Buy-to-let investors are getting what they deserve

[url=http://www.lovemoney.com/profile/profilehandler.aspx?uid=14092][b]Palefire[/b][/url], Thanks for the comments :-) To be honest, I see TMF as kind of 'medium-level' with regards to financial analysis. It's really aimed at the average financial consumer and it shows (just look at the headline). If you wanted more in-depth coverage there are [url=http://www.housepricecrash.co.uk]other[/url] [url=http://www.moneyweek.com]sources[/url].

[b][url=http://www.lovemoney.com/profile/profilehandler.aspx?uid=3645]Swarbs[/url][/b], [Sorry again for not getting back to you sooner, it seems that some companies have decided that the recession isn't as bad as the fundamentals would suggest and I'm not one to say "no" to some extra easy money :-).] [b]"Regarding the nature of housing, I agree that it is not as freely available as many commodities, but that is due to the nature of housing"[/b] I don't know of any other product which has that same key characteristic as housing: it's location. In fact after writing my last comments I checked a few sources for other examples but I can't find any. No modern economic theory or philosophy seems to take this into account and I assume that this is because what is currently happening is relatively new to our times. Your idea that it is an example of[url=http://en.wikipedia.org/wiki/Monopolistic_competition] monopolistic competition[/url] is also quite interesting. BTL certainly fulfills the basic criteria, especially points 1,2 and 4 (in the above article) but all the examples given show a set of producers who can in theory manufacture indefinitely. There is no restriction on supply, only on the number of providers. In theory then (and as the article linked to above says) over the long term yields will come down. But (excluding occasional crashes) this doesn't happen with BTL. In BTL, as the availability of products falls, the price goes up. This is fine but: 1. No more product can be manufactured to keep up with demand, 2. The product provided is necessary for living and 3. The barrier to market entry is effectively fixed, allowing the eventual monopolisation of a fixed supply of land. OK, you can increase the housing density (subject to regulation) but this wouldn't be capitalism but socialism. [b]"I don't know if you can say it is vital - many people happily live on boats, farms, campsites etc. Housing is only vital for modern urban consumer based living."[/b] People need somewhere to live and in a modern society this is a house (or flat). Now, I have no problem (within reason) with the free market dictating the best use of a limited supply of land/housing and if someone wants to live on a barge then so be it. What I have a problem with is someone using the unique nature of the market to turn a profit without adding equivalent 'value' back. At the risk of sounding like a socialist again, we need to allocate resources based on value added and market distortions such as BTL do not help us to achieve this. [b]"But ultimately, even in the South East and London, there is the potential to increase production through denser construction - high rise apartment blocks, building over gardens, splitting large houses in flats etc. This is prevented by regulation and planning laws."[/b] The reason why I'm sounding like a socialist is probably because of the social nature of housing. In an ideal society there will be a balance between socialist principles of looking after everyone (NHS, DSS et al) and capitalism (work harder -> higher productivity -> higher standards of living). If someone is priced out of an area then in a healthy market so be it. The local economy will adapt and ether house prices will fall, average salary rise (London weighting?) or some accommodation will develop (key worker scheme home shopping for food deliveries). Of course planning laws could also change if the need was perceived as great enough. [b]"I don't follow the monopoly argument - controlling a part of a fixed resource gives market power, not monopoly power"[/b] OK, I'll give you this. An individual who has a BTL property is able to control a larger part of the market than their productivity would normally allow. They achieve this by using someone else's productivity, which they get by denying them access to a necessary social resource. It's a market failure but in a unique market and with socially important consequences. [b]"By your same argument, any shop has monopoly power because it controls some land and the amount of land in the area cannot be increased"[/b] With certain exceptions (like the four Tescos which are within a 10 minute drive from here) the commercial property market is actually quite well regulated. The town or city council has a say on what and where new shops or commercial developments can be based and this is done for the social and economic benefit of all. [b]"And the argument about wanting to live there is the same as for any other product - people who want to buy a car have to either pay the price for that car, buy a lesser one, or both. Same with food, electricity, gas etc."[/b] [b]So their ability to earn (as determined by the market) controls their ability to make purchases and in theory where they can live. I don't have a problem with this but I do have a problem with people using other people's productivity to gain a competitive advantage in such a vital yet supply-constrained market..[/b] [b]"I'm not sure what 'significant amount' of productivity you are referring to. The rental yield from a BTL property is generally very similar to the mortgage interest, and often ever lower."[/b] I will admit that I haven't had the opportunity to speak to that many BTL'ers but those who I have spoken to over the last few years have all spoken about their yields being significantly higher than their costs and this includes their interest-only mortgages. They may just me smart investors who brought in the right place and at the right time but obviously different cases will have different yields. Just because some BTL'ers aren't making money doesn't mean that the market shouldn't be regulated. They are still benefiting from someone else's productivity, someone who could and probably would otherwise buy. And that's ignoring the point that if they have mis-calculated it's still the taxpayer who has to pick up the bill. [b]"Many BTL landlords, myself included, make a net loss on some of their properties."