Buy-to-let purchases fall by 50% year on year

Article is here

Scary numbers but why are they happening?

Numbers are always interesting but what is more interesting are the reasons behind them. Put bluntly: purchases are down because people think they can’t make money in buy-to-let anymore. A combination of the higher stamp duty, disallowance of wear and tear tax deductions, and Brexit… all play a role.

The reason that the government imposed the stamp duty and disallowed tax deductions was purportedly to cool the growth of house prices and to allow more first-time buyers onto the ladder. However, at the same time, the government has the help-to-buy scheme that helps first timers get their first house by effectively giving them more money which has the effect of pushing prices up even further so there are some counter-acting policies in play at the moment.

Is this really helping first-time buyers?

A stat I would like to see is how much first-time buying is up year on year. That would be a good indicator of whether the measures taken by the government have been effective.

So, does that mean buy-to-let is dead in the UK for the time being?

In my view, yes.Right now, you know all those books “Rich Dad, Poor Dad” and “Real estate riches” that tell you how to get rich by buying and renting out houses with little or no money down? Well, you can forget about that for the time being. Not one of them is relevant in the context of current government measures. They are dependent on easy credit (can’t get that now), not having punitive stamp duty (which we have now) and the ability to deduct expenses for tax purposes (can’t do that anymore).

Right now, you know all those books “Rich Dad, Poor Dad” and “Real estate riches” that tell you how to get rich by buying and renting out houses with little or no money down? Well, you can forget about that for the time being. Not one of them is relevant at the moment. They are dependent on easy credit (can’t get that now), not having punitive stamp duty (which we have now) and the ability to deduct expenses for tax purposes (can’t do that anymore).

If Brexit goes through and is not done well, there will be huge changes in law and tax to get the economy moving again. Don’t be surprised if buy-to-let comes roaring back if Brexit goes sour.

Property prices in London fell 2.4% in June

According to this article here.

The real question is why? Despite inflation going up to 2.9%, interest rates remain unchanged. See article on this: here

The scary thing is, one of the key ways to deal with inflation is interest rates. Put simply, one of the reasons for inflation is too much money chasing a limited amount of goods. Why is there too much money? With low interest rates, people are encouraged to borrow more. So, if you normally don’t borrow and earn say £2,000/month, then you only have to £2,000 to buy goods. If you borrow another £1,000 then you have £3,000 to buy goods. The more money people have to buy goods, the more prices go up.

Put another way: Imagine an auction. If something is being sold that people really want and everyone only has £2,000. What does the item sell for? You guessed it: £2,000. If, however, people have £3,000 as per the above example, then what is the max price the item can sell for? You guessed right again: £3,000. More money = higher prices. Inflation 101.

The Bank of England is in a tough spot though. One of the key ways to grow an economy is also through interest rates. You lower interest rates to stimulate the economy. For businesses to expand, they usually need to borrow money. If interest rates are high they tend not to borrow and not to expand and may even reduce in size and lay off workers. When this happens the Bank of England usually lowers interest rates which means businesses can borrow cheaply and can expand their businesses and hire more workers.

At the moment, because of Brexit, there is so much uncertainty about the future, businesses are not in the mood to expand and everyone is tightening up. If the Bank of England raises interest rates it could push the economy off a cliff. If it does not, it can’t curb inflation which is being mainly driven by a weak pound (which has nothing to do with extra money through borrowing which is usually the culprit).

Quite frankly, I don’t think the Bank of England knows what to do which is why there are so much conflicting theories floating around.

So basically, interest rates should be going up but they can’t for political reasons.

Fun times…