We'd sell every property we own if this happened

0:02Hey everyone, Rob B here with Rob D and you are listening to the Property Podcast. You might think that we are diehard property people, nothing would stop us, but that's far from the truth. There are things that could happen that would absolutely make us walk away and sell down our portfolios. And it's not just one thing, we have a list of them. So this week's episode, we're going to share a list of things that would terrify us so much, it would make us walk away for property investment for good.

0:34Welcome to the Property Podcast. Thank you for joining us. In case you don't know, we run a company that ranges more than£100 million worth of property deals for our clients every year. You can find out more about that at propertyhub.net slash invest. And we've been podcasting for getting on for 14 years. Does that mean we're just going to go on forever? Could anything stop this train? Well, yes, a few things could. And we're going to tell you what those are in just a minute. Well it's time for our news story of the week and this week's news story comes courtesy of Hamptons, thank you Hamptons, and their headline reads, Landlord sales slow following the Renters' Rights Act.

1:07Hamptons have done some analysis Rob and their data shows that the pace of landlord sales has slowed in recent months following a spike in activity leading up to the implementation of the Renters' Rights Act. I'm not surprised there was a spike in activity we've seen that type of thing before when stamp duty is moving or anything like that you tend to see a flurry of activity is the shift in data now off the back of just that all the business was done before now it's all evened out or is this something more meaningful well i think there's a couple of things going on here one is that all the people who most wanted to sell have done by now so the news about renters rights was knocking around for a long time people have plenty of time to not come to terms with the idea and decide to sell.

1:51And these are estimates, but probably knocking on for around about 200 ,000 over a couple of years, landlords selling up. So they saw what was coming, they didn't like it, and they have sold. Does that mean that everyone who's left is delighted? Not necessarily. I don't think we can say, well, everyone who wanted to get out has got out because the sale market, as we know, is not strong right now. And that is probably the under-exaggeration of the day. So there might be a secondary spike in the future. It might be that all people who really wanted to get out have done. And then you've got another group going, oh, I'm still not super chuffed.

2:21I want to be in property long term. But now's not the time. So it's possible that as the market recovers, we will see another move to the exit. But what we do know is that right now, the proportion of landlord sales is much lower than it has been for quite a while. The really astonishing stat in here, which isn't astonishing for me because I've read it before, but I think it will be astonishing for a lot of people that this reconfirms an old Zoopla stat from a couple of years ago, which is that the number of rental homes in England has not changed over the last decade. So 10 years ago, you had 4.8 million rental homes.

2:52Today, you have around 4.8 million rental homes. And the total number of homes in the country has increased by 2 million in that time. And of course, the population has increased significantly in that time. So this isn't like a last couple of years thing. But over the last decade, we've seen both a real rebalancing away from investors and towards owner occupiers. And also, Rob, a structurally ever falling supply as the amount of properties doesn't change and the population goes up. That's an astonishing statistic that there's the same amount of rental homes as 10 years ago. I mean that is absolutely bonkers.

3:24But then when you look at rental inflation over the last 10 years which has been pretty aggressive. Rental inflation has kicked on no end particularly in the last five of those 10 years and rental inflation doesn't happen by chance. It is purely supply and demand driven. And that is why. There's just that. No one's talking about that. I mean, as property investors, you're like, okay, wow, things have got a lot better there for us over the last 10 years. What we do is in more demand, but nobody else has come into the market. No one else is seeing what we're doing. But then, Rob, this week's episode, depending on how it goes, may mean even more people decide to exit the market and more people, including ourselves.

4:06What would need to happen for you and I to leave the property market, wipe our hands with it and walk away. And now I think a lot of people listening to this would go, nothing. These guys are property through and through. They are 100 % committed to property, whatever happens. They'll always find a sunny side up view no matter how bad it gets. And it's absolutely not the case. No, this is not going to be one of those clickbaity style. What would it take? Nothing. No, there are actual reasons and we're going to get to them that would stop us from investing in property. But before we get to those, Rob, I think let's have a lightning round round up of the things that wouldn't make us stop because there's lots of rumours doing the rounds at the moment about things that may or may not happen.

4:49Lots of things that people are worried about. So let's get some of those out of the way as things that wouldn't stop us. I'll take the first one, which is a very easy one. Renters' rights. It hasn't stopped us because it's already happened. And that doesn't mean that we're not going to adjust our approach. You told recently on the podcast about your nightmare tenant and how you're always going to be taking on insurance in the future. I think a lot of people in the wake of renters' rights will be doing things like that and changing how they reference and all of that. But renters' rights in itself hasn't stopped us and won't stop us.

