The Government curbs the buy-to-let market at its peril, writes Benjamin Rochelle.
The buy-to-let boom has grown at a rapid pace in recent years, doubling the size of the private rented sector since 2004. In the midst of a housing crisis it now provides some three million homes for those not yet able to afford to buy their homes and, during a time when the stock market has performed so poorly, offers a largely reliable method of providing a successful income in old age.
However, recent interventions from the Treasury and the Bank of England threaten to drastically hamper the buy-to let market and with that the private rented sector. A 3% hike in stamp duty on second homes and buy-to-let investments came into force on 1 April and, under the Finance Act 2015, rules that allow landlords to offset all of their mortgage interest against their tax bill will be phased out from April 2017.
Last week the Bank of England’s financial supervisory unit, the Prudential Regulation Authority (PRA), suggested tightening rules on the availability of buy-to-let mortgages, after a review into the market raised concerns about risk-taking.
The main proposals from the PRA will make sure lenders check that rental income is sufficiently higher than the monthly mortgage cost, take into account additional costs – such as management charges and lettings agency fees – when calculating the income, and run tests on borrowers to make sure they can withstand an interest rate rise to at least 5.5% over five years.
The Bank of England hopes that the stricter lending criteria, bringing buy-to-let mortgages closer in-line with owner-occupier mortgages, will reduce the amount of buy-to-let lending by 10% to 20% in three years’ time.
Inevitably the first three months of 2016 saw a major rise in interest from landlords looking to snap up a buy-to-let property in time to beat an increased tax bill. But we can now expect a sharp slowdown as changes in tax and stamp duty come into effect. This is most likely to be felt in London and the South East where the Treasury’s changes add £16,000 to the cost of buying the average home as an additional property.
Meanwhile the new Bank of England rules are likely to have the biggest impact on the same region. Ensuring that rental income is sufficiently more than the monthly mortgage cost is difficult in London and the South East because house prices are so high. This means that smaller property investors who rely on considerable loan-to-value mortgages will face trouble.
The Government’s measures to curb buy-to-let will come at a cost, not only for those who will now face higher rents, but for the wider economy. The Treasury Select Committee has expressed firm opposition to the moves.
In its February report it said: “A failure to ensure that individuals have access to a well-functioning, affordable rental market will inhibit labour mobility and reduce economic activity.”
The committee challenged the stamp duty surcharge and reduction in tax reliefs available on mortgage interest payments claiming that these would be a deterrent to investment in this sector, and with it “act as an enduring constraint on the supply of privately rented properties”. Certainly the rise in rents will add to the financial burden already on young tenants.
Furthermore, it may put thousands of tenants’ security at risk as buyers will want to sell with vacant possession.
It is clear that there is a home ownership crisis. But the real key is building more homes and freeing up planning restrictions not further regulatory intervention into the private rented market.
As the Treasury Committee has noted Labour, Conservative and Coalition governments have for decades recognised the vital significance of maintaining confidence in the buy-to-let and private rented sector, well aware of the destructive consequences of regulatory interventions for employment and economic activity.
This Government must do the same.