Irish State could be inadvertently complicit in small landlords losing their investment BTL properties in RPZs.

[CarrotStick]

Scenario.

Background.

Landlord bought a PTSB variable rate interest only Residential Investment Property (RIP) near the top of the market. Mortgage was subsequently restructured by PTSB with a term extension in 2013. Interest rate 3.5%, borrower paying 1000 euro to the Bank monthly. The monthly rent for his investment property, a 2 bedroom apartment, is 1500 euro.

Property transferred to Pepper. Pepper ups the variable interest rate incrementally to 7%. Now interest only mortgage payments are 2000 euro monthly. Landlord has to subsidise 500 euro monthly (6000 net annually, 12000 euro before tax approximately)) to keep up with the mortgage payments on the RIP. However, he cannot, as his home is on a ECB tracker rate mortgage loan, the mortgage payments of which have recently been increasing monthly and he must prioritise his family home. This is eating up any excess cash he has.

The Government has introduced the 2% Rent Pressure Zone (RPZ) in the area where his BTL property is located (most urban areas at this stage), so he cannot increase the rent significantly to try and cover the increased mortgage interest rates being applied by Pepper. He is getting into financial difficulties.

Options, sell the RIP (if Pepper allow him to) and take a loss and try and do a deal with Pepper regarding the residual balance, or try and restructure RIP with Pepper, or run the gauntlet of Pepper appointing a receiver over the BTL.

Probable outcome, loss of investment property, due to no repayment capacity, in part due to the Irish Government’s introduction of Rent Pressure Zones (RPZ’s), but not forgetting Pepper’s increase in its variable rate mortgages.

 

[azerty]

I don't know if that is a question but your scenario is plausible. The reality is probably that while most LL, even accidental, eventually managed or will manage, some will continue to struggle and find themselves in very difficult situations. The increase of interest rate will put pressure on these investments. I don't think people realise how much of a risky business it can be between property crash, difficult tenants, unpaid rent, maintenance costs, mortgage costs... I think interest only mortgage was a real gamble. But this is easy to say with insight.

 

[CarrotStick]

I don't know if that is a question but your scenario is plausible. The reality is probably that while most LL, even accidental, eventually managed or will manage, some will continue to struggle and find themselves in very difficult situations. The increase of interest rate will put pressure on these investments. I don't think people realise how much of a risky business it can be between property crash, difficult tenants, unpaid rent, maintenance costs, mortgage costs... I think interest only mortgage was a real gamble. But this is easy to say with insight.

IANAL The interesting thing is, the Irish State could be liable if a landlord was in a similar position as set out in the scenario above.

 

[ClubMan]

Landlord bought a PTSB variable rate interest only Residential Investment Property (RIP) near the top of the market. Mortgage was subsequently restructured by PTSB with a term extension in 2013. Interest rate 3.5%, borrower paying 1000 euro to the Bank monthly. The monthly rent for his investment property, a 2 bedroom apartment, is 1500 euro.

Property transferred to Pepper. Pepper ups the variable interest rate incrementally to 7%. Now interest only mortgage payments are 2000 euro monthly. Landlord has to subsidise 500 euro monthly (6000 net annually, 12000 euro before tax approximately)) to keep up with the mortgage payments on the RIP. However, he cannot, as his home is on a ECB tracker rate mortgage loan, the mortgage payments of which have recently been increasing monthly and he must prioritise his family home. This is eating up any excess cash he has.

The Government has introduced the 2% Rent Pressure Zone (RPZ) in the area where his BTL property is located (most urban areas at this stage), so he cannot increase the rent significantly to try and cover the increased mortgage interest rates being applied by Pepper. He is getting into financial difficulties.

Options, sell the RIP (if Pepper allow you to) and take a loss and try and do a deal with Pepper for the residual balance, or try and restructure RIP with Pepper, or run the gauntlet of Pepper appointing a receiver over the BTL.

Probable outcome, loss of investment property, due to no repayment capacity, in part due to the Irish Government’s introduction of Rent Pressure Zones (RPZ’s), but not forgetting Pepper’s increase in its variable rate mortgages.