5:17But there's plenty of other things that people are worried about as well. Another one is our new Prime Minister, Andy Bertham, and we talked about him recently on the podcast. But one of the things people are quite worried about is the alignment of capital gains with income tax. Now, that impacts many investments, not just property investment but some people are very worried about that we're not it will impact some property investors and I can understand why legacy landlords would be very nervous about this but for people who invest through limited companies which is the vast majority of property investors who invest today they're not impacted by that and therefore it wouldn't stop us so legacy landlords get it understand the pain understand the frustration and you know investing in anything actually it's going to be painful if you're doing it in your own name moving forward in the uk but as property investors investing through a limited company that's not one to worry about another one that started coming up with andy burnham coming into power is a land value tax that's something that he has spoken in support of for a long time so now he's in power it's something that people are getting increasingly concerned about because it's got the word tax in it it's got the word land in it it's another tax and if it is just another tax then yeah that would be pretty bad but the formulations of this that have been doing the rounds are well it's either going to replace stamp duty or it's going to replace council tax and which of those it ended up being would actually make a huge difference in terms of who it affects because the value of your property and where in the country it is it would be hit very differently depending on which of those implementations or a completely different implementation were chosen.

6:56But would any of the rumours during the rounds be catastrophic for investors? I don't think so and even if they were it wouldn't worry me at all because I would put this firmly in the not going to happen pile. Implementing anything close to a land value tax is politically extremely hard to do. We don't need to get off into the whys and wherefores of it now but people have poked at this before and very quickly retreated so for somebody coming into power who needs all the political capital he could get however strongly he believes it's a good idea and i don't doubt that he does i just can't see it being something he touches so if it did happen it wouldn't particularly worry me but i'd say this is very low likelihood from something that's very low likelihood to absolute certainty to happen but wouldn't stop us is negative news well if that was going to stop us it would have stopped just a while ago, wouldn't it?

7:46I don't think there's been a year gone by when there hasn't been negative news. I mean, you could broaden this much further than property, but with property, there is always negative news, even in good markets. And actually, the more negative the news, often, not always, but often, it's the best time to invest because the opportunities are massed and more people are scared. And we've seen that over the last 12 to 18 months where yields are incredible right now the best they've been in a long time interest rates are now falling things are going in the favor of property investment we talked about the supply and demand balances before when it comes to rental market so much to go okay wow the foundations are in place for it to kick start into a good place medium to long term no one's going to say that in the media and far from it it's going to be very very negative so that is something that we'll always live with and does stop many people which is a real shame because if you let the news stories be your investment guides you're going to be very poor in the long term but i know podcast listeners you know they get themselves above the news they tune into shows like this to get through the noise to be able to then make better decisions but unfortunately for a lot of people it will stop them in their tracks okay so what actually would stop us then because there are some reasons like we said and i'll kick off with one which is we talk about low likelihood this is exceptionally low likelihood which is a genuine and sustained shift in supply and demand in other words if property became abundant and this would have to be sustained and it would have to be serious so this isn't just like oh wow governments hit their house building target for a couple of years which is pretty remote in itself but i'm talking about a situation where you have a massive house building program suddenly there's loads of property to go around and the country starts emptying out and there's this property lying around everywhere now likely no not at all but it does break the case for property investment and you've seen it in other places so for example you saw it in lots of areas of spain in the aftermath of the last financial crisis because there was so much construction activity so much speculation and then when it ended there's all this property sitting around that no one wanted and you could see what it did to prices there you see it in parts of the northeast and mining towns where there just isn't any work anymore.

10:01And the gate no more is being built, but the town just empties out and property values are on the floor because it's just sitting around. So we've seen it happen in various locations over time. We've seen the effect that it has on property values and it's not pretty. So if that worked to take hold, then I think there's a fair case for saying, you know what, property just doesn't work under these conditions. But as I said, Rob, I'd say this one is spectacularly unlikely to happen. Yeah, it really is. You referenced Spain, but it also happened in Ireland and many people don't recall that especially as Ireland's property market is booming right now so it shows actually can happen and then recover the other way as well so you get oversupply but then it goes too far the other way and you get undersupply it actually happened in England a little bit as well nowhere near as exaggerated as Spain or Ireland but in Leeds in the city centre leading up to the 08 crash there was a lot built in the city centre and then because the market collapsed afterwards nothing got built for a long time and local planners didn't seem to have much appetite for building in the city center either and it was nearly a decade was lost and now it's gone too far the other way and that's why so many institutions have been piling into leads all the smart money because the supply and demand ratio went too far the other way so it can happen and actually then eventually create opportunity again for it happened to a level where it completely crates the market permanently would be you know insane it would have to be a period of insanity where people are just building and building and building and it makes no sense we seem very far away from that place at the moment and i doubt we'll ever get to that place that would stop us what else genuinely would stop us investing and for me leverage no leverage no party.

