A small half

Another example of journalists failing to be able to accurately report basic statistics leapt out of the Times today. "House sales could halve this year, down from a peak of 1.78 million in 2004 to an estimated 1.17 million" burbled Judith Heywood and Rebecca O'Connor. My calculations make that a 34% fall - barely more than a third and certainly nowhere near half, however you round it.

This miserably poor calculation is complemented by the "Analysis" piece by Ann Ashworth, headlined "Smart landlords snap up properties that would-be buyers are having to rent". The basic premise of this is that this is a great time to buy-to-let, as hapless First Time Buyers (FTBs) will be driven into your arms by their inability to borrow money. She offers up a quote from "one observer of the sector" wherein the hypothetical landlord "may be dismayed at the slew of statistics suggesting that the housing market is stagnating". Maybe this observer and Anne Ashworth have an entirely different source of news to the rest of us, but the statistics I'm aware of don't suggest that it is stagnating, they confirm that it is falling.

A basic calculation of whether BTL is a good investment would be:

House Price Inflation (HPI) - Mortgage Interest + (Rent * Void%) - Letting Fees - Maintenance

Let's try an optimistic case scenario. Most estimates are now putting annual HPI at falls of between 5 and 10%. Paragon elsewhere in the article estimate rental yield at 6.4%. Personally I wouldn't trust this as Paragon figures have never borne much relation to other organisations and they have a massive axe to grind, but let's put this on one side and give them the benefit of the doubt. Furthermore, we'll ignore voids, letting fees and maintenance, we'll pretend that you do all the maintenance yourself and that a friendly estate agent agrees to advertise the property for nothing with phenomenal success. Not only that but your cast-iron credit rating secures a mortgage in line with the best domestic deals at 6.25% + arrangement.

That tots up as a loss of just under 5% or £10K on a £200K property. Ouch.

A less optimistic scenario would put rental yield at 4.7% (IPD Index), mortgage interest at 8.09% (5 year rate quoted in main article), and allow 1.5% agent fees on rent, and 10% voids. This combined with a 10% HP fall would come in at a loss of 14% over the next year, or £28K on our hypothetical £200K property.

Perhaps Ann Ashworth couldn't be bothered to google up a few basic figures, or couldn't add them together, because if she had, why on earth would she have written an article called "Smart landlords snap up properties that would-be buyers are having to rent"? There's nothing very smart about lining up to lose 5-14% in the next year. Even if the investment paid out in the long term, it would be better to buy in a year or more once prices bottomed out.

How could such an ill-thought out and misleading piece have been written? I don't know, but I have a theory. I would guess that it might start out with a release or interview with someone in the industry who has a case to make. Paragon, whose figures are quoted, would be a good fit. They are very near to being Northern Rocked, and their share price has fallen by over 80% in the last year or so (certainly a more efficient way to lose money than buy-to-let). If the market doesn't pick up then they are going to go belly up, so they would be trying very hard to talk up the market. They cough up some desperately thin case which looks at all the positives and none of the negatives and the journalist dutifully regurgitates it through a combination of laziness and ignorance. What is particularly shameful is that a broadsheet has paid for and printed this rubbish.