http://www.enhr2007rotterdam.nl/documents/...anlon_Lunde.pdf

In 2004/05, reflecting official concern with the spread of interest-only mortgages in the UK,
the Survey of English Housing included a question about how interest-only borrowers
planned to pay off their mortgage. The results are shown in Table 6. A worryingly high
proportion—more than one third—planned to repay the principal by selling the mortgaged
dwelling; a further 5% did not know how they would repay.
The UK’s Financial Services Authority commissioned more detailed research in this area,
which was published in December 2006. The FSA research set out to determine who the
interest-only borrowers were, how they intended to repay their loans (including how firm their
intentions were), and how well they understood interest-only mortgages. A survey was
conducted of 857 recent interest-only borrowers (that is, borrowers for whom banks had no
record of a repayment vehicle). According to this research a rather smaller percentage of
borrowers planned to sell the mortgaged house to pay off the mortgage (18%, in contrast to
the 36% found by the Survey of English Housing); rather, the concern here was that some
borrowers had no plans, or only very vague plans, for paying off the principal. (FSA, 2006)
Although most borrowers had a good understanding of what an interest-only mortgage was
and the risks involved, ‘a significant minority had no idea or definite plans on how they would
pay back the capital they borrowed. A large proportion of these borrowers admitted that
dealing with finance was best left to the experts, and many had taken an interest-only
mortgage because it was recommended to them by a professional.’ (FSA, 2006, p. 2) Of
those who did have a plan for paying back the mortgage ‘in a number of cases the credibility
of this repayment strategy may be open to question.’ Only 22% had formal arrangements in
place to repay the principal, while 65% had other plans, including selling property or
switching to a repayment mortgage. Some 13% had a ‘rough idea’ or ‘no idea’ of how they
would repay the loan. Such borrowers tended to be in lower social classes and more reliant
on professional advisers. (FSA, 2006)
Most of the borrowers surveyed had remortgaged to an interest-only loan (52%); 29% were
moving home and only 12% were first-time buyers. The main reason borrowers chose such
loans was because the monthly payments were low.

Besides taking advantage of lower interest rates, owner-occupiers may refinance in order to
withdraw equity. Although formal equity-release programmes do exist in some countries
(notably the UK), more common methods of equity release are remortgaging for an increased
amount without moving home, or taking out a second secured loan. In the UK, for example,
31% of all households with mortgages have either remortgaged for a higher amount or taken a
further advance (Survey of English Housing, 2003/04). This releases funds that can be used
at the owner-occupier’s discretion. In an environment of falling interest rates, it may even be
possible to remortgage for a higher amount, but at a lower interest rate, and pay no more in
monthly payments.

http://www.enhr2007rotterdam.nl/documents/...er_Andersen.pdf
Economic strategies for private landlords
Who is investing in private renting and
why and how are they doing it?
Experience from Denmark

“Although the sector has grown significantly in the last decade, it is still a ‘cottage
industry’ owned and managed by small scale individual landlords, few of whom have
any qualifications in property, let alone in the letting business. Very few can either
achieve economics of scale in managing their holdings or manage market risk through
a geographically and otherwise diversified portfolio”

Therefore it is an experience from many countries – especially
Britain - that professional investors often tend to avoid this sector. It could be expected that the
strict Danish rent control to a greater extent would deter professional investors to enter the sector,
but this does not seem to be the case. The composition of landlords in Denmark does not deviate
markedly from landlords in many other countries and compared to Britain, where there is no rent
control, there is a greater share of private rented dwellings owned by professional landlords
(business landlords) in Denmark. It has not been the subject of this article to identify the reasons for
this contradiction, but there could be two explanations. The first is, that returns on Danish properties
in the private rented sector have not been so bad – partly because of increases in property values
and possibilities to avoid the regulation by investing in renovation of dwellings -; the second that
rent control has resulted in a very stable surplus demand for private renting in most of the country,
which has diminished economic risks.

http://www.threshold.ie/documents/Investme...mpleteFINAL.pdf
Data about the private rented sector is extremely limited. What is available suggests that capital gains on
investment from residential rental properties are competitive but long-term income returns are low. It is the
flow of income returns that provides the benchmark for investment decisions by financial institutions.

Many individual investors are in traditional employment, such as policeman and teachers, and have borrowed
against the large increases in the value of their own property. One to three bed apartment properties are the
most common form of investment. The large increase in demand for investment properties has fuelled rising
prices and forced many who would normally have bought a property into rented accommodation.

