Feast to Famine to Feast?

Landlords, there’s no doubt about it. We live in extraordinary and complex times. Who would have thought a couple of years ago that some whiz, bang, financial derivatives such as mortgage backed securities or credit default swaps invented in London and exported around the world would come back and bite us all on the butt?

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This complex financial engineering has certainly made the world a more confusing place.

Now governments and companies are forced to come up with even more complicated solutions like quantitative easing as they struggle to get themselves and us out of this hole.

Landlords have truly witnessed some feasts and famines over the last decade.

All this messing about with global financial economics has made our lives as landlords difficult to manage. Firstly, a capital feast, as rising house prices appeared to have only one trajectory, ever upwards. The result; landlords were cash poor as a rents barely covered mortgages, but asset rich as our portfolios ballooned in value. At this time an apparent famine of rental accommodation encouraged landlords to step into the breach to do their bit and feast on the ever growing demand for rental accommodation.

Landlords were able to feast on a wall of cheap money thrown at them by lenders who got fat on profits made by advancing huge amounts of money against what we all assumed were secure asset values.

Then, the mother of all credit crunches. Banks, governments all realised that they had over done the lending thing. Asset values started to plunge and with it landlord’s portfolio values. Homeowners can’t sell so instead let their property turning a shortage of rental accommodation into a glut.

Interest rates fall through the fall. This week’s rate cut leaves them a whisker away from zero. Suddenly landlords are feasting on big rental profits. The wall of buy-to-let money has been replaced by lenders forcing landlords to do a merry little dance, stand on their head and whistle Dixie before even standing a chance of getting a sniff at an over priced buy-to-let mortgage.

Confused? You are not the only one.

When I bought my first buy-to-let property 15 odd years ago. I didn’t expect to be rich overnight, but the confusion many landlords feel is that we are rich, but then poor, but poor whilst now also rich (if you include rental profits).

What does it all mean?

The message is maybe that our technology enhanced post modern society is not as complex and clever as we think it is. Maybe we are all unable to escape our basic primitive inclinations to feast when times are good and then have to endure periods of famine when all the goodies are gone.

What we do know instictively is that a feast is followed by famine which then in turn some time later is followed by another feast.

So when & where will the next feast come for landlords?

Property values are still in free fall. Savills recently suggested that what we need is for sellers to drop their prices by 25%.

A fall in values by this magnitude will surely be enough to prompt landlords into a feeding frenzy. At these kind of prices returns on a landlords investment would be stellar.

This week the announcement was that construction hit an all time low.

Let’s face it, nothing is being built and won’t be for several years to come. There is a famine of new supply of accommodation. With a 25% cut in house prices, lenders would feel confident to open the tap on lending. With interest rates down at zero they are paying next to nothing to their depositors. With lots of money being thrown into the system this will surely result in stellar inflation. The best hedge against inflation is property. Ask anybody who remembers the 70s and 80s.

All this means that the famine of the next few years is more than likely going to end up in another feast before long.

I’m sure landlords that keep the faith will drink to that.

HAWKEYE – a unique perspective on property investment