On the UK Housing Market – Part Three

This is the final post in a series of three about my experience of the UK housing market. I wrote it all out and then realised it was a little too long for one post so I’ve split it out into three sections – the houses I grew up in (here), the houses I bought (here), and my thoughts on the UK rental market and strategies to make the most of it.

When I started investing in property most people’s responses were of humour (oh so how’s the property empire coming along? Are you a property mogul now? Have you bought Mayfair yet etc etc) On the other hand some people I could tell were resentful. And I get that, it’s so hard for young people now to get onto the property ladder. Personally I own one HMO (house of multiple occupation) which I rent out room by room, quite cheaply for the area I think. So I don’t think I’m directly competing with first time buyers, if anything I’m helping by providing low cost rent for young people so they can save up a deposit.

Even so, there is still resentment. One of my best friends doesn’t think people should own more than two houses, one to live in and one to rent out, and perhaps he’s right. I think there needs to be some form of rental market – otherwise where would people live until they can afford to buy a house?

Some people say that buy-to-let shouldn’t be a thing, but what is the alternative? Only big organisations or the very wealthy buying houses? Personally I think it’s better to have lots of independent landlords than just a few big organisations providing housing. I try to see all sides of the argument though. All in all it’s a difficult issue, especially in the UK, and emotions can run high.

I have a plan to buy one more house, roughly the middle of 2018, after which I’m thinking I’ll stop and focus more on investing in the stock market. I think one house for myself and two to rent out is reasonable, and it means I can focus on being a great landlord for those tenants. I’ve been thinking about writing a manifesto for being a great landlord – perhaps the subject of a future post.

Why Property?

I mentioned in my last post on the housing market that I’d read Rich Dad Poor Dad by Robert Kiyosaki and decided that I would invest in assets (which throw off money) as opposed to liabilities (which cost money). But why property and not something like stocks and shares?

Back in 2013 I read a book called The 3 + 1 Plan by Brett Alegre-Wood, in which he talks about owning 4 properties, one to live in and three to rent out which should in theory pay for a comfortable retirement. I liked the idea of it and set about making it a reality for myself. The book seems to be aimed at a slightly older audience, people in their 40s and 50s who already have some significant equity in their own houses. The idea for these people is to release equity from their own house in order to put deposits down on buy-to-let houses.

One of the most important principles I got from this book was the leveraging effect – this is something that doesn’t really apply to stocks and shares. Let’s say hypothetically speaking you have £200k to spend. Do you buy a £200k rental property outright with that? No! It’s better, says Alegre-Wood, to buy 5 houses with a 20% deposit on each, because in time they’ll go up in value and you’ll pocket the difference.

Now you might think having £800k of mortgages across 5 properties is a bad thing, but consider that the mortgage and most other costs will be covered by the rent paid by your tenants. Now, if over say 10 years the properties double in value then your 5 properties will now be worth £2m, a much bigger gain on just buying one house outright. Let’s draw this out:

Buying 1 property outright:

  • Total equity at start = £200k
  • Total house value after property has doubled in value = £400k
  • Total equity after property has doubled in value = £400k
  • Total gain on initial investment = £200k

Buying 5 properties with a 20% deposit (of £40k) on each and interest-only mortgages:

  • Total equity at start = £200k, Mortgage = £800k
  • Total house value after properties have doubled in value = £2m
  • Total equity after properties have doubled in value = £1.2m, Mortgage = £800k
  • Total gain on initial investment = £1m

Now these are obviously very simplified examples and you’d need to consider the tax implications and other costs in both scenarios. But even so, the difference is so huge (£200k vs £1m) that the strategy should be worth it.

There is also the chance that properties might go down in value though I believe this is less likely than for stocks/shares for the following reasons:

  • When houses start to lose value, people are reluctant to put them up for sale, so the supply in the market is lower and so house prices hold up.
  • The government tends to want to prop up house prices – witness the Help To Buy scheme in recent years which Theresa May has just renewed.
  • When the economy is doing badly and there are less buyers, housing developers will often reduce production and therefore supply is reduced which keeps house prices steady.

