From: "Stephen Burke" 
Newsgroups: uk.finance
Subject: Re: Buy to let in the South East
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Date: Sun, 7 Mar 2004 14:12:41 -0000

Ronald Raygun  wrote:
> property becomes empty.  The folks in the buying queue are simply
> waiting for prices to drop, and if enough wannabe landlords throw
> in the towel, under pressure of watching their equity shrink and
> their cashflow go pear-shaped, will be desperate enough to bail out
> to drop their prices.

When you said that rental yields might rise I was assuming that you meant they
would rise based on current prices, i.e. that actual rents would rise as the
supply of rental property decreased. Obviously if prices fall then yields will
rise based on the new prices, but that isn't a lot of comfort if you're
already a landlord now. What I think is true is that prices may not fall all
that far, because as you say there are plenty of would-be FTBs waiting for
prices to get into their affordability range.

> I'm not sure people will delay because of tax.  If there is little
> profit in BTL from actual rental yield, then most of the profit is
> in gain.  If gain is your aim, delaying selling because you've
> made too much gain is daft, since if prices drop, you'll lose more
> in gain than you'd save in tax.

That assumes that you know that prices are going to drop significantly, but in
practice people always tend to hope for the best. Also a lot of people dislike
paying tax on principle. True, once you've decided to sell there is little
gain from delaying, but I suspect that many people will leave the decision in
the hope that it won't be necessary. As indeed it might not be, it's possible
that interest rates won't rise as much as expected, and house prices may just
flatten out rather than fall. For a new buyer, zero capital growth and a
rental yield below what you can get on cash might not look that appetising,
but for an existing investor it may be good enough to stay in. The real killer
is negative cashflow, once you're paying out more in interest and maintenance
than you receive in rent you will be forced to sell if you don't have other
income to cover it. As I understand it lenders have been asking for a minimum
rental cover of 130%, so if interest rates rise by more than 30% - i.e.
something like 2 % points - that margin will be pretty much eroded. That
suggests that base rates at 5.5-6% is the significant region.

-- 
Stephen Burke