Sentiment among landlords is at a low ebb at present. But there is still cause to think that buy-to-let is a worthwhile investment.
The pre-April surge in buy-to-let activity has passed, and investor optimism is apparently waning. According to market researcher BDRC Continental, confidence among landlords is at its lowest level in a decade.
Budget measures have eroded landlord confidence
Two budget measures announced by the government in 2015 have contributed. One is the scaling back of tax relief for buy-to-let mortgage interest. The other is the stamp duty surcharge for the purchase of additional properties.
According to the Council of Mortgage lenders, the latter “significantly influenced” the spike in the market in the first quarter. CML economist Mohammad Jamei remarked that the distortion is greater than any he has previously seen.
But now the April 1 deadline has passed. The market has cooled, and landlords are looking to the future with concern. 59% believe that the 2015 Budget will have a negative effect on their profits. Among landlords with 20 or more properties, the figure rises to 80%.
Buy to let faces a regulatory clampdown
It isn’t just Westminster that is causing landlords grief. The buy-to-let sector mortgage sector is also under fire from Threadneedle Street.
The branch of the Bank of England responsible for supervising mortgage lenders, the Prudential Regulation Authority (PRA), has proposed clamping down on buy-to-let mortgage lending. A consultation published in March outlines risk-limiting proposals, including tightening affordability tests for landlords.
Industry experts have urged regulators to act with caution. The CML believes that new tax rules will slow growth, and is wary of the cumulative effects of continued intervention. It also advises against taking a one-size-fits-all approach due to the diversity of the buy-to-let market.
The latest Budget did landlords no favours
Budget 2016 did little to strengthen the position of landlords. First, the Treasury decided not to exempt larger or corporate investors from the higher rates of stamp duty. Second, it excluded residential property from a generous 8 percentage point cut in capital gains tax.
But this was far from the worst-case picture. In the run-up to the budget, some anxious landlords were predicting that corporation tax payers would also see their tax relief cut – thus ensuring none but the most under-leveraged landlords would escape punishment.
But in reality, though the Budget did landlords no favours, it didn’t spring any further nasty surprises on them either.
Help to Buy relief for accidental landlords
And it appears that the Treasury is not above applying some common sense to its policies.
First-time buyers who benefit from either the Help to Buy or Lifetime ISA when saving for a home must declare that they will not rent out their home after they buy it. If they do, the government will claw back the bonus money it gave them.
But Money Saving Expert’s Martin Lewis recognised that circumstances change. Future ‘accidental’ landlords who have used either ISA might find their bonus reclaimed through no fault of their own.
After a protracted series of communications with the Treasury, Mr. Lewis elicited a welcome response. The Treasury will take a ‘common sense’ approach, considering the buyer’s intentions at the time of purchase. If someone uses a government ISA to buy a home, but their circumstances later change and it is most appropriate for them to let it out, they will be allowed to keep their bonus.
This amnesty is a small concession, but it is a sign of hope.
Times are tough, but property is still a sound investment
Though the buy-to-let climate is difficult at present, the fundamental factors that underpin the market still make it a strong investment. Both house prices and rents are rising above the rate of inflation. Demand from tenants is also rising.
Meanwhile, lenders are more keen than ever to attract business. Buy-to-let rates are falling, and lenders are improving their criteria to remain competitive.
This is despite the threat of regulatory intervention from the PRA. Many of the regulator’s proposed changes are already part of lenders’ underwriting processes, and none are planning to tighten their affordability rules.
Rather than give up hope, landlords are simply changing their strategies. One researcher reports that, despite diminished confidence, only one in ten landlords have reduced or plan to reduce their portfolio. Over two fifths, meanwhile, are planning to incorporate their property businesses to offset their rising tax costs.
As always, landlords who adapt and plan for the future will find that property investment can still prove worthwhile.