[/b] It's an investment and like any investment it's a gamble. That said I would assume that you're not in it to make a loss and if you have done your sums correctly you will still end up with a significant unearned gain in the end. [b]"If any profit is made it's either due to more efficient use of the property or its marginal at best"[/b] Let's not beat around the bush here: BTL is a business. If you did your sums right then you would have realised significant unearned gains from all your properties. That you haven't is, for the purposes of this argument irrelevant. Others just like you who brought in earlier in the boom will have made significant amounts of unearned money by capitalising on supply constraints which you yourself have contributed to. The extra money needed to get onto the housing ladder (or even just rent) has caused a significant amount of debt to enter the economy, debt which will now not be paid back and which is itself a leading cause of this crash. [b]"If you are referring to capital gains, this is not really productivity, its more a return on capital"[/b] Which would be fine if it were a non-socially important asset. Your capital gain occurs due to competition in the housing market which is itself partly a result of BTL activity. Most people don't want to subsidise or pay off someone else's mortgage so they will always try and buy their own home and make their productivity work for them. The only problem is increased competition from 'investors' capitalising on an essential need can make this impossible and so they are forced to rent, subsidising your (or another's) investment and allowing you to MEW, further increasing pressure on house prices and increasing your potential capital gain in the process. [b]"and is not guaranteed - just look at BTL landlords who bought during the boom."[/b] As I said before BTL is an [b]investment.[/b] If you gambled wisely then you will have made a lot of money. If not then tough. [Before I respond to your next point I would just like to say that I have no problem with people gambling like this with their own money and their own lives. This is one aspect of how capitalism works and in any other market I wouldn't have a problem with it as it's only the money and lives of the willing participants which is at risk, not some innocent family just trying to live.] [b]"The critical difference here is that water is continuous, whilst property is discrete"[/b] One supplier for one area, one mains supply. Take it or leave it. [b]"Additionally, most property has not been produced by the people who sell it - it has been traded over a long period of time"[/b] I don't get your point here. Water is not manufactured by the water company but recycled. They add value by purifying it. You could also argue that a homeowner adds value by building an extension or by maintaining the house and by updating it. [b]"True, but you seem to have no problem with the council taking your productivity and using it to provide council housing, or pay the rent for people who can't cover their mortgages. What's the difference?"[/b] Because I'm happy to contribute a small amount of my productivity to live in a nice country with a nice culture and a nice society which looks after it's own. I'm not happy for people to use a unique market with features unique to it's design to extract a lot of money for very little productive work. And in any case, this sort of help would only be provided if there were no viable council house places available and even then, only the mortgage interest (+1-2%) would be paid with the mortgage company free to sell of the house when a council house place comes available.  It seems to me that problem which we keep bumping into here and what is making me sound like a communist is that the housing market is unusual in that it's socially important. In fact it seems to me to be unique in that in every other domain where this problem exists, so does regulation. Why not housing? [b]"But housing is a business! It's made by companies for profit"[/b] Yes, but they add value to an existing resource (land). [b]"it is bought and sold by people for profit"[/b] Such as speculators who 'flip' housing? Buying, improving and then selling I have no problem with. The developers in this event [b]add value[/b] which is fundamental to any capitalistic society. [b]"and all the intermediaries who deal with it are looking to make a profit (agents, solicitors etc)."[/b] They do an important job and because of their expertise, [b]add value[/b] to the transaction. They are even subject to a truly free market. Again I have no problem with this. [b]"Ultimately every businessman aims to acquire more wealth than they put back into society - these additional returns are the only reason to invest."[/b] Yes and if they do it by genuinely adding value (relative to what they take out) then I don't have a problem! "[b]The problem with proposing regulation for housing is that as the price of housing goes up, so do people's asset values."[/b] So what would happen if a system (like [url=http://en.wikipedia.org/wiki/Land_value_tax]LVT[/url]) were introduced and asset (i.e. house price) values kept suppressed so that they closely followed (or were slightly higher than) the rate of inflation? [b]"As such, any regulation to control house prices will reduce the amount of wealth that people perceive themselves to have"[/b] Key word there: [b]perceive[/b] We are in the biggest financial crisis since at least the 1930's and people's perception of how wealthy they were has paid a significant part in causing this. I would rather have real growth based on real productivity rather than a housing driven boom and bust any day. [b]"thus harming consumer confidence and costing political capital."[/b] I'll agree with you that the illusion of unearned wealth can, for a short time provide much political capital but in the longer term, and as we have seen recently, the result of reality eventually catching up is less than desirable. [b]"Which is ultimately what all regulation is about - obtaining political capital."