European and UK housing rental yields absurdly low
Posted on 27 August 2010 with 9 comments from readers
Who would be a landlord in the UK or continental Europe? Rental yields are absurdly low and not enough to cover long-term maintenance and property taxes, let alone a mortgage.
Yesterday this author visited his former apartment in Pimlico in London. I left 17 years ago and sold it for $110,000. The rent for that flat then was $400 a week. Now the same pad sells for $600,000 and the weekly rent is around $550.
Over valuation
You do not need a PhD to spot absurd over valuation. Where is the rental yield to justify the capital tied up in the apartment, let alone to pay a mortgage not benefiting from the current low base rate? But admittedly it has been like this for years and has just gotten worse and worse for the landlord – although admittedly he will have been counting that capital gain.
It was the same in Sweden at the weekend. My friends pay around $35,000 a year for a $1 million home. Who is getting the better deal? My friends or the landlord who is keeping it for his family? Doubtless they will sell it as soon as they get their hands on it – and that would actually be the most sensible strategy.
A huge asset with very poor return must be at huge risk of capital depreciation over the long term, and houses are usually judged long term assets. The trouble is that people confuse an emotional attachment to a home with investment potential, and set themselves up to lose a great deal of money.
Counter argument
Now I can understand that this argument cuts little ice with youngsters who point to the capital gains of the past decade or more, and think they have a good argument. But this is nonsense. The capital gain is all in the past and yields at present levels leave little upside and a very large downside.
In fact, the housing market in the UK has formed a classic double-top. This means a market peak then decline and then another peak. Such a market set-up almost always portends a big downside movement – with the potential to go right back to the start of the up curve.
So why do landlords keep their properties and not cash out? That is a question many will ask in the near future.
9 Comments posted by readers:
Why do landlords keep their properties and not cash out? Because there is nowhere else to invest the cash. Bond yields are even worse than property; and come with the risk of inflation. Shares are volatile and yields are currently poor. Gold doesn’t produce any yield at all. Compared with the alternatives, London property looks like a safe haven.
Thats actually not too bad compared to where I live in Barcelona where yields regularly seem to be below 3%. 20k rent on an 800k flat and I’ve seen 1%. Of course there’s very little liquidity (or rental sector) so its difficult to say what the current prices are.
My theory is that many landlords are sitting on huge capital gains and don’t seem to need the money (that may be changing) and the annual rental yield is just the icing on the cake. Such perceptions will probably only change very slowly (in the case of Spain for sure)
What absurd rubbish – suggest the author checks his facts. If hesoldthe house for $110,000, he was giving up a 19% yield – what a fool. I defy anyone to find a property to rent in prime London today where the Landlord is only yielding 1%. The figures were pulled from thin air!
Ed Note: Well I moved up the ladder and made a fortune over time. The data is first hand and not made up! Red danger signals are all over UK property.
If you do not have a mortgage property is still a good investment long term. Right now if you have large savings in a bank it is being eroded by inflation, and that is going to carry on. Even if interest rates rise to counter inflation, the interest rate you revceive will still not be as high as inflation. Plus the banks are still bankrupt really which means you still run the risk of losing all your savings at the moment under a domino of banks collapsing. Don’t be fooled it could yet happen.
Shares and other investments are also risky.
Provided you can afford to hold on to the bricks and do not have to sell they are the safest. They are also useful – a nice home of your own is not just a nice home of your own. What has renting got to offer? In this country not particularly nice homes, never knowing where you are going to go when your time is up on this one. If you want to rent cheap you have to live with others putting yourself at risk of crime. All that money you are earning going down the drain. Where are you going to live when you retire? Who will be renting to you then? How will you like sharing with others when you are more frail? Do you think there will be enough money in the country to provide for you in an old people’s home by then? If you do not own a home outright by then, and your savings have been eroded by years of high inflation and high interest rates you have no asset paid off to draw money against. Houses always stay more or less in line with wages to the degree that you can rent out a home to supplement lost earnings in retirement.
This is the same thing happening in Asia,
i recently visited Taipei city, Taiwan, and the rental yields are around 2-3%, yet property and land prices just kept going up, while rents remains stagnate.
A feasible explaination might be that interest rates are kept so low around the world and landlords see possible inflation in the near future which discourage them to sale their properties for cash. Real estate is seen more as a hedge for inflation than gold for the past 20-30years
Further to my earlier comment, in the long term yields will revert to the mean. This can happen either through falling prices or rising rents. At present there is some evidence that rents are rising:
http://www.ftadviser.com/FTAdviser/Mortgages/News/article/20100827/65373a30-b1ac-11df-9fc6-00144f2af8e8/Lack-of-mortgage-finance-means-buoyant-rentals.jsp
With the future economic outlook so uncertain who is to say its better to cash out or hold on to a ‘buy to let’ residence.
Here in Australia I am only achieving at best 2% gross return but approx 14% based on original purchase price some 17 yrs ago.Issue in my case is the main value is in the land.Nevertheless with several daughters it does represent an eventual roof over one or more of their heads ie its tangible.This may be the case with many similar landlords.
if you have to borrow to buy a property then you pay mortgage interest or rent by another name.ie you are renting the money.to buy the property.most people never do the sums when they buy property it is human nature to invest blind.(most people anyway).do the sums ,mortgage costs ,legal fees .estate agents fees.maintenance.capital gains ,losses etc.in ireland for example you can rent fully furnished brand new houses,5000 euros worth of unused furniture installed.little or no property taxes .no moving in expenses .for 500 euros a month.yet the purchase price of the same house/apartment.=250,000 euros.do the sums yourself.invest your money elsewhere and use the proceeds to rent.
I just stumbled upon this article. Interesting article, and more interesting comments …
[chris sensemakesnosense] : “.do the sums yourself.invest your money elsewhere and use the proceeds to rent”
- as others pointed out, invest where ? The alternatives dont seem good.
shares are probably the best option. However, investment expenses (unit trusts, manager fees) etc are too high in the UK, so it is good for the financial industry but not for the average joe investor. You can pick individual shares, but the odds are not that good that you can beat the market *consistently*. Timing the market, and other snake-oil newsletter strategies are also not sensible strategies. A portfolio of very low cost index trackers (as advocated by the Bogleheads people) is probably the best option, at least with that approach, you can have a sensible strategy focussed on asset allocation, and stay the course without panicking during the market crashes. This is a sensible idea, but even this will only give you maximum 10% annualized return over the long run.
Also, nobody is going to give you a cheap loan (mortgage) so you can punt on index funds (total market index) on leverage. If this was possible, it is not a bad idea. Therefore, taking everything into account, property seems like the best option. But like anything, it is hard work to find those high rental yield places. In some cities in US, we are now able to get 10% rental yield. (house prices in houston for $250K renting for $2K per month). If you look around, such deals may exist. But I dont see this happening in UK.
In the UK, the goverment could have taken measures to avoid this property appreciation (bubble) : Remove stamp duty completely for primay homes. Why ? because it encourages labour mobility which is good for the economy. At the same time, start imposing higher taxes on 2nd, 3rd, 4th properties etc. This would discourage people from hoarding up too many properties. If they had done this, we would not have had this sort of reckless property bubble. Oh, dont like this idea of government interference ? fine, I dont like government interference either, but in that case, allow the free market to operate instead of imposing green-belt restrictions etc. Once companies build houses, house supply increases and prices fall, making it affordable for people. if you have arbitrary green-belt restrictions, then you are by definition restricting supply and making houses a scarce commodity. If you do this, it doesnt make sense to allow people to hoard properties. You just cant have it both ways.