Prices of buy-to-let properties are largely based on the rental yield that can be produced, and there are 2 things to consider here:

  • If the economy is doing badly then there will be more people renting, and so there will be more demand for rental properties keeping rents high (or at least preventing them dropping by much).
  • If the economy is doing well then the properties will most likely be increasing in value as people should in theory have higher incomes and therefore can spend more on a house.

So either way landlords will do alright.

Even so, it is possible for house prices to fall, especially when there is a big shock to the economy like the Credit Crunch in 2007. My previous landlord made a £10k loss on her investment. With Brexit on the horizon it already looks like higher value properties in London are reducing in price, though it looks like house prices are increasing everywhere else across the country.

I guess what I’m saying is that houses can be a risky investment, but no more so than stocks and shares, and perhaps less so for the reasons above. I mean if you put all your money in the stock market in 2000 then over the next few years you’d have watched as the share values dropped by a third. likewise in 2007. There just doesn’t seem to be a non-risky investment so I’d say houses are fair game, and at least with houses there is something tangible there – you can see where your money is going and it’s not about to just disappear the way a company might go into administration (rendering shares worthless).

Capital in the 21st Century by Thomas Piketty

A few years back I read this book and it was a real eye-opener. Piketty is an economic historian based in France and he looks at levels of inequality over time. The conclusions he draws are quite worrying really.

In the late 19th and early 20th century Britain and France were extremely unequal societies, so much so that about 90% of all the wealth (that is, land, houses, businesses etc) was owned by 10% of the population in both countries. There was no such thing as the middle class (or if there was it was very small) – society was split into two camps, the wealthy:

downton

And the poor:

les mis

Sound familiar? Kiyosaki draws a similar parallel in Rich Dad Poor Dad, between the wealthy who own assets and the poor who don’t.

During the 20th century there were three major shocks in the western world; WWI, the Great Depression, and WWII. These shocks massively reduced overall wealth and after WWII when major nations set about creating welfare states there was a great redistribution of wealth and societies became far more egalitarian. Suddenly the middle class was born, a large section of the population with great spending power and ability to buy houses.

Unfortunately this situation will not last, according to Piketty, unless we do something about it. Wealth will usually outpace economic growth and so the power of wealth will increase over time and become more and more concentrated. Witness recently Sir James Dyson, the well known vacuum cleaner salesman, buying up 25,000 acres of land instead of investing in his business, because he knows over time the value of land and property will increase (land is finite after all) and so is a safe bet.

The Death of the Middle Class

The middle class is slowly being suffocated, squeezed, by the increase in property prices and the sluggish growth of real wages. This graph shows the wealth of the top 0.1% is overtaking the wealth of the bottom 90% in the US (the picture is the same in the UK):

piketty split

The change in most pronounced in university education – most students now in the UK will be paying a 9% graduate tax for 30 years after they graduate, and end up paying far more than the rich (who will pay off their student fees straight away and so pay less overall).

I can’t pretend that the growth of buy-to-let isn’t part of the problem. Buy-to-let landlords are competing with people just trying to buy their own home. But actually I believe buy-to-let  is the last grasp of the middle class trying to hold onto wealth. It’s interesting that the two changes George Osborne brought in to limit the buy-to-let market – increasing tax on mortgages and increasing tax on stamp duty – won’t actually affect those who already hold significant wealth. It’s almost like he wanted to squeeze out the middle class yet further and allow his rich friends to move in and take over the housing sector. It amuses me that people think Osborne brought in these changes to help young and less well-off people, it’s quite the opposite in fact.

Piketty suggests a global tax on wealth, which seems quaintly naive really, especially the way things are going with Brexit and people like Donald Trump in power. You would need every country to sign up to it to avoid massive movements of wealth across countries, and I just can’t see that happening.