11:50I'm not in it. Property investment is not worth it without leverage. That may surprise some people, but regular listeners to this podcast know that we've said this before. If you said to me you could only invest in property with cash, I wouldn't do it. And that's because the magic of property, the magic formula that we talk about, involves leverage. In fact, it doesn't involve leverage. The critical ingredient is leverage. You may as well just go and invest in stocks and shares, bonds and things like that if you're not going to leverage. So property right now might give you a stronger return than it has historically because yields are so good, say 6-7%, but you're normally around the 5%.

12:33You can get 5 % very easily with no work involved. It's leverage that compounds the wealth. It's leverage that accelerates things. It's leverage that changes your financial future. If you've got a portfolio and you've been buying it in cash, you've been doing investment in rock hard mode and you've been holding yourself back. You don't need to go reckless. Some people are scared of leverage. I'm not saying that you need to leverage yourself up to the hill, but without leverage, I just don't see a world where I'd be interested in doing property investment, Rob. No, very hard to see the case for it.

13:07Because if you look over the long term, the returns that you make from the stock market versus property, when you factored in both capital growth and income, not that different. Of course, with leverage, you can buy three or four times as much of it. So of course, property ends up winning by an absolute mile. But if you couldn't do that, you just got similar results from each, then why would you take on the extra effort? Why would you take on the illiquidity? Why would you take on the far worse tax treatment? It just wouldn't make any sense. Now, of course, if you were developing property, it's a trade, it's a business, it's something that you're doing to make a profit that way, fine.

13:39If you're adding significant value to property and you're making your money that way then again that would make sense but again is that investment yes it is but there's an active and a passive component and the active component would still work the passive component it just wouldn't make any sense anymore and it's just this magical combination for property that we rely on where your debt stays the same the amount you borrow is the amount you always have to pay back whereas the value of your asset and the value of your rent just keeps on going up thanks to inflation even if property isn't doing anything special.

14:09It's not doing anything different from what anything else in your life is doing, what prices are doing in the shops or what you're getting paid at work. It's just doing the same thing, but it's making you wealthier over time. And that nicely leads into the third thing that would stop us or stop me at least. Well, I know it stopped both of us. I don't need to say it's just me. Because if leverage is the point and leverage relies on inflation, then a sustained period of deflation would absolutely destroy property investment. So this is the inverse of everything I've just been talking about. So thanks to inflation, your debt stays the same, the value of your asset goes up.

14:42If you have deflation, so everything's getting cheaper, the prices in the shop is getting cheaper, property's getting cheaper, everything's getting cheaper, and your debt stays the same, well that's obviously really bad. So a tailwind has turned into a headwind, and it's working against you year after year. If that happened, property investment flat out wouldn't work. Leveraged property investment absolutely wouldn't work. But Rob, if we're talking about likelihood, somehow I think you'd have to rank this even below an abundance of property because you can't have sustained deflation because it wouldn't just bring down property investors.

15:14It would bring down the government, the public finances, the world economy because of the amount of debt that we have in the system right now. You cannot have deflation. No, everybody's interests are aligned here. Inflation is here to stay. And you think about the Bank of England, their target around inflation is not zero. You think about the Fed in the US, their target is not zero. The target is growth. It's small sustained growth but it's growth and often it's tolerated for it to be above the target. Frequently it is. In fact in recent history it's pretty much always above the target. It's very rarely below the target set by the whichever government you look at.

15:56They've all got slightly different targets. So it's clear they're mandated to make sure there is inflation. Well, you may ask yourself, but how can they change that? What can they do? They just create money. Like if you want inflation, you create money. The greatest example of this is when you look at charts of inflation through time. And there was a big change in the early 70s. And the main reason why inflation spiked after 1971 and was relatively under control before before 1971 was the fact that the gold standard was ended. President Nixon got rid of the gold standard. And the gold standard used to mean that there used to have to be a certain amount of gold allocated to the amount of currency in play.

16:38And it was watered down until it was removed altogether. And that one event has changed monetary history forever. I mean, Rob, I could go on, but someone should probably write a book about this. Yeah, my book, The Price of Money, is basically about that. and you don't have to read it because Robbie just summed it up brilliantly and I think that is exactly right and I think understanding this is so important because from a general this probably isn't how the world should be level it's not particularly reassuring but as an investor who's positioning yourself in a way where you're going well look this is reality maybe it shouldn't be this way but it is this way and these are the things you have to do to position yourself to gain from it rather than be punished by it then knowing just how absolutely baked in it is and why that's the case and how it came to be is actually pretty reassuring and i would say rob out of the scenarios we talked about so far of what would make a stop this is by far the least likely i mean none of them are in the likely camp but this one for me so far is the one i'd rank as the least likely of them all to happen because of what we've discussed the one that may be the Most likely, though, is our last one.

