling me or anyone else. Perhaps Appalled Landlord is used to a little army of trolls doing his bidding. I'm used to reasoned debate.

As to the threats of legal action, they weren't pathetic, they were very serious. I believe that anyone who comes on a blog should realise that they have the potential to create serious financial damage to themselves if they make libellous comments. That's just common sense.

Finally, if you think from this blog that I am obsessed with defending my report then by implication, as Appalled Landlord has written more about it on this blog than I have, wouldn't it be fair to say he was obsessed with it? Oh, but that would mean criticising him.

He doesn't like the fact that it didn't include inflation and tax in the calculation. He is the only person who has ever raised this point with me but if that's his view fair enough. I've explained why I used the methodology I did. Why does he keep coming back with the same point again and again.

You may think the report painted an overly optimistic picture but it wasn't designed to do so. And to be fair, how many landlords actually know what their full cumulative returns have been (including their net rental income over the years). If you've been a landlord since 1996 you might be surprised how high those returns have been.

by Appalled Landlord

22:50 PM, 1st September 2017, About 4 years ago

Reply to the comment left by Rob Thomas at 31/08/2017 - 22:51
I am not obsessed by your report. I did not give it a second thought last week. You challenged me to say there were no errors in your report, forcing me to reply to the contrary.

by Appalled Landlord

22:54 PM, 1st September 2017, About 4 years ago

Reply to the comment left by Rob Thomas at 31/08/2017 - 22:57
"Value at end 2014 of £1,000 invested at end 1996" is not clear, and is not as clear as "Cumulative total returns for the main UK asset classes (1996-2014)" in bigger, bold type above it, and much less clear than"Section 2 - Investment returns compared" in even bigger bold type above that.

Give it up and admit that you put figures in a table that did not correspond to the title of the table or the title of the chapter. That was an error.

Using the figures as returns misled me into thinking and stating that you had not deducted the deposit in calculating the capital gain, because the resulting figure was higher than the gross gain of £134,000.

However, yesterday I discovered from your post of 24 August that you had used the figure of £153,367, and I pointed out that this was about £19,000 too high. That was another error. You have not commented on the discrepancy, thereby tacitly accepting that the figure was wrong.

by Appalled Landlord

22:56 PM, 1st September 2017, About 4 years ago

Reply to the comment left by Rob Thomas at 31/08/2017 - 23:25
I explained yesterday why your report was damaging.

I do spend a lot of time on the campaign against S 24.

Your comment that using S 162 of the tax legislation is avoiding paying taxes they rightfully owe is nonsense. Coming from a management consultant makes it bizarre. S 162 was enacted to relieve them of the tax, which means they do not owe it, rightfully or wrongfully.

by Appalled Landlord

22:59 PM, 1st September 2017, About 4 years ago

Reply to the comment left by Rob Thomas at 01/09/2017 - 11:39
I do not have a little army of trolls. Annie Landlord and I do not know each other and have never corresponded. She is not a troll. I have read many of her posts in the past and they have always been eminently sensible. She queried your assumption and you were obnoxious to her. Her comments are her own opinion, but I do agree with them.

I keep coming back about inflation and taxation because you keep trying to justify their absence.

You ask “how many landlords actually know what their full cumulative returns have been (including their net rental income over the years). If you've been a landlord since 1996 you might be surprised how high those returns have been.”

That is the crux of the matter. Nobody calculates that figure because it is a completely pointless exercise. I have been a landlord longer than you but it has never occurred to me to waste my time on such a calculation.


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