Property Ownership: Second Homes, BTL, and The Housing Crisis.

Money is strange.  It’s one of the most important parts of our world, yet the vast majority of people do not understand what it is, or how it works.  There are many examples of the illogical decisions people make when it comes to money, such as being willing to travel an hour to save £10 when buying a new coat for £150 instead of £160, but not being willing to travel the same distance to save £10 on a new laptop, which could be bought for £1,000 instead of £1,010.  There are all sorts of heuristics at play when it comes to decisions involving money.  

The thing about money, that not many people seem to realise, is that it’s a game.  Like any game it has rules.  If you want to be better at the game, you need to learn the rules and learn the hacks or loopholes in the system.  I’m not talking about how the world should be; that’s not the purpose of my blog.  In an ideal world, we’d like in one huge collective, sharing responsibilities and living happy lives.  Until we change the nature of what it is to be human, that’s not going to happen.  So, unless you are able to change society through democratic means, you are left with the game of money as it stands now.  

Let me start by posing a hypothetical; you have £10,000.  You have three options;

  1. Keep your £10,000.
  2. Lose £1,000, meaning you have £9,000.
  3. Gain £1,000, meaning you have £11,000.

What option do you choose?

We live in a world that relies on money.  As society has developed, the flow of money has become faster.  Our currency, like many others around the world, used to be backed by physical commodities, such as gold, or silver.  The US moving away from the gold standard, the end of the Bretton Woods system, and the move to fiat money is a fascinating topic, and entire books can be written on the subject.  For now, all we need to be clear on is that the UK’s currency; pound sterling, is a fiat currency, in that it is not backed by any physical commodity.  The currency maintains value, in large part, because people have confidence that it will continue to maintain value.  

So, we live in a society where money is a thing we’ve created that is not backed by anything physical, and currency maintains value due to a number of factors, including confidence in the currency.  We also have inflation; the increase in the cost of goods and services.  Inflation means that if you have £10,000, in a few years you will not have the same spending power with that £10,000.

The Bank of England has the stated aim of keeping inflation at 2%.  Between 2001 and 2021, inflation averaged 2.1%.  If in 2001, something cost £10,000, then following that same level of inflation it would be expected to cost £15,160.03 in 2021.  In a similar fashion, if you kept your £10,000 under the mattress because you don’t trust the banks, assuming an even 2% level of inflation for 20 years your money would be worth only £6,729.71 at the end of the period.

All very interesting, but how does this relate to home ownership and landlords?

Let me come back to our hypothetical; you have £10,000.  You have three options;

  1. Keep your £10,000.
  2. Lose £1,000, meaning you have £9,000.
  3. Gain £1,000, meaning you have £11,000.

The first option assumes no inflation eroding the value of your cash; either you have kept pace with inflation or inflation is zero.

The second option assumes that inflation erodes the value of your money.

The third option assumes that you have made gains on your money at a rate greater than inflation.

In real life, what choices do you have if you have a spare £10,000?  

  1. You can keep the cash in a tin/box/envelope etc.  You don’t have to worry about the pesky bankers using your cash, but inflation will eat away at the actual value.
  2. You can keep your money in a simple savings account. Depending on where you look, you might get a rate of 2% on a savings account that comes with a list of caveats.  I had a quick look at HSBC (because I never pass up a chance to kick them) and they are offering 1% on a simple savings account.  Inflation is currently over 10%, with some people suggesting it could hit 20% by year-end.
  3. You could look at an investment ISA.  These come with fees and you have to decide how and where to invest.  I’m a big fan of stock market investing in terms of ease and rate of return, but if you dig just below the surface at what you are investing in, it can become quite murky.    
  4. You can invest in property.
  5. You can do nothing, but this is pretty much the same as option 1.

Property Investment comes in many forms.  You can, for example, buy property to rent out on ASTs.  You can buy a property to rent as a holiday let.  You can build property from scratch and sell it.  You can buy yourself a second home.  For many people, they go down the route of buying a property to rent, as a traditional buy-to-let.  

