The Daily Telegraph has reported that ‘Buy-to-let’ returns will plunge 62% in the next 12 months, according to Britain’s biggest network of letting agents and property valuers. LSL Property Services, who own 500 Estate Agents, predicts that by April 2016 total returns on ‘buy-to-let’, taking into account a combination of both rental income and capital growth, will be just 3.4%, down from an average of almost 9% today.
That return, which would be the lowest in at least four years, would be before mortgages, maintenance and tax are factored in, all of which could push landlords’ investments into the red. In addition to this George Osborne’s new Stamp Duty of an additional 3% duty rate on any property bought as a ‘buy-to -let’ or as a second home, will see the tax on a £175,000 purchase jump six fold from £1,000 to £6,250. For someone buying in London, say a two-bed flat for £400,000, the stamp duty rises from £10,000 to £22,000.
Currently, the rate for stamp duty is 0% on properties up to £125,000, then 2% on any sums over and above £125,000 to £250,000. Properties sold at £250,000 to £925,000 pay 5%, then it is 10% above that. These rates remain the same for standard residential buyers – but 3% extra will be added if the property is to be used as a buy-to-let or second home.
The tax bill for landlords buying and renting in 2017 will be triple the amount today. It gave the example of a property bought for £300,000 with a £240,000 mortgage, which produces rent of £14,000 a year and where the mortgage interest is £9,000 a year.
Buying in the current tax year would cost the landlord £5,000 stamp duty and £1,600 tax, or £6,600 in total. The £1,600 bill comes from paying 40% tax on the £5,000 profit he makes on the rent, minus the mortgage interest.
If the same landlord buys in 2017, the stamp duty will be £14,000 and the tax payable on the income will be £3,400, making a total of £17,400.
Not only will prospective landlords have to pay far more than conventional residential buyers, they also face much heavier taxes on their profits. The maximum tax relief will drop from 45% and 40% to just 20%, so that an investor with a £150,000 buy-to-let mortgage on a property worth £200,000 is likely to see his or her net annual profit collapse from £2,160 a year to just £960.
In addition, the chancellor has introduced a new rule requiring landlords to pay Capital Gains Tax within 30 days of selling a property, instead of a year’s grace, although the CGT rates remain the same.
Once letting fees and “voids” (the short periods when the property isn’t tenanted) are included, any profit is likely to disappear. If interest rates rise, many landlords are likely to start making losses.
Figures from the Council of Mortgage Lenders released in early November, showed that the number of ‘buy-to-let’ mortgages granted had jumped by 36% over the previous 12 months, compared with a 10% increase for first-time buyers. However, this week’s rise in stamp duty could stop this growth in its tracks.
For many years landlords have invested in residential property to be let for profit, but due to the rent controls imposed during the First World War, arranging a mortgage to fund such a purchase was difficult. Between 1915 and 1991, the percentage of housing stock accounted for by private rented properties decreased from around 90% to just 7%.
Since the Housing Act 1988 introduced assured shorthold tenancies (ASTs) for residential properties, which are not subject to rent controls and provide less secure tenure than older tenancy types, mortgage lenders have been more willing to provide finance and the size of the ‘buy-to-let’ market has been growing steadily in recent years
How did this come about? Following the Second World War and prior to the Rent Act 1957, private tenancies in the UK were subject to strict rent controls. During the subsequent decontrolling period, between 1957 and 1965, the infamous landlord Peter Rachman is said to have started a trend of harassing existing tenants until they left and replacing them with new tenants who had diminished security of tenure and high market rents.
Parliament acted against so-called ‘’Rachmanism’’ in 1977 with the introduction of the Protection from Eviction Act, and more comprehensively through the Rent Act 1977, which – although preventing unlawful eviction and creating security of tenure – meant that renting out property was often loss-making for landlords. As a consequence, the private rental sector declined, and without a growth in social housing to compensate, a housing shortage followed.
After sustained pressure by private landlords and in line with Thatcher’s philosophy of ‘leaving it to the market’, the 1988 Housing Act introduced the ‘Right to Buy’ for council tenants and created the concept of the Assured Shorthold Tenancy (ASTs), where Landlords gained substantially more power to evict tenants. This gave rise to more individuals investing in residential property and in turn the ‘Buy-to-let’ mortgage.
As for all property rental, the benefits for a ‘buy-to-let’ landlord can include a stable income from rental receipts, as well as an accumulation of wealth if house prices go up over time. Rising house prices in the UK have made ‘buy-to-let’ a popular way to invest. The main risk involves leveraged speculation where the landlord takes a loan to buy the property, with the expectation that the house can be sold later for a higher price, or that rental income will meet or exceed the cost of the loan. In the best outcome for the landlord, she or he will have benefited from the use of the lending banks money indicating that she or he has allocated the capital more efficiently than professional investors could have done. If the landlord cannot meet the conditions of their mortgage repayments, if interest rates rise and if the growth in ‘Buy-to-let mortgages stops, coupled with the current high prices and difficulty in getting a standard mortgagee, what would be the consequences?
An immediate consequence would be a fall in the availability of rental properties. This does not mean a fall in house prices though. So those wanting to buy a conventional home will still face high asking prices but will find that rental market, due to lack of supply, my also increase, pricing them out of that option.
The Chancellor’s action may go some way to slowing down the price of residential property but unfortunately, especially in the South East of England, property prices, coupled with strict mortgage requirements, still means that it’s an expensive market for buyers.