This growth was subsequently fuelled by rapidly rising house prices, leading to
investors buying property primarily for capital appreciation. Investments are highly geared: landlords have
received around 80% mortgages and so needed to put in only 20% equity. Often rents are not sufficient to
cover mortgage and letting costs and investments rely on capital growth for long term returns.
Some interviewees argued that many people in Ireland with spare money to invest put it into property and
were not very price sensitive when acquiring properties. This has led to excessive demand. Private
investors have been buying everything from apartment dwellings to standard semi-detached properties in
suburbia and letting them. Investors were thus crowding out first time buyers and were hence, and
ironically, securing tenants by effectively making property unaffordable for them to purchase.


Concern about the implications of these rapidly rising house prices for owner-occupiers (created as much by
supply side constraints as by investor demand) and also for the state of the construction industry has
dominated recent policy decisions. There has in particular been concern about competition between ‘one
off’ purchases by individual investors and first time buyers with private investors crowded out traditional
owner-occupiers. It was a market in a booming economy with a tightly constrained supply. There has been
a willingness on the part of the government to use tax measures to shape the market. In the absence of
monetary control, interviewees pointed out that fiscal measures are the main instrument available for the
Irish government to influence the market.

Mortgage data indicate that investors appear to be ‘ordinary’ people in ‘ordinary’ jobs. Evidence in early
2002 suggested that landlords were then able to get about 80% mortgage on valuation, so needed to put in
only 20% as equity (sometimes 90% loans were available for the first investment property). This does not
necessarily mean landlords have to find this equity as many recent entrants to the investor market are using
increases in their own home to finance a mortgage on a second (investment) property. This means that
new landlords (and existing ones wanting to enlarge their portfolio) do not need additional equity to become
an investor; they can lever in the equity from their own house. But many investors will use private savings
as equity, typically, €20,000 to pay for stamp duty and to undertake refurbishment. Examples quoted
included policemen, teachers, and bank officials all investing in properties based on the value of their first
houses and the capital rise expected from their investments.


Given the extent of capital appreciation, individual
investors are not as concerned with income growth as financial institutions, provided that rents cover interest
and other running costs. Hence, private investors may ‘crowd out’ equity investment from financial institutions,
since they are not seeking a target income or total return on their investments.


We can say with confidence that:
• the PRS has grown rapidly in recent years, spurred originally by tax incentives and more recently by
capital growth prospects and low interest rates;
• the vast majority of PRS dwellings are owned by individual landlords, seeking capital gains; debt
funding is readily available with high loan to value ratios and competitive interest rates; overseas lenders
are active in the lending market; this ‘buy to let’ market is hence highly geared;
• most of the new supply is targeted at the middle and upper end of the lettings market; there is some
evidence that supply at the lower end has fallen, and that rising rents on this limited (if not diminished)
supply have led to increased rent subsidies for low income tenants;
• although financial institutions are very active in the debt market, there is no evidence of equity
investment by them, nor any immediate prospects for it; some of the reasons for this are the perceived
high costs (and risk to reputation) of both entering the market (in terms of transactions costs) and of
management and maintenance costs, both compared with commercial property; the lack of tax
transparent investment vehicles may be a factor deterring indirect investment by non tax paying
institutions who do not want to own and manage residential lettings directly themselves;
• there is even less likelihood that institutions would wish to be involved directly in financing landlords in
the low income sub-sector, for a combination of return and reputation risk; providing subsidies to
enhance returns is unlikely to work as institutions look unfavourably upon like investments where the
returns are dependent on tax breaks; tax transparency however is desired;
Because the quantitative data are poor we can say with less confidence that:
• income returns appear to be low, by comparison with other European, including UK, residential markets;
this appears to be a product of the high levels of capital appreciation, as a result of which total returns are
equivalent to returns from both commercial property in Ireland and residential lettings elsewhere in Europe;
• the evidence suggests that initial income returns may be unattractive to potential new corporate
landlords and to equity investment by financial institutions; this barrier is significant in the light of the
risk and liquidity characteristics of residential property and of its novelty; all these latter factors imply a
high ‘hurdle’ rate of return for new corporate investors; whilst this might fall with increasing experience
and familiarity with the market, it suggests that there are few, if any, immediate prospects of equity
investment in the PRS by financial institutions;
• by contrast, the environment is conducive to small scale and individual investors, seeking capital gains
and willing to manage property themselves; they may be content with the low net income returns,
provided rents cover debt charges and other running costs, because of the long term prospects of capital
growth and hence high total returns; as there are few, if any, investment vehicles that enable ‘retail’
investors to invest in residential property, becoming a small scale landlord is the best way to invest;
• as these individual landlords are ‘content’ with rents that cover costs, this investment pattern may
‘crowd out’ large scale equity investment from financial institutions that are seeking a higher initial
income return.

