MortgagesJan 6 2016

Wrong time to attack BTL market, says Lord Flight

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Wrong time to attack BTL market, says Lord Flight

Lord (Howard) Flight argued it is “precisely the wrong time to be attacking the buy-to-let market when the balance of supply and demand is shifting”.

He urged the government to re-think its “sudden attack” on buy-to-let, saying it could “create a sharp fall in prices, if not a crash”.

Chancellor George Osborne announced in November there would be a 3 per cent premium on stamp duty for buy-to-let investors and those buying second homes, in a bid to raise £1bn by 2021.

According to Lord Flight, potential buyers will be put off by the additional 3 per cent stamp duty, particularly on top of existing rates in London.

“A significant increase in those selling buy-to-let properties may also put thousands of tenants’ security at risk as buyers will want to sell with vacant possession.”

This was a second blow to the industry after Mr Osborne in his summer Budget announced plans to stop landlords offsetting interest costs on their mortgages against profits before calculating their tax bill.

Lord Flight claimed this had been the only buy-to-let ‘tax advantage’ previously, and that new measures, however, affect this by limiting the tax deductibility of mortgage interest to a 20 per cent tax rate.

“This will hit more modest buy-to-let investors the most, while many of the more sophisticated have their buy-to-let properties held through a company.”

He argued the government is “misconceived” in thinking buy-to-let investment has squeezed young buyers out of the market, and blamed it on developers “hoarding” land.

“Politically, the government may lose more votes over this issue than they realise: there are many thousand buy-to-let investors living in marginal constituencies.”

Lord Flight described the buy-to-let market as an “entirely sensible market economy development”, which provided an alternative to saving for old age through pension schemes.

He also pointed out that buy-to-let has provided some three million homes for those not able yet to afford to buy property.

“Younger buyers cannot afford market prices in London and the South East, and cannot borrow to finance the substantial stamp duty costs of acquisition.”

In addition, the Tory peer said if there is a crash in property prices in Greater London, this will have a major impact on banks and on the economy as a whole, for which he suggested the government will be blamed.

He argued that it would have been much fairer for the reduced 20 per cent allowable offset tax on mortgage interest to apply to new, and not existing, buy-to-let investments.

Andrew Turner, director of intermediary CommercialTrust.co.uk, said he agreed with Lord Flight’s observation that scarcity of property, rather than the popularity of buy-to-let investment, is the chief factor in driving up prices to unaffordable levels and locking millions of buyers out of the market.

He said: “In fact, the buy-to-let market has helped to provide millions of homes where the construction and social housing sectors have failed.

“I am puzzled at the government’s claims that by penalising buy-to-let landlords they will somehow help first-time buyers, whose plight is as much to do with affordability as it is availability.

Mr Turner questioned how much house prices would need to fall to become affordable to the average buyer, and argued that the Treasury and the Bank of England would not be willing to allow this due to the “deleterious knock-on effects” this could have on the economy.

“I can only assume, therefore, that the government does not believe enough landlords will exit the sector to have an appreciable downward effect on house prices.”

Given that companies will not be restricted on mortgage interest relief, and those buying property in bulk will be exempt from the new stamp duty surcharge, he suggested the government is steering towards a institutionally-owned rather than individually-owned rental sector by enticing large-scale corporate investment.

He said: “Helping people fulfil their aspiration to own a home of their own is a noble aim, but I don’t believe that penalising small landlords is the way to do it; nor do I believe that it is the true end goal of this policymaking.

“Rather, I believe the government wishes to push up private rents while simultaneously creating a surfeit of rental properties for purchase, attracting investment by large companies.”

Simon Torry, chartered financial planner at Essex-based SRC Wealth Management, said: “Although Lord Flight makes some valid points I do think that it’s perhaps a little early to start ringing the ‘death knell’ for the buy-to-let sector.

“What the changes will no doubt do, is make the decision to invest in property something that requires more consideration, but even with the increase in stamp duty and the restriction on tax relief, property investment could still prove to be an attractive opportunity.

“What may result from the changes however is that any increased costs could be passed on to the tenant. The chancellor may well therefore succeed in his objective of reducing government spending, but this could be at the expense of those least able to carry the burden.”