If you object to this type of property investment as being “repugnant” or “morally bankrupt”, then I ask you a simple question; what should this person do with their spare cash?  When answering, remember that the money is there anyway, and if this investor does nothing with the cash it will simply lose value.  Again, we live in this world, not an ideal world.  So, what does the person do with their cash?

Most UK landlords own between 1-3 properties, with around half of landlords having just one rental.  The vast majority of landlords are not the aristocracy; they are people who came into some money and wanted a way to make sure it didn’t lose value and/or they wanted to earn extra cash for retirement.  Granted, there are some crap landlords, but there are also crap doctors, solicitors, bankers, and shop assistants.  

I agree that everyone should have access to affordable housing.  I agree that people should be able to get a mortgage if they want one, subject to reasonable affordability and credit checks.  I agree that homeownership for owner-occupiers should be a priority over people having a portfolio of rental properties, but the fact is there is more than enough property to go around.  Property prices are not being pushed up by landlords.  Data differ depending on where you look, but there are roughly three million buy-to-let mortgages in the UK, split between individuals and companies.  In England alone, there are approximately 25 million dwellings.  BTL mortgages are the minority.

Property Ownership

It’s easy for people to say that you should only be able to own one property.  However, such a statement doesn’t stand up to even the most basic scrutiny.  It shouldn’t come as any surprise to anyone reading this blog that I’m a mortgage advisor.  I’ve worked in mortgages for over a decade.  I think this gives me a decent level of experience to draw upon, and whilst I’m not going to give any details away about specific cases, I can talk in general terms about things I’ve witnessed time and time again.  

Meet Brad.  He’s in his late 30s and lives with his wife and two young kids.  The property they live in is owned jointly by Brad and his wife.  However, they divorce.  Brad moves out and, as often happens, the home has to be kept until the children move out when they are older.  If people were only able to own one property, what would Brad do?  I suppose he could live with his soon-to-be-ex-wife.  That would be messy though, and unfair to the children.  Brad could rent a property, but if people could only own one property there would be a shortage of rentals available.  He could wait for a council house, but in the real world how long would a single man in his 30s have to wait for a council house?  Or, he could buy another property.  Brad would then own two properties.  Is he repugnant?

Let’s look at a slightly different case, involving Jack and Jill, who have a whirlwind romance and want to buy a house on a hill.  They are young professionals in training to be doctors.  They both own their own one-bed apartments.  They are madly, disgustingly, in love and want to start a family.  To do this, they need a bigger home and the House on the Hill is perfect.  They put their apartments up for sale but a combination of poor management companies, issues with the freeholders, and there simply being too many apartments for sale in the area mean they can’t get enough money to justify selling.  Jack has his mortgage with ABCD Bank and is locked in for a few more years.  It would cost a few thousand to come out of the deal, and he would have to pay agent fees to sell.  Jill is with XYZ Bank and has early repayment fees also.  If they decide to take a joint mortgage with one of their lenders, then they can port their rate over but the other person’s mortgage will incur fees for being paid up early.  Once they total up all the costs of selling; agent fees, management fees for the lease pack, legal fees, and early repayment charges, it’s just not worth selling at this point in time.  What options do Jack and Jill have?

They could move in together in one of their apartments.  As they are both one-bed flats, this is not ideal for starting a family.  They think about renting a house together, but they are informed by their lenders that they can let their own properties out and apply for a joint mortgage on a new property through one of the many schemes available.  As their properties will be rented out, they would be removed from the affordability calculation.  They only need a 5% deposit, as the developer will put in a 20% share to be repaid later.  They jump at the chance, and in doing so create two new landlords.  Are Jack and Jill morally bankrupt for becoming landlords?

There are many accidental landlords forced into renting out properties they own.  This is just part of life.  Labelling all landlords as “scum” or “slumlords” is just lazy.  Yes, there are bad landlords, as I’ve stated before.  There are also bad police officers, but I wouldn’t call them all scum.  I’ve said it before, but it’s worth repeating, we don’t live in a utopia.  We live in a world in which money is hugely important, and when you drill down deeper into the examples I’ve provided it all comes down to money.