http://enhr2006-ljubljana.uirs.si/publish/W02_Smith.pdf

Third, and crucially, our analysis suggests that the balance of spend of MEW between
homes and on other things may be changing. This trend is best-illustrated across the
13 sweeps of the BHPS shown in figure 1. While 65 per cent households spent their
MEW on home improvements in 1991, just 44 per cent were doing so by 2003. The
proportion of those spending on home extensions also dropped by a nearly third, from
30 per cent to 22 per cent in that period, while the tendency to spend on cars, other
consumer goods and other specified (but unrecoverable) reasons all increased. And
although the numbers are small, a comparison of the five year periods 1994-8 and
1999-2003, shows that while households only reinvesting in the home doubled, those
only spending on other things increased threefold.

MEW is usually, and surprisingly uncritically, presumed to be net of reinvestment,
yet the truth is that not much is known about the way mortgage holders weigh the lure
of the high street against the practicalities of conserving home assets (or spending
them in other ways).

http://enhr2006-ljubljana.uirs.si/publish/...akili%20Zad.pdf
In Italy, one in every five dwellings is vacant, whereas in Malta and Spain the degree of vacancies is
15%. In Portugal and Greece, the vacancy rate is respectively 11% and 9%, also higher than in most
other European countries. For four of the five Southern European countries, the second homes are
not included in the definition of a vacant dwelling.

As far as this is concerned, two countries particularly stand out: Spain and Malta. These two
countries are characterized by both the highest vacancy rates and the highest increase in house
prices! This firmly contradicts with what we would expect on the basis of economic theory and
strongly suggest that most Spanish and Maltese vacant dwellings are not available for the housing
market. Rather, they seem to be kept aside for some reason or another

Based on the figures that were presented in this section, the following conclusions can be drawn.
First of all, it is clear that within the European Union, the highest vacancy rates can be found in the
Southern European EU countries: Greece, Italy, Portugal, Spain and Malta. Furthermore, contrary to
what one would expect on the basis of economic theory, these high Southern European vacancy
rates go together with substantial increases in house prices, a high rate of housing production and a
high degree of home ownership. Especially in Spain and Malta, the interrelationship between these
four variables is very strong.
Thus, the housing markets of the Mediterranean countries seem to be governed by a different logic;
they don’t follow the principles of ‘normal’ economic theory. In the rest of this paper, we try to
explain this Mediterranean paradox.

The profitability of investments in homes largely depends on the development of house prices. In
both Malta and Spain, these developments have been very positive. House prices have been rising in
Malta since anybody remembers. Since 1987, the average price for housing has been rising by on
average 10.3 percent annually. In 1987, the average price of a flat was Lm16,354 (approximately €
40,000 ) whereas it was LM85,376 (approximately € 190,000) in 2004; almost 5 times as much!
(Falzon et al, 2005, p.64). In Spain, the price developments are rather similar. Between 1995 and
2005, the average square meter price for housing has risen from € 662 in 1995 till € 1824 in 2005
(www.mviv.es). Although there are some economic and demographic reasons for this price
explosion (rather strong economic growth, low interest rates, deregulation of the mortgage market),
many analysts fear that the Spanish housing market is built on a bubble, caused by speculation
(Garcia-Montalvo, 2003). This is best illustrated by the extremely high housing costs that Spanish
households have to bear. Spanish house-buyers that bought a house in 2004 on average needed 8 net
yearly salaries to carry out this purchase. This results in an average mortgage repayment of 55% of
the net monthly household income! (Europa Press, 2005).
As long as the house prices keep on rising in the pace described above, there is no urgent need for
Maltese or Spanish owners of vacant dwellings to let or to sell these dwellings. After all, in the
current housing market, only possessing a dwelling is enough to yield an attractive (although
fictitious as long as the dwelling is not sold) return.

http://enhr2006-ljubljana.uirs.si/publish/W24_Paris.pdf

Second homes in the UK and Ireland
Good data on second home ownership in England are collected biannually in the
Survey of English Housing (SEH), including both where second home owners live
and also where their second homes are located. The SEH shows that the number of
households with second homes increased from 329,000 in 1994/95 to 502,000 in
2003/04. Most second homes were in England, especially in the South West,
South East and London. Most households with second homes had household
reference persons in older age groups (45<), mid to high household incomes, and
their second homes were for holiday use, future retirement and/or investment.
We have to use the census and house condition surveys for data on second homes
and vacant dwellings in other UK jurisdictions. On that basis, we estimate there
were about 5,000 second homes in NI in 2001, where house condition survey data
showed rapid growth between 1996 and 2001: 65% overall equal to about 5% of
total stock growth. There are no official statistics on second homes in the RoI as
the census only covers occupied dwellings. Recent estimates suggest that second
homes and other vacant dwellings accounted for 30% of all new housing between
1996 and 2002, with more in areas of high demand along the ‘Atlantic seaboard’
(McCarthy et al, 2003; FitzGerald, 2004) with second homes representing an
increasing share of new housing construction (NESC, 2004).


