Last September the Prudential Regulation Authority, a subsidiary of the Bank of England, hit the headlines when it announced more stringent rules on mortgage lending for buy-to-let (BTL) landlords. As a result, the near two million ‘hobby’ landlords who own 15% of the housing market have found it increasingly difficult to raise finance from traditional lenders.
This is not the only headwind faced by BTL landlords. The Government’s introduction of the 3% stamp duty surcharge on second homes in April 2016 and withdrawal of tax relief by 2020 also present challenges for the sector. So, do these changes spell the end for the UK BTL market? While some have predicted this, I’m not so pessimistic.
It is true that the BTL landlord has been hit, albeit slowly over the last few years. Although the powers-that-be seem to be managing the investor out, whether they are going to succeed is less clear.
The forces behind these relatively recent shifts are evident. The Bank of England, along with the Government has come to view the BTL market presents a systemic risk to the economy. On the up, money floods in to the sector creating a bubble, whilst on the way down, two million investors can choose to instantly sell the houses they don’t live in, thereby magnifying any downward price trend as they race to sell their property first.
To help manage this risk and win votes, the Government is offering housing to ‘the many’ whilst punishing ‘the few’ landlords with its 3% surcharge and tapering tax relief. This also has the added benefit of raising more money for the central government coffers. These policies may slow the pace of investment and thin the market, but will they actually shift ownership from investor to occupier?
I doubt it. Currently, owner-occupiers are finding it hard to save a deposit, unsurprising given that according to ONS data, tenants in London spent nearly half (49%) of their salary on rent. A look nationwide at the cost of a property relative to earnings is perhaps even more chastening; for England and Wales in 1997 it was around 3.6 times earnings, whilst in 2016 it had more than doubled to 7.6 times.
As a result, while the extra costs caused by these tax changes have undoubtedly encouraged people to sell, the sales I have witnessed have not been to owner-occupiers. Instead, I have seen assets simply transfer to the same type of investor. These investors have full knowledge of the tax environment, and at the appropriate LTV and rent to withstand the stress testing, they are able to weather any shocks to the market.
As a result, property is becoming less about instant and fast capital gain to compensate for the low yield and more about a sensible yield from purchase with a projected modest capital gain. This is far more in line with why property as an asset class has historically been viewed as a desirable investment instrument.
However, a real shift in this market is being driven by the increased clout of the Bank of Mum & Dad. Indeed, having lent an estimated £6.5bn in 2017, this ‘bank’ is now the 9th largest in the UK. And as this market has matured, new mortgage products have catered to it, such as the Joint Borrower Sole Proprietor (JBSP) from Barclays. This product is designed to allow borrowers to legitimately escape the stamp duty surcharge trap by allowing a family member to back a buyer financially without becoming a co-owner of the property. This also avoids capital gains tax when the house is sold and allows a first-time buyer to benefit from the abolishment of stamp duty in November 2017. These are welcome developments, although no huge force for change in the grand scheme of things.
Whilst it may seem that buy-to-let investors are under assault from all sides, the fundamentals of investing in bricks and mortar remain strong. Although the sector may not offer the eye-catching capital returns it once did, it has instead returned to its historic asset characteristics, offering investors a reasonable yield and a hedge against inflation. Although the perfect storm of capital growth has ended, the BTL sector lives on.
Notes to editor
Gary joined Allsop in 1987 and was invited to join the Partnership in 1991. Since then, he has been head of the Residential Auction Department with Chris Berriman. The department is now the largest residential auction house in the UK and sells up to 2000 lots each year to a value of around £400 million.
Gary is vice chair of the RICS Auctioneering Group, a member of the RICS Auction Legal Review Group and a former member of the RICS Estate Agency Group. He is past chair of the RICS Agency Skills Panel and past chair of the ISVA Auctioneering committee.
Gary is the author of many articles in regular trade press, a frequent speaker at professional conferences and a regular charity auctioneer.
If you would like to get in touch with Gary, please contact him:
email@example.com or +44 (0)20 7344 2619