[/b] I'm not entirely convinced by this statement. That said I'm not a politician, I just want an equitable and fair society which rewards productivity and doesn't cost the future for short term gain. "[b]Erm, oil, gold and platinum all have limited supply. There is only a limited amount available on earth."[/b] I also said “for the purposes of this argument”. While the planet will eventually run out one day, that hasn't happened yet and as supply continues it is still subject to the free market.. [b]"There is no way to manufacture oil without putting the same, or greater, amount of energy into the manufacturing process, which ultimately is pointless unless we can secure a cheap and near infinite energy source."[/b] Like I said: "just like oil which, incidentally can be manufactured but only at a higher cost than it can be pumped/steamed out" [b]"Your point seems to be that, as prices rise, so companies will invest more into extraction."[/b] Yep. As the price goes up harder to access resources become economically viable to mine. [b]"Yes, but as house prices rise, so companies will take on more developments and look to increase the use of available land etc."[/b] Naturally, leading to increased capital gains (which might not be earned) and lower quality housing stock. Like I said, I'm also pro-population reduction (but that's another argument). [b]"If house prices rise high enough, it will become cost efficienct to clear up polluted brownfield sites and build all the civic amenities that developers are often required to by the council."[/b] There's no reason why a regulated housing market could not favor such developments, and at a much lower cost to society. For example, let's assume that LVT was implemented. This would put pressure on the existing owners to either develop the land or sell it, even at a capital loss. [b]"No real difference that I can see there, except obviously as house prices rise people will complain about people making money out of it"[/b] And for doing no work (house flipping, speculators). Oh, and then there's the mis-allocation of resources, inflationary consequences, etc. [b]"whilst if oil prices rise it is companies and the government who are making money out of it."[/b] Swings and roundabouts. I'm not sure about other countries but certainly in Europe, all the countries I know about have some control over their natural reserves and if prices rise, governments benefit and can lower taxes to compensate. The private companies involved get a higher return on their investments and if they are any good (certainly all British operators seem to be) they will invest in more/better production facilities while at the same time future-proofing themselves by investing in alternative energy sources. And to be honest I don't see a problem with this. [b]"Do you think private house building firms would invest as much in building new houses if they knew their profits would be capped by regulation?"[/b] I'm not against developers making money on the work done to develop a piece of land, only house 'flipping' speculators and BTL'ers getting rental and capital yields way above what they would reasonably expect (if the market were truly free and functional). [b]"Just look at how a 15-20% fall in house prices has reduced the number of houses being built and developed"[/b] [b]Now is that because of the recession and people no longer having the ability or willingness to buy a new house, because speculators aren't able or willing to buy speculative builds or is it because new debt availability has fallen to such a low level that it's now causing a fall in the number of houses built to match market demand?[/b] [b]"But these people provide a service - they make property available to rent for people who are willing to rent it."[/b] [b]As I've already said, I don't have a problem with this. I do have a problem with BTL'ers being able to make a very significant yield relative to the value added and doing so though monopolistic practices. In any other industry this would be regulated but not in this one. Why?[/b] [b]"Why do you think oil hit almost $150 last year and is now around a third of that price?"[/b] Because speculators were able to bid each other up in a frenzy. Free market dynamics also lead to this crashing down again so I don't see a big problem here. [b]"And oil is at least as vital for life as housing - you can't build, heat or power houses without oil!"[/b] You can. It's just less efficient (economically and energetically). [b]"Your ideal world sounds a lot like communism! And who decides who does a vital or very useful job?"[/b] We let the market decide. Ideally the government would prioritise key workers and then charge rent based on average mortgage cost for an equivalent home. The extra unearned income (relative to value added) would then go back the the government and therefore back to society. [b]"And who decides how properties are sorted?"[/b] Once again the fee market. Value added (as rewarded by money) should be the determinant. BTL is a distortion in this sense and I would seek to make it only as profitable as the value it adds. [b]"Oh, and in Germany there may be a thriving rental market, but there is also just a 43% level of home ownership."[/b] Sounds like a BTL paradise. So why are rents so low given the monopolistic competition? [b]"Oh, and Germany's housing benefit and social costs are around 1.5 times higher than the UK's as a percentage of GDP, so Germans pay even more of their productive wages to unproductive members of society."[/b] That's nice. Maybe that's because their NHS equivalent is better than ours, they have the most retired / pensionable age population of any European country (they are about 10-20 years ahead of us in their pension crisis) or perhaps it's that they have taken on the most non-European immigrants (i.e. asylum seekers) out of the whole of the EU? And of course, all of that's assuming that our GDP figures can be believed.

Lol, thanks Palefire! Well I am a freelance writer, maybe lovemoney would like to recruit a more moderate and considered type of journalist? Wait a sec...moderate and considered journalist? In the UK?!? Hmmm, maybe not. I'll go get back in the box now...