Here's another scenario. I buy ETFs on the margin at the top of a market cycle while understanding that they're subject to CGT. The market crashes and Revenue clarifies that ETFs are subject to exit tax and deemed disposal taxation every 8 years. My investment is worthless and I still owe money on the margin.I have to sell up and still find the money to pay the margin. Why should it be any other way? I took the risk and it didn't pay off due to poor timing, poor decisions and subsequent events outside my control - so now I have to face the consequences.

 

[Brendan Burgess]

the Irish State could be liable if a landlord was in a similar position as set out in the scenario above.

And maybe sue ptsb for restructuring the loan instead of repossessing it years ago.
They could also be liable for mismanaging the economy causing a downturn in rents over what could have been expected.
They could also be liable for failure to allow lenders repossess properties easily.
And have a go at the ECB for raising interest rates and for the the Governor of the Central Bank to call on lenders to pass on such rates.

Brendan

IANALE

 

[cremeegg]

There is a difference between understanding ETFs are subject to CGT and Revenue clarifying that they are subject to exit tax and deemed disposal on the one hand and Government introducing new legislation limiting your freedom of action in the market on the other. Price control legislation like this is unprecedented.

 

[CarrotStick]

Here's another scenario. I buy ETFs on the margin at the top of a market cycle while understanding that they're subject to CGT. The market crashes and Revenue clarifies that ETFs are subject to exit tax and deemed disposal taxation every 8 years. My investment is worthless and I still owe money on the margin.I have to sell up and still find the money to pay the margin. Why should it be any other way? I took the risk and it didn't pay off due to poor timing, poor decisions and subsequent events outside my control - so now I have to face the consequences.

That is a very interesting scenario and deserves a separate thread, but can we at least stay on the scenario as set out in the first post. The State introduced RPZ, such legislation may have consequences, as was a concern of the last Attorney General Paul Gallagher.

 

[CarrotStick]

And maybe sue ptsb for restructuring the loan instead of repossessing it years ago.
They could also be liable for mismanaging the economy causing a downturn in rents over what could have been expected.
They could also be liable for failure to allow lenders repossess properties easily.
And have a go at the ECB for raising interest rates and for the the Governor of the Central Bank to call on lenders to pass on such rates.

Brendan

IANALE

Your being a silly billy now, let’s have grown up discussion about the thread title.

 

[azerty]

There is a difference between understanding ETFs are subject to CGT and Revenue clarifying that they are subject to exit tax and deemed disposal on the one hand and Government introducing new legislation limiting your freedom of action in the market on the other. Price control legislation like this is unprecedented.

The situation was not created by rent controls. I have a property and I am not defending rent control but in fairness rents are similar or above what they were before the crash. Regulations around rent price exists in numerous countries. I think rent control are too blunt though.
The situation was created by overstretching financially and betting on the increase value of a property.
If the state was legally responsible for every negative impact to anyone from any law, there would never be any changes.

 

[Sarenco]

IANAL The interesting thing is, the Irish State could be liable if a landlord was in a similar position as set out in the scenario above.

Eh, no it couldn’t.

I know you’re not a lawyer but even by your standards this is bonkers stuff.

 

[CarrotStick]

The situation was not created by rent controls. I have a property and I am not defending rent control but in fairness rents are similar or above what they were before the crash. Regulations around rent price exists in numerous countries. I think rent control are too blunt though.
The situation was created by overstretching financially and betting on the increase value of a property.
If the state was legally responsible for every negative impact to anyone from any law, there would never be any changes.

But property rights are protected by our constitution, this is an important issue as well as the right to make a living (landlord) without undue State interference.

The scenario as set out above, is created by rent controls, the fund has price gouged its trapped customer, whilst PTSB variable rate customers who own a similar BTL and have a similar mortgage can make a modest profit. The only way out for the borrower as set out in the first post (which I might add is not implausible situation) would have been to up the rent to 2000. The State no longer allows that. Do not forget that when he took out his BTL, there was no rent controls, they were not being even considered by Government.

