to think high house prices are the problem?

[benefitcapclaptrap]

Just watched a news item about the benefit cap being introduced today in some areas. Not sure I totally agree with it but I understand that the reason for it is that the welfare bill is too high. What I don't understand is how reducing housing benefit payments will solve the problem in the long term.

As I see it, the reason housing benefit spending is high is because the rents charged are also high. Too high in fact for the (mostly working,but low paid) tenants to be able to afford to pay without assistance. The usual reason given for high rents is lack of available properties, but I can't see the evidence for this locally (south east) or in other towns I have visited.

Instead, I would suggest that, the reason for high rents and demand exceeding supply is actually due to the cost of buying a house being far too high. A large proportion of people who would like to buy a house (and in the past would have been able to afford to) have been priced out of the housing market. Therefore they have no choice but to rent those same houses from a landlord that could afford to buy it. This means the rent is at a rate that not only covers the mortgage the tenant couldn't afford plus extra for maintenance and I presume some amount of profit. So it would follow that the tenant quite likely will not be able to pay the whole rent their self and must apply for housing benefit.

Am I being unreasonable in thinking that if house prices were lower and affordable to most people on an average wage there would be a lower demand for rental properties. In turn this would mean lower rents for those who can't or don't want to buy and mean lower bills for housing benefit. Also if people didn't have to spend such a high proportion of their income on the basic necessity of a home to live in, there would be less need for top-up benefits (e.g. tax credits) and people would be able to spend more which would get the economy moving again.

So AIBU?

Has anyone mentioned big factor is under-crowding? Families of 6+ used to live in small 3 bed terraces; now it's common for singles and childless couples to insist they can't reside in anything smaller than a 3 bed semi. Lower density is a huge factor in housing demand. Grannies don't live with family any more, divorced people don't share flats with their mates, lodgers are increasingly unusual.

There are lots of empty properties, too, but usually in the places with too few jobs so not enough demand.

Unless shortfalls in rent combined with other costs (interest, repairs and so on) over the lifetime of your mortgage are more than the value of the property at the end of it, then you're not making a loss.

What started the whole saga in 2008, the sub prime mortgages, is IMO just the tip of the iceberg. House prices are in for a big readjustment once the interest rates start to hike up - many will find themselves in the same situation as the post thatcher negative (or zero balance) equity era.

As for rental prices being too high, i dont think so as historically residential rents have been fixed at 6% but now are closer to 4% due to market saturation of rentals as well as lower interest rates so not really out of line if price of property is taken into account.

That's a good point, lijkk.

I know plenty of people who live in homes with one or more spare bedroom for a variety of reasons.

yeah i can see your point but id be quite mad to see my house value drop when i already felt a drop as we bought just before the recession when the prices were higher.

wonderingagain with negative gearing, you basically do this:

John Q Bloke works as a trader in Ozzie bank. He pays 46.5% income tax on everything over $180k.

John Q Bloke buys an apartment in Melbourne for $300,000. On this he pays $17,500 in mortgage interest and other costs, and receives $11,000 in rent, so apparently renting it out at a loss of $6,500 per year.

In addition, he is allowed to write off 2.5% of the cost of his apartment as a capital allowance, this is $7,500 per year.

His deemed net loss is therefore $14,000 per year. The actual cash flow loss is $6,500, but he's also writing down $7,500 (2.5%) of the capital cost of the building.

This $14,000 loss, even though arising on a property, is then deductible against his personal income tax liabilities for working in the bank.

So he ends up deducting 46.5% of $14,000 off his tax bill tax = $6,510 per year.

As he is only losing $6,500 on renting the apartment out, he ends up making $10/year profit. Not much for sure, but it's a lot better than that $6,500 loss, and he reckons this time next year the apartment will be worth $325k, so it's fair dinkum after all.

Obviously the higher your income, the bigger benefit you get from doing this, and because in fact there isn't really a capital loss at all (since the capital values of the land are rising), a big portion of the tax loss is not a real loss.

Without the capital allowance, you could still use negative gearing to reduce the loss on the rent, but it's the capital allowances that make it really profitable.

I think this negative gearing works on the basis of being accounts literate. The only people that would understand this are bankers and accountants (and obviously you Yoni).

But the gist of it I guess is that it began as a way to keep the housing market reasonably stable but has changed as it now covers people's tax income from other earnings meaning that people are doing this as a sideline tax dodge rather than a way to keep their property business afloat.

Well:

UK - interest payments only deductible from rental income only
Aus: interest payments and capital costs deductible from total personal income

Moody - it happens in every LHA- landlords/B&B's renting out at ridiculous prices because of people losing their homes....and the councils pay it...

i hope that with all the benefits caps that will help put a stop to that. while i don't agree with a lot of the recent benefit cuts, thats one cut i absolutely do agree with cos it will stop profiteering landlords ripping off the state. GOOD!! they'll have no choice but to accept less rent, either that or get fuck all.

and actually mrs btl Bucket IMO do think 600 a month is a lot for a 3 bed (detached or not) my rent is £78 a week (about 340 a month?) for a large 3 bed semi. (and before anyone starts on about LA rents being too low, its not that they are too low its that private rents are too HIGH)

oh i could talk about this till the cows come home. but something i heard some say recently which made me think. the way home ownership at all costs is pushed on to people as the be all and end all. might it have anything to do with the fact if we are a nation of mostly home owners, when we are old, the govt won't have to stump up for care will they? cos they will just make people sell their houses.

