Weekend reading: a little rate rise goes a long way to ruin the day for wealthier landlords

What caught my eye this week.

According to a report in the Financial Times [search result], just a handful of interest rate rises could eat up all the profits of higher rate tax paying landlords.

The FT cites research by the upmarket estate agent Hamptons, which sent freedom of information requests to HMRC. The data collected enabled Hamptons to estimate the pain points for landlords:

Landlords paying the 40% income tax rate would see their annual profits on a mortgaged buy-to-let home wiped out if UK interest rates rise by another two percentage points […] underlining the tightness of margins maintained by property investors.

For a higher-rate taxpayer with an average two-year fixed rate and a 75% loan-to-value interest-only mortgage — a common type of buy-to-let loan — a rise of two percentage points would eradicate their profits, while a single percentage point rise would halve them.

These are dramatically low margins of safety.

CPI inflation is already running at 7% and it is likely to rise further before it falls.

The Bank of England has barely started its rate-rise campaign in response, having taken Bank Rate to 0.75%.

More interest rate rises seem nailed-on. The buy-to-let business could thus be about to be become unprofitable for many wealthier landlords.

Buy-to-lose blues

Of course, those feeling the pinch have options.

Paying down an increasingly costly mortgage will look more attractive as rates rise and cheaper fixed-rate deals expire. Assets and income can be reshuffled.

Some landlords may choose to just eat the pain and subsidize their properties, trusting that eventually rents will catch up or rates fall. Property is a long-term game, after all.

The maths will also make buying rental properties through limited companies more attractive thanks to their more favourable tax treatment – even for those not yet paying higher rate taxes, considering how the income tax bands have been frozen. May as well be prepared.

Higher power

How much sympathy you have for buy-to-let landlords will mostly depend, I imagine, on whether you are one.

But it’s another canary in the coal mine. Higher rates aren’t just bad news for disruptive growth stock investors who’ve seen their shares crash or – at the other end of the spectrum – for those who owned too many long-dated bonds. There will be knock-on effects all over the place.

It’s a process we need to go through to return financial conditions back towards normalcy.

Everyone hated the near-zero-interest rate world. But escaping its feeble gravity will be bumpy.

Have a great long weekend!

From Monevator

A book review of Just Keeping BuyingMonevator

Inflation hedges: what does and doesn’t work – Monevator

From the archive-ator: Vanguard LifeStrategy funds review – Monevator

News

Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1

House prices up 12%, but rises expected to slow says Nationwide – BBC

US economy shrank by 1.4% to start the year as pandemic recovery takes a hit – CNBC

Most of UK’s extra inflation “caused by Brexit”, says former BOE official – ThisIsMoney

…and Brexit losses are more than 178 times greater than trade deal gains – Independent

Boris Becker jailed for two and a half years for flouting the terms of his bankruptcy – Sky News

The growing importance of intangible assets – Validea

Products and services

The best regular savings accounts are now paying between 2% to 3.5% – ThisIsMoney

Tech expert slays myth of energy-guzzling ‘vampire devices’ – Guardian

Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor

State pension top-up system [reportedly] in ‘chaos’ – ThisIsMoney

“A mysterious stranger has trashed my credit rating”Guardian

Will Virgin Media Stream save you money? – Be Clever With Your Cash

Homes for sale near wild swimming spots, in pictures – Guardian

Comment and opinion

I don’t know – Compound Advisers

The Bogleheads have launched a podcast [Podcast] – via Jon Luskin

Why aren’t rich people happier? – AWOCS

The pros and cons of market cap weighted index funds [Tax bit is U.S.]Morningstar

A stock is not an index – Of Dollars and Data

Six reasons why high earners don’t get rich – Banker on FIRE

The rich and the wealthy – Morgan Housel

The second rule of FI Club – 3652 Days

Inheritance tax: the good, the bad, and what you can do about it [Search result]FT

Jack Bogle and the spirit of punk – A Teachable Moment

A retiree looks back on the financial ups and downs of her life – Humble Dollar

Crypt o’ crypto

How the crypto market really works [Podcast] – Bloomberg Odd Lots via Apple

Bitcoin is not an investment – The Evidence-based Investor

‘Staggering’ crypto seizures have cops struggling to keep up – Advisor Perspectives

Incoherent doomsters with laser eyes – The Reformed Broker

Naughty corner: active antics

How wide moat stocks can reduce portfolio volatility – Morningstar

Mental health issues in the hyper-competitive investment industry – Institutional Investor

Three questions Warren Buffett won’t answer at this weekend’s Berkshire meeting – B.V.I.

The brutal bear market in disruptive high-growth stocks – The Irrelevant Investor

Market efficiency: active versus passive versus HFT – Klement on Investing

Bireme has re-upped on Netflix after the crash – Bireme Capital Q1 Letter

A soft profile of the British hedge fund legend Chris Hohn – Institutional Investor

Recession or no recession mini-special

Kenneth Rogoff: the growing threat of global recession – Project Syndicate

A groggy global economy has lost its mojo – David Smith

More losses for the British Pound as recession risks burn brighter, says Deutsche Bank – PSL

This doesn’t look very recessionary [US perspective]TKer

Kindle book bargains

How Not To Worry by Paul McGee – £1.59 on Kindle

Shackleton’s Way: Leadership Lessons from the Antarctic Explorer by Margot Morrell – £0.99 on Kindle

Who Moved My Cheese? by Dr Spencer Johnson – £0.99 on Kindle

The Art of Gathering: How We Meet and Why It Matters by Priya Parker – £0.99 on Kindle

Environmental factors

The queen conch’s gambit: breeding an endangered delicacy – Hakai Magazine

‘Relentless’ destruction of rainforest continuing, despite Cop26 pledge – Guardian

Recycling shit – Aeon

Coral workshops help tell wild from farmed Indonesian corals – Reef Builders

Off our beat

As China looks on at a world opening up, can Xi Jinping survive zero-Covid? – Guardian

The right to free speech does not mean a right to AI amplification – David Meerman Scott

Netflix’s bad habits have caught up with it – Vulture

Aging clocks aim to predict how long you’ll live [couple of weeks old]Technology Review

The greatest solo traveler you’ve never heard of – Afar

Which computational universe do we live in? – Quanta Magazine

The best midweek dinner recipes, according to The Eater’s editors – The Eater

“And then a fan’s ashes were scattered on stage! My night out with Half Man Half Biscuit’s fanatical followers”Guardian

And finally…

“A lot of people with high IQs are terrible investors because they’ve got terrible temperaments. And that is why we say that having a certain kind of temperament is more important than brains. You need to keep raw irrational emotion under control. You need patience and discipline and an ability to take losses and adversity without going crazy. You need an ability to not be driven crazy by extreme success.”
– Charlie Munger via Value Investing: A Value Investor’s Journey

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Landlords will soon feel the squeeze from higher rates, plus the rest of the week’s good reads…
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