The end times are nigh for the buy to let market – at least, so the papers would have you believe. But is the sector truly as doomed as the journalists think it is?
“Do new stamp duty taxes mean bye-bye buy to let?” asked The Guardian last month. They were just one of many voices predicting the end of the industry after chancellor George Osborne announced the introduction of a three percentage point surcharge on stamp duty for buy to let transactions.
People were asking similar questions after the July Budget, when the Chancellor told the nation’s landlords that he was restricting their right to claim tax relief on their buy to let mortgage interest. In an article written on 22 August, Richard Dyson at the Telegraph called it “the death of buy to let”.
Yet buy to let borrowing is still rising
Figures released by the Council of Mortgage Lenders (CML) on Tuesday tell a different story.
According to its Regulated Mortgage Survey, gross buy to let purchase lending grew by seven per cent between September and October, despite July’s surprising announcement. In the year to October 2015, gross lending had grown by a third.
Granted, the new tax regime won’t begin to take effect until April 2017. But buy to let is typically a long-term investment, and as important a future development as the overhaul of how their income is taxed would surely inform any purchase decisions an investor makes now.
The effects of the stamp duty hike have yet to be felt
Experts believe that November’s announcement will have a more pronounced effect on the market, with Introducer Today calling October “the calm before the storm”. The current prediction is for a rush of activity in the first quarter, followed by a cooling of the market – and dwindling supply – afterwards.
This may or may not be true, but it is worth returning to the CML’s figures and noting that UK landlords took on a combined £209 million more debt in October. This is three months after the July Budget tax relief announcement.
Not all of this will be non-deductible by the time the tax changes have been fully implemented in 2020 – limited companies are still able to claim relief – but much of it will. And yet, landlords are still choosing to invest.
A good deal is still a good deal
The notion that landlords are prone to quit in their thousands when investing becomes more difficult or expensive relies on the idea that landlords have a fixed view of what makes a worthwhile investment. In reality, the fundamentals of a good deal are not so immutable.
Buy to let first became popular in the late 1990s, when the central interest rate hovered between five and eight per cent – a level that Bank of England policymakers assure us we will never return to. The staggering house price growth that took place in the nineties likely justified the short-term mortgage costs for many investors, but the overheads would have been potentially crippling for some borrowers at the time.
Then the crash came in the latter half of last decade. Property values dipped between 10 and 20 per cent, and have not since resumed the stratospheric growth that preceded the financial crisis. Yet buy to let was one of the first markets to recover.
The fundamentals have not changed
Ultimately, buy to let is successful because demand from tenants for decent homes is huge, and always rising. Homes in the UK are unaffordable for millions, and this is not set to change.
Rental property offers strong asset growth at a time when interest rates are flat. It offers relative stability at a time of turbulence for global stock markets. It offers decent potential income thanks to supply and demand. Changing tax laws, increasing legislation and the threat of market intervention merely represent the game changing – not becoming unplayable.
If anyone will be deterred, it will be those who think that buy to let is an armchair investment – easy money for little work. But driving the growth of the sector are the serious investors who recognise that adaptation is the key to success; these people will regroup, re-evaluate their strategy, and continue onwards.