Comments: Held at 5.75%

Dear David,
I enjoyed your lecture at Cardiff Business School enormously yesterday. Do you agreee that the evidence seems to point to a definite slowdown in the housing market? In addition to the Halifax data and the market interbank rate increasing, Hometrack are reporting not only record highs in the ratio of prices to income but that the net yield on rental income is negative without capital gains (with rent being some 30% lower than mortgage payments!). If those who bought to let are relying on capital gains for profit, this must surely be unsustainable.

Posted by Mark Clatworthy at October 5, 2007 08:01 AM

Thanks for the comments - you should have put this as a question, perhaps you were one of those who did not get a chance!

If you look at buy-to-let then, as you say, new investments do not look viable. There appear to be three practical counters to that, however. The first is that many buy-to-let landlords seem to be looking for very long-term capital gain, which history suggests they are likely to get. This perhaps explains a second factor, which is that most surveys of the sector remain upbeat, and do not suggest that people are heading for the exits. Third, a survey I saw recently suggested that the average debt to property value ratio for private equity landlords is under 40% spread across a portfolio. This means, firstly, that returns are better than they look in relation to debt and, secondly, that they may still add low return properties to their portfolios in anticipation of those long-term gains. But we'll see.

Posted by David Smith at October 5, 2007 01:48 PM

David.

It would seem that the new CGT flat rate has just blown another wheel of "the long term" wagon ?

Mad scramble to liquidate before April 08.

Posted by WeLoveMerryn at October 10, 2007 02:00 PM

Odd point - and an even odder name. Surely you must have noticed that the PBR was a great boon for second home owners?

Posted by David Smith at October 10, 2007 10:12 PM

> The first is that many buy-to-let landlords seem to be looking for very long-term capital gain, which history suggests they are likely to get.

Errr, history suggests that people who buy an asset before it falls in price, may take years just to get back to square one.
Just ask the 1M folk who had negative equity in their houses around the ~1990 UK property crash.

Better to leave your money in the bank, than buy a falling asset - it is strange that you think David that people will ignore short term falls, because their faith in 'long term gains' is so high.

Isn't the first law of business to 'buy cheap and sell high' ?

DJ

Posted by DJ in Kent at October 11, 2007 12:11 AM

I don't know whether that's the first law of business, though it may be one of the first laws of street market trading. Tesco's first law, as I recall it, was "Pile it high, sell it cheap". Even anybody who bought property in 1990 and tucked it away for their retirement will have done pretty well.

The fact is that, though buy to let demand continues strong - as the August CML figures showed - most bought on the way up, and when prices were well below present levels. We're going through an episode very similar to 2004-5, when in response to a flattening of prices BTL landlords did not desert the market and net demand increased. History may not repeat itself this time, but that's the experience we have to go on.

Posted by David Smith at October 11, 2007 10:01 AM