The growth of buy-to-let has been among the defining characteristics of the post-crisis mortgage market. Council of Mortgage Lenders figures released this month show that lending to landlords accounted for 17 per cent of all new loans in the third quarter of 2015. With rising property prices, meanwhile, property consultants Savills estimated last year that landlords had benefited from £177bn in capital growth since the start of the decade.
In one sense, the changes being introduced by the government, which is increasing stamp duty on buy-to-let property while reducing the available tax relief, are substantial. The stamp duty hike alone – 3 per cent on top of current levels – is expected to raise £3bn over the next five years.
So what impact, if any, will this have on the growth of the buy-to-let sector?
No place to go
First, the influence of buy-to-let on the housing market is easily exaggerated if you only look at the headline figures. In fact, the majority – about 60 per cent – of lending to the sector is for remortgaging rather than new money coming in.
Ramping up costs and applying more checks and balances to the buy-to-let market is therefore not going to help the wider issue of declining numbers of owner-occupied properties. The private rental sector is an increasingly important and growing part of the housing market and, until the issue of inadequate housing supply is addressed, this is not going to change.
Second, while no one can say for sure how buy-to-let investors will react to the changes being introduced, it seems doubtful that many will be put off. As far as stamp duty is concerned, most investors are looking for long-term returns, not short-term capital gains. They are likely to simply set the higher one-off transaction costs against years of rental income and potential increases in values.
Of course, some may seek to offset the cost by rebalancing their portfolios towards cheaper properties in lower stamp duty bands. That, however, is unlikely to do much to help first-time buyers competing for the same properties. In the short term, there’s already strong evidence that a rush by property investors to beat the April introduction of higher duties is pushing up prices.
The other tax changes – limiting tax relief on mortgage interest payments to the basic rate and reducing relief on wear and tear to itemised expenses rather than an automatic 10 per cent of rents – will undoubtedly hit landlords. It is too early to say by how much, though, and it will vary considerably between investors. Some will seek to offset the losses by pushing up rents – surely not what the government intended. Others may be able to reduce the impact by setting up as a limited company. Investors will need to take tax advice to see what works for their individual circumstances.
Why widespread withdrawal is unlikely
But in any case, two facts make any widespread withdrawal from the buy-to-let market – and consequently much impact on prices – unlikely.
The first is the large number of investors not relying on mortgages. According to the Council of Mortgage Lenders, only 31 per cent of buy-to-let property has a mortgage on it.
Second, and perhaps more important, is the lack of alternatives. The stock market is volatile, and bank returns for savings remain negligible. Even the prospect of modest house price inflation over a long period looks attractive in comparison. As long as there is inadequate housing supply driving up house prices, investors will continue to put money into the buy-to-let market for long-term growth. There is simply nowhere else most investors can get comparable returns.
The changes we’re seeing might well raise some revenue for government, and – now the principle is established – investors will be wary that the current and subsequent chancellors will be tempted to revisit this area in future. They will not, however, help potential homebuyers faced with high prices and the often impossible task of raising a sufficient deposit. Ultimately, the problems they face are not down to demand from the buy-to-let market; they are down to a fundamental lack of supply in the housing market. Their troubles will continue until this is addressed.