We also need to look at the idea of property ownership in a wider context, in terms of what rights people have over their own property.  In Sheffield, there is a campaign to “save the Leadmill”.  The abridged version is that there is a nightclub/music venue owned by one party and leased to the people running a business from the property; that business being the Leadmill.  The freeholders have decided to evict the tenants, as they want to run their own venue.  The “save the Leadmill” campaign wants to force the freeholders to keep the current arrangement.  

Imagine if you wanted to perform a legal act with your own property, be that a car, house, boat, or whatever, and you were stopped from doing so because someone else didn’t like it.  This would bring the whole concept of private ownership of property into question.  If someone has the money to purchase another dwelling, and they are blocked because it’s seen as wrong to own more than one home, it becomes a slippery slope.

The Housing Crisis

The property market is insane, and prices are not sustainable.  It’s so difficult for first-time buyers to purchase a property but this is not due to a lack of property.  It, once again, comes back to money.  There are two ways FTBs are hindered financially when it comes to their first home; the need for a deposit, and the monthly mortgage payment.  The key to helping FTB is to change the system.  Making life difficult for landlords will not automatically make life easier for FTB; it’s two separate issues.  

One possible solution for helping FTB, that I discussed with someone in passing a few weeks ago, would be to provide a version of 100% mortgages backed by the state.  The government would hold a percentage of the equity so that when the property is sold, the government takes that percentage back.  These mortgages would be offered to FTB only, and would come with long-term fixed rates with minimal penalties for early repayment.  

Investment in property is popular because it has demonstrated consistent capital growth for hundreds of years.  Also, the rental income is a bonus.  To a degree, I understand why people feel uncomfortable about housing being owned by private landlords.  It ultimately comes down to ego, or pride.  No one likes feeling subservient to someone else, especially about something so emotive as your own home.  When I rent property to tenants, I always try to approach it from the perspective of, it’s my house, but it’s their home.  No doubt some people reading this will be bitching and moaning about me wanting praise for being a decent person.  It’s not that at all, but as I’ve said many times, we live in this world and not an ideal utopia.  I happen to be in a position where I have plenty of disposable income and I want to make a better life for myself.  Which brings me on to my next point…

A bit about me…

I’ve been featured in the national media, in places like The Telegraph, The Money Edit, Sovereign Quest, and my blog features on many “best of” lists.  People generally enjoy my content, and I’ve met some great people through this blog.  Some of those people I’ve had major disagreements with, but it’s always been friendly, civil, and polite.  Others, well, haven’t.  I’ve been called pretty much every insult you can think of and many have accused me of living off the Bank of Mom and Dad.  So, here are a few facts about me.

I grew up in some of the roughest parts of the city.  My parents were basically still kids themselves when I was born, with a combined age that was less than my 38 years at the time of writing.  People now, who were the same age my parents were at my birth, can’t legally buy alcohol, so that gives you an idea as to the socioeconomic background I was born into.  The thing is, my parents are amazing people.  Hardworking, intelligent, honest, decent people.  I admire them both, and I’m eternally grateful for everything they’ve done to push me on to better things.  I’m the first person in my family to go to university.  The first to get a degree, and postgraduate qualifications.  I’ve pushed myself to get a number of professional qualifications.  I’ve battled through a list of physical and mental health problems that would have put many other people under, but I keep getting back up and pressing on.  Everything I’ve achieved is down to me.  I wasn’t handed a trust fund, and I wasn’t handed thousands of pounds to buy my own home, or my BTL.  I’ve had some luck on the way, and this should never be ignored, although I feel many “successful” people tend to overlook the impact that chance had on their fortunes.  