 

[CarrotStick]

Eh, no it couldn’t.

I know you’re not a lawyer but even by your standards this is bonkers stuff.

IANAL, thanks for your great contribution to the thread, you are not a lawyer either. I have discussed this matter with eminent senior counsels and yes the State could be liable. This is not bonkers stuff. Stop trying to disrail any thread I start, a pattern is starting to emerge. Tell us why the State could not be liable in any instance by its introducing RPZ’s rather that the glib “Eh, no it couldn’t“ comment.

 

[cremeegg]

And maybe sue ptsb for restructuring the loan instead of repossessing it years ago.
They could also be liable for mismanaging the economy causing a downturn in rents over what could have been expected.
They could also be liable for failure to allow lenders repossess properties easily.
And have a go at the ECB for raising interest rates and for the the Governor of the Central Bank to call on lenders to pass on such rates.

Brendan

IANALE

Well I think that selling on variable rate loans should not be easy. When a borrower takes out a loan with a large retail organisation like PTSB he has a certain security that his loan rate will be ramped up egregiously as the lender has a reputation in the market to maintain. When the loan is sold on to a company like Pepper no such restraint exists.

 

[ClubMan]

There is a difference between understanding ETFs are subject to CGT and Revenue clarifying that they are subject to exit tax and deemed disposal on the one hand and Government introducing new legislation limiting your freedom of action in the market on the other. Price control legislation like this is unprecedented.

Same as the government introducing levies or other charges/taxes on income, pensions, insurance policies, unit linked policies etc. after people have bought into them surely? Why should any investor assume that nothing will ever change with regard to stuff like this? Why do some people seem to assume that property investors should be protected from same?

 

[PebbleBeach2020]

I think a more realistic discussion is where due to increasing interest rates over the last 7 months and being limited to rent increases of 2% per annum, quite a large number of property owners have seen their profit from having a BTL completely eroded. Is begs the obvious question, if they aren't making a profit then it's time to sell up.

 

[cremeegg]

@ClubMan There is a world of difference between levies on income and a restriction on earning that income in the first place.

 

[ClubMan]

There is a world of difference between levies on income and a restriction on earning that income in the first place.

What about the cap on bankers' remuneration then?

 

[CarrotStick]

Same as the government introducing levies or other charges on income, pensions, insurance policies, unit linked policies etc. after people have bought into them surely? Why should any investor assume that nothing will ever change with regard to stuff like this? Why do some people assume that property investors should be protected from same?

I am afraid all these issues listed by you do not impinge on a citizen‘s rights under the constitution

 

[CarrotStick]

I think a more realistic discussion is where due to increasing interest rates over the last 7 months and being limited to rent increases of 2% per annum, quite a large number of property owners have seen their profit from having a BTL completely eroded. Is begs the obvious question, if they aren't making a profit then it's time to sell up.

This is what they are doing, in droves, Most of these properties are being bought by owner occupier, thus further limiting the rental supply.

 

[ClubMan]

I am afraid all these issues listed by you do not impugn on a citizen‘s property rights under the constitution

I presume that you mean "impinge" but I realise that YANAL.

Fundamental rights under the Irish Constitution

The Irish Constitution recognises and declares that you have certain fundamental personal rights. These are confirmed and protected by the Constitution.

www.citizensinformation.ie

Emphasis is mine.

Property rights

The Constitution declares that the State will vindicate the property rights of every citizen. This means that you have a right to own, transfer and inherit property. You also have the right to bequeath property upon your death. The State guarantees to pass no law to abolish these rights.

Article 43 acknowledges that these rights ought to be regulated by the principles of social justice. This means that the State may pass laws limiting your right to private property in the interests of the common good. The most common form of limitation is taxation on ownership, transfer and inheritance.

Other examples of restrictions or limitations on your right to own property include town and regional planning, protection of national monuments, compulsory acquisition of land.

If the State passes a law that otherwise restricts your property rights, it may be required to compensate you for this restriction.