In areas where the inflation of house prices has made it impossible for many
local people to obtain their own homes, the sight of outsiders purchasing
houses when they already have one elsewhere can be an affront to local
dignity…it is not surprising that the local population becomes angered. Their
children have little prospect of finding any housing in their village when they
wish to set up their own homes. The locals must leave, while houses in their
village remain locked and empty for months at a time (Newby, 1979: 176-177).


In other cases, common in Britain from the 1960s through 1980s, second home
cycles began with the purchase of abandoned or dilapidated dwellings in the
countryside and moved on through purchase of existing occupied dwellings
coming on the market, often in places where new building was constrained by
planning regulations. Coppock (1977c) argued that many Welsh houses acquired
as second homes in the 1960s were old and unmodernised in areas of
depopulation. Although their new owners restored vacant or derelict structures,
they were vilified by militant locals. In 2006, however, such debates are
anachronistic: few cheap abandoned dwellings remain to be converted as most
houses in the Welsh countryside are priced on the basis of hugely inflated
expectations.


The property sections of national UK newspapers reveal rampant growth in
overseas second home ownership. In September 2005, for example, a supplement2
in The Times featured famous sporting personalities extolling the virtues of
overseas property investment. Dozens of advertisements proclaim the virtues of a
staggering array of opportunities in Cyprus, France, Spain, Italy and South Africa,
as well as ‘superb value tropical holiday homes’ in Thailand, luxury apartments in
Dubai and Kuala Lumpur, ‘perfect sea views’ in Bulgaria, ‘superb chalet
residences’ in Switzerland and ‘five star relaxation’ in a resort development in
Newfoundland, Canada. Columnist Sarah Marks (2005: 30) reported that
‘dedicated amateurs’ search the globe for investment properties:
Five years ago only professionals were interested in overseas property
investment. Then the toe-dipping amateurs arrived on the scene(…)today a new
breed is buying not just one property but building sizeable foreign holdings.
Asia, the Caribbean, South America, the former communist states – it does not
matter how far away it is as long as the investment logic is sound’ (op. cit).


to such property investment. Issues of equity and choice, however, come into
sharper focus as the growth of transnational second home ownerships brings
greater differentials of incomes and wealth between ‘locals’ and second home
owners (Smith & Duffy, 2003). Citizens of different countries have hugely
different capacities to be mobile, both in terms of the financial costs of mobility
and differential rights to mobility (relating to national jurisdictions etc). In some
countries it may be easier for non-nationals to buy a second home, to come and go
more freely than nationals and to be regulated by different rules and legislation
(legal access to alcohol, tax free shopping opportunities etc). Some countries,
actively seek transnational investment by second home purchasers, for example
Malaysia and Dubai, but other countries, notably Australia, impose barriers to
second home ownership by non-citizens

The extent to which second home and holiday accommodation developments are
sustainable in the longer term will be affected by many factors, including taxation
policies and practices of national governments and multi-national institutions,
especially the EU, as well as fuel costs, especially aviation fuel. There are also
question marks over the longer-term sustainability of local housing markets with
high proportions of second homes. The 2005 annual RICS review of European
housing markets for the first time included a chapter on ‘the second home boom’
and discussed the growth and impact of second home ownership across Europe.
This noted the traditions of second home ownership in some countries and
examined rapid growth of a possible ‘holiday home bubble’ bursting in the event
of any economic downturn.
The RICS review suggested (2005: 14) that local markets with high proportions of
second homes may be much more volatile than ‘primary’ housing markets for four
reasons: ‘demand is more discretionary than primary home markets’; lenders may
take a tougher line on defaults; ‘there is no fallback demand’; and, ‘the supply
side is more likely to transmit volatility’. The report did not predict major
problems ahead in second homes markets but warned (p.35) that ‘the longer the
second homes markets boom, the greater is the chance that shocks will lead to
serious short-term declines’.


