42 THE CONNECTION BETWEEN PROPERTY AND INTEREST

Adam Smith states, ‘The ordinary market price of land depends everywhere upon the ordinary market rate of interest. A person who has capital from which he wishes to derive a revenue deliberates whether he should buy land or lend it out at interest.’ He also suggests the ‘superior security of land’ offers considerable advantage.

DEFINING IDEA…

I figure if I have my health, can pay the rent and I have my friends, I call it ‘content’.

~ LAUREN BACALL, ACTRESS

Easy credit, home equity and a booming property market led to the creation of the buy-to-let sector. For many, ambitions grew way beyond owning their own home; instead they saw property as an easy way to build wealth, especially as banks were falling over themselves to lend money. Northern Rock, the first bank to suffer from the US sub-prime fall-out was also heavily involved in sub-prime lending in the UK. Offering 125% loans, not only had borrowers no need to demonstrate any financial prudence in saving for a deposit, but they would also receive a windfall cash bonus once they bought their home!

With money so freely available, why stop at just one property when you could own half a dozen and rent them out? The tenant would then be paying your mortgage while giving you a residual income on top. Fabulous!

This euphoria fuelled another industry: property investment seminars! Self-professed gurus cashed in on the frenzy of property ownership. I remember being asked to ghost a book for one such guru in Australia, who was charging $50,000 for some of his courses. At the time, banks in Australia were even lending people the money to attend such courses! But then the bubble burst. Property values dropped, capital gain turned into capital drain and investors experienced one of the major downsides to property - illiquidity. In other words, there isn’t always a buyer when you need one.

Like all booms, the inexperienced masses got in at the tail end. For those who had bought property at rock-bottom prices before the term ‘buy-to-let’ was even invented, property was a genuine route to wealth creation. For the rest, it became a one-way ticket to trouble. Buy-to-let investors jumped in at the top of the housing bubble. Demand had created an oversupply, especially in the trendy executive rental market in certain cities. Falling rents and property values made it impossible to service the huge debt obligations. In the third quarter of 2008, 18,000 buy-to-let mortgages in the UK were in serious arrears, up 49% on the second quarter of the year.

Buying property is no longer a sure thing. Instead of struggling to get on the property ladder and having to purchase outside the preferred area, perhaps we will see a shift back to renting. The money that might have been consumed in fees, mortgage payments and maintenance could then be invested prudently for future financial growth.

HERE’S AN IDEA FOR YOU…

Try negotiating a long-term lease. In France far fewer people buy property and tenants have more rights. It’s possible this sort of arrangement will cross the channel. If you have found a place you enjoy living in, then approach the owner to see if they would be interested in letting the property to you for an extended period of time so you have greater security.