Am I a good person?  That depends on who you ask, but isn’t that the same for everyone?  Do I try to take advantage of other people?  No.  There are three pillars to how I try to live my life; stoicism, nihilism and humanism.  I’ve blogged before about how they guide my choices.  So, when people call me a “parasite” or “slumlord” or “wanker banker”, I often think it just comes from a place of insecurity and ignorance.  For some reason we have been conditioned to view the pursuit of wealth as dirty, or evil.  Yet, if we come back to my question about the £10,000, no sane person would opt for an option that reduces their wealth.  It’s possible to be an ethical investor.  It’s possible to be an ethical landlord.  Private landlords are not the enemy of the public, or those wanting to get on the housing ladder.  It’s the people who designed the game of money, and who want to keep the rules a secret, that stand between those who are uninformed about money and their hopes of owning their own home.  In the UK in 2022 there is little excuse for not taking the time to educate yourself about money, investing, property, or really anything at all.  We have the collective knowledge of our species freely available through smartphones, laptops, at public libraries or anywhere with a wi-fi hotspot.

Expecting other people who have worked hard to earn surplus cash to not invest it because you personally find it offensive is just a little strange.  There are some people, and the number is growing, who are in really shitty financial situations.  That sucks.  I do what I can to help by donating to food banks, giving money to various local charities, and helping out where I can.  Should I feel bad about the fact I am in a comfortable financial position?  What good would that do?  Should I purposefully sabotage my own financial plans to make strangers less angry?  Again, what good would it do?

Don’t hate the players, hate the game itself.  We are all stuck inside the game, and you can either try and change it through the democratic process, or you can learn the rules to try and improve your position.  Having a go at other people who are playing by the rules and trying to achieve something is not going to result in anything positive.  Be better.  Do better.  

Possible Solutions…

Limit home ownership with an arbitrary number.

What number do you choose?  I’ve already provided examples of why limiting people to one property doesn’t work.  So what about two? Or three? Imposing any number creates its own problems.

Ban BTL mortgages

BTL mortgages have opened up property investing to those who would otherwise not been able to afford it.  If you ban BTL mortgages, you are opening up the property market to those investors who already have enough wealth to buy properties outright.  In short, the rich get richer.  

Tax additional properties

This already happens.  Stamp Duty Land Tax is paid at a higher level for additional properties bought.  Rental income is taxable.  There are some gaps in the tax system when it comes to properties owned through limited companies that could be closed, though.

More council houses

There needs to be more council houses but do you really trust the Tory government to do this the right way?  Any large project to build hundreds of thousands of new homes will result in vast amounts of wealth being transferred to those already wealthy.  Look at what happened with PPE.  There needs to be a better way of providing council housing that shuts down any hint of money being siphoned off.  I just don’t know how to design this.

“Right to buy” from private landlords

Absolutely not.  This is a recipe for disaster and calls into question the very concept of property ownership, and I mean any and all types of property.  The concept of ownership is fundamental to our legal system and way of life.  Handing people the power to claim ownership over another person’s property is insane.  

First refusal and/or rent to buy

I like this idea.  If you are renting a property and the landlord decides to sell, then first refusal should go to the current tenant, who should be given a reasonable time to consider whether to buy the property or not.  An independent surveyor would arrive at a fair valuation, which would be the purchase price.  The tenant should then receive a discount on that price based on the amount of time they have rented the property.  The exact numbers would need a lot of work, but the principle seems fine.  The landlord can decide to not sell, but they can’t bypass the tenant without giving them first refusal via this process.

Everyone should have a home that is safe, and secure.  Some people want to own their own home but there are also plenty of people who prefer the flexibility of renting.  This is often seen with young professionals such as trainee doctors, solicitors, military personel, students, and those in the country temporarily, to name just a few.  If a landlord can provide clean, safe, and quality property to these people for a fair price, then where is the problem?  Some landlords charge insane rents, but in my experience this is the exception rather than the rule.

Anyway, I’ve gone on way longer than I expected.  Apologies for the stream of consciousness and if you’ve read this far, thank you.  If you enjoy my content, please share this post on your social media of choice.  If you feel like it, you can buy me a coffee at the link below.  Thanks again.

https://www.buymeacoffee.com/davidscothern

2 thoughts on “Property Ownership: Second Homes, BTL, and The Housing Crisis.

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