The idea that owning a second home is an investment recurs strongly across the
literature. As well, however, the literature also identifies second homes as items of
leisure consumption. Thus second homes are distinctive leisure/consumption
items: house prices usually appreciate, albeit largely as a function of increased
land values, whereas most consumption goods depreciate in value (caravans,
boats, RVs etc). There are no meaningful barriers between ‘housing’ and ‘leisure’
markets, apart from regulatory requirements or contractual arrangements (either or
both of which may frequently be ignored in practice). It is a matter of personal
choice, albeit partly influenced by legal and regulatory cvonditions, whether and
when a particular dwelling is used as a second home for personal consumption,
and/or to let on a commercial basis to other leisure users (‘on holiday’) or private
tenants as an investment. Any appreciation in value depends on overall market
trends, not whether the dwelling is conceptualised as a second home for personal
consumption or as an investment for financial gain.
Many ‘boosters’ of second home sales claim that such investments will increase in
value well above the rate of inflation, though such claims may be based more in
wishful thinking or salespersons’ hype than sound business planning. Media and
other commentators often suggest that there is a growing preference for
investment in property (buy-to-let private rental housing, holiday homes to let and
second homes) rather than pensions or the stock market (e.g. Francis, 2006b).
Such investment has increasingly taken a transnational dimension, fuelled by the
growth of housing assets and disposable incomes in rich countries. Greater levels
of mobility, both personal and of financial assets, are resulting in massive
expansion of leisure-related investment and consumption (Forrest, 2005). Smith
(2005) recently argued that housing wealth ‘is no longer a fixed asset’ but ‘is
mobile in all kinds of ways’ (p. 9). She suggested that low interest rates and the
low cost of secured loans combined to make borrowing against the primary
residence an easy and highly cost-effective way of funding spending. The
available funds, moreover, appear to be massive: ‘With estimates of unmortgaged
housing equity now standing at £2.2 trillion, this is a significant resource’ (loc.
cit). She suggested that equity withdrawal may be routinely utilised as ‘a part of
households’ financial management’, although she emphasized that very little was
known about these processes.

http://borg.hi.is/enhr2005iceland/ppr/Ronald.pdf


Property, Consumption and Investment

“A central goal has been to discredit the social democratic concept of universal
citizenship rights, guaranteed and enforced through public agencies and to replace it
with a concept of citizenship rights achieved through property ownership and
participation in markets.”

“There is a popular saying that house prices are like an accelerating train – you
should get on the train as soon as possible otherwise you will never make it… In this
situation the home ownership ethos is cultivated in which people believe that they
should purchase their home as soon as possible, or invest in housing as much as
possible. Everyone believes that a fortune can be made as long as he or she can
afford to buy a flat” (Chan 2000:34).

“There is, however, a strong belief that a mortgage is buying something in a way that
rental payments are not. Even in negative equity there is an ownership goal, a debt is
hopefully being reduced and at the end of the day there will be something to show for
it”


“The general message…was that respondents still aspired to owning their own home
but that these aspirations were no longer so closely associated with financial
gain…The notion of developing a housing career, of accumulating equity and
improving one’s dwelling, also seemed to have diminished with households expecting
to make long-term housing choices involving manageable financial commitment”

For Japanese homeowners, like British ones, the main advantage, or reason given in the
majority of cases for home purchase was financial. Money spent on rent was seen as
wasted, and discourses tended to fit with the wasted money arguments identified by
Gurney (1999a) and Richards (1990). Housing loan repayments of the other hand were
a means of accumulation of wealth or asset building. Interviewees were very explicit
about such motivations.
No matter what happens in the future, we will always have a place to live, because we
own rather than rent. We can always use the house or convert it into cash if we need
to. The house is the most valuable asset and so it is very important how we use and
manage it (F 57).

Do you think this house has been a good investment?
I don’t think so at all. We knew at the time we bought this place that the prices were
going down. I don’t really expect them to recover too much either, but it is quite
important to maximize the performance of this house. You might feel that it is better to
own a house than renting even though the value has gone down (M 37).

How about your home, has it been a good investment?
Not really. Maybe a couple of years ago. I don’t really think of this place as an
investment. I am not interested in investments. This place is bought for living in, that’s
why we are not worrying about this place as an investment (F 36).

Investment and speculation in Hong Kong
appears driven by the volatility of the housing market and the activity of developers,
whereas in Britain the historical pattern of boom and bust has embedded faith in an
inevitability of house price re-inflation and housing as a long term investment.

European Housing Conference Papers 2005-2007
http://www.enhr2007rotterdam.nl/pages/papersdownload.htm
http://enhr2006-ljubljana.uirs.si/c_papers.asp
http://borg.hi.is/enhr2005iceland/index.ph...4&Itemid=37

Good work!

I have a tonne of interesting papers which link in with this, I'll upload them later this week.

Bob