Concluding Thoughts

I can’t predict what will happen 50/100/200 years down the line. And I wouldn’t class myself as a social warrior or anything like that. There are major forces at work in the world right now – the rise of populism, the growth of inequality, climate change, and so on which in my view make the future look bleak for your ordinary person.

I don’t pretend to have any answers. All I can do is work with the situation I’m presented with now. Maybe I can produce enough wealth for myself and family to live a comfortable life, and maybe that will help me give my children a decent leg up too. And maybe one day I’ll go into politics and try to make the world a better place (though it seems unlikely).

What do you think? Are we all doomed to become peasants in an increasingly hostile world, or is the future brighter than I’m making out?

As always thanks for reading,

Wephway

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5 thoughts on “On the UK Housing Market – Part Three

  1. When I was looking for my BTL, I thought that my budget and property-type was in the range where I was competing with first time buyers, ie £60-£80k/1 bed flat and that I would struggle to find something decent. I was surprised to see that the likes of Right Move and Zoopla were awash with numerous such properties – perhaps first time buyers don’t want flats, only houses?

    Anyway, I did consider (as my friends would also put it) ‘expanding my property empire’ but decided that that wasn’t the way I wanted to go, so I’ll just stick to the one. I’m currently paying down my BTL mortgage so although I’m not sure I want to pay it all off – I’ll see how things go in a few years’ time.

    Sorry for all these comments, I’m just catching up on my blog reading! 🙂

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    1. Hi Weenie, thanks for the comments!

      That’s interesting, I wonder if first time buyers and BTL landlords don’t compete as much as people make out – they do often have quite different considerations when looking at properties. I’ve noticed when people buy a property to live in they often start out at a lower budget but end up stretching themselves to their highest possible budget, looking for things like a parking space, or a south facing garden and so on. Whereas landlords are a bit more practical maybe, and more concerned with the numbers.

      It’s nice to hear from another landlord actually – I get the impression that the Ermine and other bloggers are quite dismissive of being a landlord, or see it as a bit of a racket. But I do think it can be part of a successful strategy for early retirement.

      Have you seen the iretiredyoung.net blog? They have some properties in the UK but live in Dubai – they must have a decent letting agent to be able to leave their houses alone like that!

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  2. You’re spot on with the leveraging strategy and it’s what most landlords do. Not only does it make financial sense but you’re also then spreading the risks of bad tenants, repairs, damage etc.

    I’ve not really looked into BTL myself as I was always of the impression you couldn’t get a BTL mortgage while still paying off your own residential mortgage?

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    1. Hi Guy, yes I hadn’t thought about the spreading of risks – actually though that’s one of the reasons I like having a HMO, with 5 tenants in one house if one of them moves out it doesn’t impact my finances so heavily. If you let out a property as a whole and have a vacant period or a bad tenant then you could run out of funds quickly.

      You can definitely get a BTL mortgage whilst still paying off your residential mortgage. Deposits generally need to be higher with a BTL house though, as is stamp duty. I would say do your own research, partly because I wouldn’t want you to buy a house and then see the value plummet or something, and there is the risk of bad tenants and so on. It helps if you know the local market and the general movement of house prices in that area. There have been tax changes over the last few years that have made it less profitable as well – higher stamp duty, fewer tax breaks. But overall I would still say it’s a worthwhile investment.

      Purely for strategy (and motivation too) I would highly recommend the book ‘The 3+1 Plan’, I think you can pick up a second hand copy fairly cheap. At the end of the day though there’s nothing better than actual experience – you learn a lot by doing as they say.

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  3. What’s your reasoning for another btl? I’ve considered this as I’ve got 200k of equity in my house and decent savings (about 50k) but the 3% stamp duty puts me off and you are putting all your money in a single asset. By contrast shares can be invested in the global market. Literally millions of businesses. It can go down yes but if youd held your nerve In 2007 you’d be way above the 2000 levels by now especially taking into account dividends

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