Is it the end of the buy-to-let era?
Last week, the buy-to-let industry was handed a potentially damaging blow by George Osbourne in his Autumn Statement. Stamp duty for buy-to-lets is set to increase by a surcharge of 3% over standard rates. This is in addition to the further changes that he announced in his budget earlier in the year, predominantly the reduction in tax relief for mortgage interest payments which will see some landlords potentially losing money.
So could this be the end for existing landlords and those thinking about investing in buy-to-lets? I think not.
Market forces will prevail
I have worked for several years in the Pensions industry which was suffered very similar ‘fatal blows’ over the last 10 years. The raft of changes included gender equalisation, where men and women would be offered the same rates for the majority of insurance and pension products. This was to have a dramatic effect on the pricing of products and their profitability. What was even more alarming, is that this regulation came without much warning from the EU, and the UK government could do nothing to stop its enforcement. This event was swiftly followed by ‘pensions liberation’ – an initiative by the Chancellor whereby pension savers can now take their pension pots as a lump sum, and spend it how they wish, rather than being forced to buy an annuity. The change came without warning, and practically destroyed the annuity market overnight.
At the time, those people working in the industry feared the changes would mean the end of the pensions industry altogether. Was it really? Well no, as companies adapted and got on with it. Just because the rules changed, it didn’t mean the market disappeared. At the end of the day, people still need an income in retirement.
There are few certainties in life, but one of them is tax
I believe the same will apply to the buy-to-let sector. Landlords will be forced to stop, take stock, and calculate how the taxation changes will affect them. They will then take measures to minimise their tax liabilities. For potential new landlords, they will have to factor in the rise in stamp duty costs, which will undeniably hurt their profit margins. But it will also save them Capital Gains Tax at the back-end, so the loss over the lifetime of the investment will not be as significant as one might think.
Property remains a good investment
House prices in the UK have increased by an average of 6.6% per year since July 1996. (And that’s an average across the country. The London market has increased by a lot more than that.) This means that the extra 3% surcharge on stamp duty could be paid off by the capital growth achieved during the first six months of the investment.
What is likely to happen is that the buy-to-let sector will become more appealing to those looking for capital growth, and slightly less appealing to those looking for a regular income. Ironically, this could mean that areas like London will become even more attractive, versus other areas of the UK where rental yields are high, but the value of the property is not likely to rise as steeply.
Why is the Chancellor picking on landlords?
The Chancellor is under some pressure to calm down the perceived pace of the buy-to-let market in response to fears raised by the Bank of England. He’s also under pressure to improve conditions for first-time buyers by slowing down house price growth, and creating a more level playing field between landlords and those looking to own their own home.
So will these changes work? Only time will tell, but my guess is no. A big factor in house price growth is a simple supply and demand issue. What has still not been addressed is the shortage of housing, particularly in London. The demand for housing is 42,000 new homes per year, whereas only 26,000 are being built. George Osbourne has pledged to build 400,000 homes over the next 5 years, but this is for the whole of the UK, which means that you can bet the majority of these won’t be in London.
I’m sure we will see people entering the buy-to-let market with a lot more caution, and doing their homework before diving in. But these changes are unlikely to kill the market when there’s still money to be made.
And as a final note, let’s not forget that the vast majority of landlords only own one property, and they see this as an additional nest egg for retirement. In an otherwise low return environment, the ‘my property is my pension’ mind-set will be hard to shift.