'GOOD!! they'll have no choice but to accept less rent, either that or get fuck all.'

No, they won't. They just won't take people on HB even if they could. It's a LL's market as fewer and fewer people can afford to buy their own home.

well where are these people going to go then? are they all going to be on the streets? i don't think so.

the councils WILL have to build homes for those who can't afford private rents.

council tax will go up but all will benefit from jobs homes etc.

Temporary housing is where they will go. The LLs can easily get people who don't need HB in this climate. This cap won't do FA and may well come back to bite plenty of people who think it's a good thing right in the arse.

'The LLs' are not a homogenous group.

The LLs can easily get people who don't need HB in this climate.

i take your point expat but as rents are so high, even working people are increasingly needing HB "top ups" so surely the pool of people who can afford extortionate rents without HB is getting smaller. and those people can probably afford to buy anyway?

many can afford the rent like my neighbours who pay 950 a month but can't afford to save for a deposit,

lots dont need hb, intact I say most private rentals arent.

Plenty are, Yoni, if their BTL lender or insurance will not allow them to take HB/LHA tenants.

'and those people can probably afford to buy anyway?'

How? Without a 20% deposit and under far stricter lending rules. Most people don't rent out of choice. There is thread after thread on here from posters with decent wages who don't even need HB struggling to rent because they have children or one is a SAHP.

many can afford the rent like my neighbours who pay 950 a month but can't afford to save for a deposit

yeah thats exactly why they cant afford a deposit. because they are lining some fucker elses pockets :( poor sods.

fair enough expat, point taken. its rubbish though isn't it? really rubbish. :(

"Plenty are, Yoni, if their BTL lender or insurance will not allow them to take HB/LHA tenants."

Hmm, I'm not sure if that's enforceable actually, now that HB is being paid to the individual.

And anyway, my point was that it's presumptuous to assume that all LL enjoy a buoyant rental market, when conditions vary hugely across the country, or even across a city.

Certainly in London demand looks good, but how about in Liverpool or somewhere like that where you can buy a house for under £50k?

Thanks for that Yoni, actually I didn't know income from rent was deductable against mortgage interest. The ultimate aim of these rules is to stabilise the rental market so we don't have landlords set up and then move tenants out at a whim when they see a better property or indeed when their BTL starts to fail financially. In Europe they control all this with long term contracts and huge legal obligations on landlords. It's not something you enter into unless you are prepared to commit. I think slowly they are working towards that here and the recent crackdown on landlords is a sign of this.

I do think prices will eventually reach 3.5 x household income eventually however because professionals now get paid more and workers get paid less, the division between the haves and have nots will get much wider and soon the only people renting will be the have nots, who will not be able to cover the rent of over-stretched BTL landlords.

MrsBucket 600 a month is low but still demands an income of at least 1200 after tax which is a sizeable sum depending on the area you live in, the wages available. London is a different ballgame entirely.

I'm not sure income multiples are necessarily that important, if interest rates remain low in the long term then affordability is what counts.

However, the issue is that affordability, while present in the North, is absent in the South East and London especially.

£1200/month income is not actually that much, when you consider that minimum wage is now (at 37.5 hrs/week), £1025/month, but on top of that, with 2 children, you would receive around £800/month in tax credits. By the time your children had grown up, you'd be all but mortgage-free.

The issue comes in London where tax credit rate are the same as in the north, but house prices up to 10 times more expensive - in the north on minimum wage, tax credits will pay your mortgage (if you have kids), in London you can't even get a mortgage, and your tax credits will line the pockets of a landlord (or more realistically a bank, since the landlord probably himself bought at some ridiculous price, and the original owner who made £££ on the sale is probably dead by now), and you've got no chance of ever affording a house. By the time your kids reach 18, since you never bought a house, your income will fall massively, but your costs will have increased with inflation (rents keep on rising, but when you buy the real cost of repayments is dramatically reduced by inflation over 25 years with a final nominal/real cost of zero (excluding maintenance) when the mortgage is paid off) over time, so you'll be old, poor, and completely fucked. Perhaps by that time parents will be borrowing from their children.

Who knows.

Anyway, thanks Tony! No more Boom and Bust indeed.

"How? Without a 20% deposit and under far stricter lending rules."

Yip - I know plenty of people with good jobs, but who can't get on the property ladder in London. I'm in my early 30s, and IME, people in their late 30s and older could afford to buy somewhere, using their own savings/funds etc. The only people I know in their ealy 30s and younger who have bought have done so with parental input, even people with good jobs/substantial savings. I don't have wealthy parents, so I'm screwed (as are many other people my age).

"yeah thats exactly why they cant afford a deposit. because they are lining some fucker elses pockets poor sods"

yes - is it fair/right that people can't afford to save for their own deposit, but are instead paying high rents to someone who either has a relatively low mortgage (having bought 15 years ago) or are mortgage free?

I wish people would stop pointing to the affordability of the north when it comes to housing. Yes, Yoni, there are certain parts of Liverpool where you can buy a 3 bed terrace for under 50k but it will be in one of the most deprived, crime-ridden areas of the country. Surely we are talking about the average British family home, in the average ok area. Not the bloody depths of drugdealer-dom.

'Some fucker else's pocket'

Charmingly phrased.

So are we suggesting that all private LLs are all 'fuckers'? That would include me, my partner, three of my friends and probably quite a few Mners. We can't all be fuckers, surely??