Saturday, 30 October 2021

"Oh no, they won't!"

From This is Money, spotted by Mombers:

Forecast rises in interest rates could force landlords to raise rents to meet mortgage affordability criteria, or risk being trapped on higher rates, according to a buy-to-let expert. This is because interest costs across the life of a buy-to-let mortgage would more than quadruple, going from £115 a month in interest now, compared to £479 with the rise in one example.

The Office for Budget Responsibility has forecast a worst-case scenario whereby a 'wage spiral' or energy price shock would require the Bank of England to increase base rate to 3.5 per cent in 2023 to curb inflation.


Rents are the Maypole around which house prices dance. Current selling prices and/or what people are prepared to borrow is the Net Present Value of the rental income (for a landlord) or the rent saved (for a first time buyer).

More prosaically, prices will settle at approx. the level where the monthly mortgage payments are about the same as the rental value. So sure, if there is a big interest rate hike, selling prices will fall (all things being equal) so that new buyers' monthly mortgage payments are still approx. the same as the monthly rent.

Landlords can't 'pass on' that fall in value any more than they can 'pass on' higher interest rates, a tenant would just move out and rent from a new landlord who had bought at the new lower price/higher interest rate.

If old landlords could 'pass on' higher interest rates and rents went up, then madness would ensue. The new landlords would be able charge the new higher rent, even though their interest payments were still based on the old lower rents i.e. they would be making a super-profit from Day One which would be competed away almost immediately.


Andrew Carey said...


Lola said...

These articles are quite absurd. Mind you I had to explain the tax (aka rent) incidence thing to a fairly senior FCA apparatchik - so there's no hope really is there?

mombers said...
No correlation with interest rates or taxes

Mark Wadsworth said...

AC, ta.

L, did you get anywhere? You once saw me try to explain incidence of VAT to an economics professor (at that think tank meeting with Thomas). He sort of understood it and concluded by saying "but it's still a tax on consumption". Twat.

M, good find. Not that the Homeys care about such trifles as "facts" or "logic"...

Lola said...

MW. Sort of. It was about FCA fees - aka trading taxes - not being paid by us but 'incident ' on our clients. He looked daggers at me as he knew he'd been 'found out'. That made me very happy...:-)

Mark Wadsworth said...

L, good stuff.

We also have to take into account barriers to entry (if high, then incumbents earn rent and taxes come out of rent); if low, then the taxes just reduce the number of competing firms and hence the amount of competition, and/or are added to charges, and are thus borne by customers.

Lola said...

MW Barriers to Entry!!!

Are extreme in FCA land.

I am going currently going through the process of changing my corporate structure from a partnership to a small Ltd co. To do this I have to apply for brand new regulation of the new company - I cannot just switch the existing registration. The FCA fees are at least £2,500. I have to employ 'experts' in filling in all the forms - another £2,500 to £5,000. I have paid my in house compliance blokey an extra £1,500 to do extra work. I have also spent money with lawyers and my accountant - probably another £5,000. My budget for what is a simple exercise in any other trade is £20,000.

It's insane. The whole thing is pure rent seeking and jobs for the boys.

Mark Wadsworth said...

L, I thought as much. I get involved in that sort of nonsense, transferring from partnership to limited, FCA crap makes it all ten times as expensive.

My initial advice is always "Don't. Partnerships are ideal for your sort of thing" but they often do anyway. Apart from once, which saved them a couple of million in tax. Not that they thanked me for it.

More specifically, can't you keep partnership going and then piggy back the limited company onto the partnership's FCA registration?

Lola said...

Yes. I could run the Ltd Co. as an 'appointed representative' of the P'ship. And that's what many people do.

But I want to get this done quickly. It has a large part to do with insulating myself from future claims should I ever retire. The FCA will pursue you personally to the grave. And if the potential regulatory liabilities are in a Ltd Co they can't.

I am aware of the huuuge potential tax implication of all this, but as I am only taking a small amount of the payment as cash (the balance in shares) pretty well full incorporation relief will be available.

But the point is, apropos of this discussion, the costs are ridiculous. A massive deadweight cost on production.

Laissez-faire works. The other things don't.

Mark Wadsworth said...

L, fair do's.

But if limiting liability is your main aim, why not shift to an LLP?

Lola said...

MW. Good point. And I understand the tax thingy. And I could still do that. But there are other issues specific to retail FS which make a Ltd Co. more attractive.

Whatever, the whole thing is a royal pain in the arse and purse.

Mark Wadsworth said...

L, again, you know exactly what you are doing, so I shouldn't stick my nose in. Agreed on it being a complete waste of time.