It is Obvious

Chris Rick has got altogether too much to say

Here, hold this

Posted by chrisrick13 on April 10, 2016

It is obvious: I’m not a betting man

Do you remember Centre Point?  A huge tower block at the eastern end of Oxford Street.  In the 60/70s the owner got mightily angry with the rates that he was going to be charged by the GLC.  They would not negotiate so he left it empty and had to pay none.  London was denied a huge lump of much needed office space and housing.  Many year it just sat there, a huge embarrassment to the GLC.  The owner just had costs and no income.

The government is attacking buy-to-let landlords.  It has attacked and will continue to attack.  It sees it as an opportunity to get many millions of renters to vote for it at the next election.  More of them than there are landlords.  The other political parties will do the same.  The big fear at the moment is a right-to-buy scheme for private landlords and their tenants.

I often say here that mainly by luck I timed my second home perfectly.  Rolled in all the tax-breaks when making a loss then paid off the mortgage when they all ended and took the profits instead of interest or whatever on the money.  I know that nobody who bought after me has made a profit because they paid more for their house.  At best, like me, they are sitting on an un-realised capital gain.  Unlike the owner of Centre Point who realised his.  I just looked into buying another house in Dorset.  ‘Do the numbers’ is the mantra.  I worked out it would cost me £1,000 a month to own it.  At the end I would be a hostage to fortune on the sale and it would have to be a sale.  At the moment the government has just taken another 3% off that sale price, in total, not the profit.  Just before April there was a rush to buy houses before the 3% surcharge.  What now?  Buy-to-let landlords getting out while they can?  I think there will be plenty of that.  This will be a force to push house prices lower.

So why is the current rate of house inflation just nicely into double figures?  What is driving it up?  One factor is the government schemes to help first-time buyers.  They don’t help much but they are good publicity.  Any benefits are countered by price rises.  It’s called a market stupid!  What else might do it?  There are two factors working hard on this.  First with low rates mortgages are affordable at high multiples of a person’s income.  0.5% base rate is 4% points below the long-term average.  At that rate the house I looked at would cost me £3,000 a month.  I even paid 3 times that for a time which would cost me £9,000 a month!  The second factor is the lack of houses.  We are building houses at a rate that barely replaces old houses due for demolition.  An increase to a useful rate is simply not going to happen.  So the market operates again.

That leaves investing in property still a good bet for capital gains.  Mark Twain said to invest in land as they have stopped making it, indeed the opposite if you go and talk to a south-sea islander or someone in Bangladesh.  But it is exactly that: a bet.  Invest in property as they have stopped making it!

What can go wrong?  If you have a mortgage at the long term average rate you can see that movements might well balance out over a 30 year period.  Can you pay at double the rate for a few years?  If you can then it is unlikely that you will get to the state where you cannot afford to pay interest on your debt.  You will keep your house.  If you buy at the current 0.5% base rate the only way is up.  Can most people who have bought in the last 7 years afford a base rate 9 times the current rate (the long-term average) or even 18 times which was the average over the previous 20 years?  So all that can go wrong is the government being forced off 0.5% base rate.

That will take some forcing.  We had inflation at 5% for 3 years which is a lot more than the 2% the BoE was supposed to keep it at.  The BoE did nothing other than to say it would come down when it should have put up interest rates.  It will come though.  I suspect that the Conservatives might think they can keep it all going until the election and then turn it over to Labour to be the party that actually pushes the button.  There are plenty of opportunities for it to happen before then.  Dollar and Euro parity would be pretty hard to live with.

I’m a freeholder.  I hold property on behalf of the Queen.  Hope she doesn’t ever want it back.

It is obvious: I’m not a betting man but I bet I will have to be

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