Opinion  

Main parties fail to address mortgage market imbalance

Ashley Wassall

Housing has always been a key election issue for the property preoccupied British electorate.

Margaret Thatcher famously galvanised the blue collar vote to the blue box on the ballot paper with populist policies on housing, helping the Tories to three of the four majorities the party secured during its 18-year commons domination.

At a time of persistently high prices that have sucked the life out of the dream of home ownership for many prospective younger buyers, housing once again featured strongly in election manifestos launched this week.

All of them pledged to once again make the dream a reality, mostly by building: Labour and the Conservatives pledged 200,000 new homes a year; the Lib Dems 300,000. The most eye-catching policy (if only because of its retro appeal to headline writers) saw the Conservatives unexpectedly resurrect the Right to Buy discounts that carried Thatcher through the 1980s.

Frankly, it’s all a bit weak. The record of the past five years does not fill me with confidence that supply targets will be met. However many votes it wins, few experts reacted favourably to the idea of reviving an effective giveaway to 1.3m council tenants.

In fact it was only the Green Party which was been brave enough to highlight one of the key imbalances of the market, which is keeping the scales tilted in favour of speculators over average buyers.

Buried in its typically quixotic offering amid proposals, for example, for £116bn worth of additional spending on state pensions, was a overdue pledge to end the tax breaks which make buy-to-let investment such an attractive option.

I’ve complained about this before, but here are some numbers to emphasise my case relating to a three-bedroom house in my area of Greater London.

Based on a rough average price of £250,000, a mortgage at 80 per cent loan-to-value with around £5,000 in stamp duty and fees would require an initial investment of £55,000.

The consensus across a few sites suggests the average rent for a three-bed semi is £1,200, producing annual income of £14,400. At the best interest-only two-year fixed rate of 3.95 per cent from Mortgage Trust, the annual mortgage fees would be £7,896 and the pre-tax ‘profit’ £6,504.

Under current rules, only this sum is liable for tax. So that’s a rough 12 per cent pre-tax return, 7 per cent after tax for someone on the 40 per cent marginal rate. If tax was charged against all of the income in the above example - a bill of £5,760 - the return would fall to £744 or 1.4 per cent.

It’s easy to see how that differential makes buy-to-let disproportionately attractive: according to a new study from the Wrigglesworth Consultancy private landlords have smashed returns from all other asset classes over the past 18 years, beating equities by more than 50 per cent.