17:48And I'm not saying most likely doesn't mean it's going to happen, but it's the one that's been talked about the most. The others just don't seem remotely possible. But rent controls, Rob, we've seen it elsewhere in the world. We've seen it north of the English border in Scotland. Rent controls, or at least a version of rent controls, would make us walk away from property investment. yeah and i think this means like proper rent controls right so there are no loopholes there are no well it resets between tenancies so the type that you've seen in other countries over time where like the gap between what the rent should be the actual market clearing price and the amount that you're able to charge are completely different now the funny thing is if it did happen for the properties you already hold if things got capped at today's prices then for the properties you're holding in the short term it might not be that bad because the one thing you would have is a lot of demand suddenly you would have the marginal investor just like going bust not being able to do it anymore or shifting their property into short-term accommodation or as we saw in argentina just literally boarding the place up going it's not worth it anymore so you would at least be able to take your pick of tenants for a while but as an investment where you don't have control over the income from your investment where you don't know if your costs go up if you're going to be able to increase the rent to account for those if over the long term you can't afford to reinvest and maintain your property because the rent that it's generating isn't enough to cover that it just doesn't work but the insidious thing about rent controls is they sound so good it sounds like such an easy solution it almost sounds fair and if it's disadvantaging anyone it's disadvantaging the minority so politically it sounds great and that's why it keeps getting tried over and over again despite having such a conspicuous pattern of failure every time it's been tried so i think that makes it really hard when we're talking about likelihood because on the one hand if you're a politician you want to win some votes you spot an obvious problem rinse a high and a really easy popular looking solution but on the other hand everyone who's involved in formulating policy will have seen all the examples and they'll know if they look how badly wrong it goes over the longer term so would someone do that in the full knowledge of how it will likely play out well scotland just has i guess we'll find out but personally i'd still put this in the unlikely pile but yeah if we did see the strong version of this and not even just like a one-year quick popularity measure type thing that's time bound but an actual ongoing policy then you can't invest through that you just can't no you can't and you could listen to what you've said rob and go well surely they would think it through look at the examples and not do it but yet government countries still try it and it has been known for governments to introduce a policy without fully thinking it through i can list a few off from our recent governments and our recent prime ministers so as we've said it's the one thing that's got the most chance of happening out of what we've listed don't think it will and a weak version of it may not stop us and it may not mean we exit the market completely we may just hold out depending on who we think is in charge and how likely things are going to last for but buying more in that setting not going to happen so now you have your proof we are not completely in love with property to a level that would mean we would invest through any market through any conditions there's clear things that have to be in play or not in play for us to invest in property luckily they're not in play and very unlikely to ever be in play so we will continue and as we said before some of the things that put others off create opportunities for us and you which is great but let us know what else would stop you what changes would have to happen or maybe even more interesting what's in play now that's stopping you let us know we will ask on our socials we'll put the questions out i'd love to hear your answers what are the things that you think are our blind spots or maybe it's just personal to you but let us know we'll put the questions out on our social channels and we'd love to get your feedback you can find us by searching property hub uk across your favorite platform right time for hub extra that part of the show where we try to squeeze in a little bit more value for you and this week i'm sharing something that my son and i have been enjoying recently which is the week junior so you've probably heard of the magazine the week you may not have heard of the week junior because i hadn't but this is as it sounds like a special version of the week that is written for kids so it's a way of starting to take an interest in what's going on in the world but in a form that is child friendly and they've also got the week junior podcast which i haven't listened to yet but i'm looking forward to checking out because again it's picking up something that's in the news and explaining it in a way that makes sense to a younger audience it could be worth checking out they've often got offers on where you get the first six issues pretty much free because they're trying to hook you in so you can try it out if you don't like it you can just cancel nothing lost so that is the week junior i love that rob we didn't get to share what have extra was going to be this week before we started recording but i can offer another one if you want to double down doesn't have to be an alternative because in our home we subscribe to first news which is a great newspaper for children as well gets delivered to your home and it breaks down what's going on in the world but in a very accessible way for children and then it's got some fun stuff in there and and what i like a lot of positivity as well so that's another one you could check out as well two for one on hub extra the value does not stop and we don't stop we'll be back on tuesday with ask rob and rob we'll be back on thursday of course with another pod and you'll see us smiling back at you in the sunday times answering more of your questions there as well so take your pick there's lots to look forward to but until that takes place take care have fun bye-bye bye-bye