MortgagesOct 20 2016

Buy-to-let and new house purchases slump

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Buy-to-let and new house purchases slump

Buy-to-let and new house purchases have suffered a sharp fall since the government's changes to landlord taxation and higher stamp duty came into effect. 

Brexit talk, tax treatment on buy-to-let and a general uncertainty in the economy has seen a swing to people remortgaging and a huge slump in the number of new home and buy-to-let mortgages, data from the Council of Mortgage Lenders (CML) has revealed.

In its latest market data, the CML said: "The stamp duty tax change in April created a distortion in the first and second quarter of this year, but data for July and August shows a market where transactions still look soft for buy-to-let.

"This looks set to continue, given that lenders have been tightening affordability criteria in anticipation of the forthcoming interest tax relief changes in April 2017, coupled with the Prudential Regulation Authority’s stress tests, which come into effect in January 2017."

There is still a growing number of borrowers, such as contractors, self-employed or those who have experienced a genuine life bump, being forced out of the market. Matt Andrews

In March, there were 29,200 buy-to-let properties sold. In August, there were just 6,500. In August 2015, the figure stood at 10,600.

New house purchases have also fallen since the start of 2016. In March this year, there were 99,200 new house purchases; in August this was down to 64,100 - approximately a third less than at the end of Q1 this year, according to the CML data.

The data also shows a swing to remortgaging activity. There were 47,400 loans for remortgaging in August 2016, up from 45,300 in March this year. 

In the Summer Budget 2015, shortly after the General Election, the government announced that buy-to-let landlords would receive a lower rate of tax relief on mortgage payments - a flat rate of 20 per cent tax credit - under changes to the taxation of mortgage interest.

Landlords can no longer deduct the cost of their mortgage interest from their rental income, so tax will be applied to the rent received, rather than net rent - that which is left of the rent after the mortgage interest has been paid. 

Then in the Autumn Statement 2015, the then chancellor George Osborne announced a 3 per cent stamp duty hike for buy-to-let landlords, whether they had two or 20 properties. 

Henry Woodcock, principal mortgage consultant at Iress, said: "The huge spike in buy-to-let lending in March came in a rush to beat that 3 per cent stamp duty change, but there are still a lot of lenders who support this market, particularly specialist lenders."

"There have been so many hits on that part of the market, and more coming in next year. It had been a growth generator for the market over the past few years but with all the changes, I suspect it will be a flat line going into 2017."

CML analyst Mohammad Jamei said although there had been a slowdown in new house purchases, the overall picture was not gloomy, with the CML's estimate of gross mortgage lending for September is £20.5bn, up 2 per cent compared with the same period a year ago.

Despite this yearly uptick, this is 7 per cent lower than August’s lending total of £22.1bn, and 2 per cent higher than the £20.1bn lent in September 2015.

Mr Jamei commented that prospects for house purchases look slightly subdued. He said: "House purchase approvals fell to a 21 month low, with just over 60,000 approvals in August."

However, although the Bank of England’s prediction in August of 56,000 approvals a month over the next nine months looks to be getting closer, he commented: "We still see this as too pessimistic, and expect a recovery, as sentiment improves."

He also suggested buy to let might recover as a result of more affordable lending brought on by the low interest rate environment.

Yet there are concerns over what Hard Brexit and the slide in sterling might mean for the UK housing market. 

There are also concerns over rising inflation, which hiked up to 1 per cent in October and is forecast to be 2 per cent to 2.5 per cent by the end of 2017, as well as further concerns over the direction of interest rates, which fell to 0.25 per cent in August 2016 after years of remaining frozen at 0.5 per cent.

Commentators are anticipating there will be some complementary fiscal measures announced when the new chancellor Philip Hammond delivers his first Autumn Statement on 23 November.

A housing white paper is also expected to be published before the end of the year, outlining housing initiatives until 2020.

Matt Andrews, managing director of Bluestone Mortgages, said: "Despite this monthly dip, the year on year increase in lending highlights that the market is still buoyant, with lenders maintaining their appetites to lend.

“However, this does not necessarily mean that each lender is lending to everyone. There is still a growing number of borrowers, such as contractors, self-employed or those who have experienced a genuine life bump, being forced out of the market for not fitting typical lending criteria."

It might not be all bad news; Mr Woodcock said the outlook was "a cup half full". He added: "The gross lending trend since the summer has been in an upward trajectory, so I’m surprised the market has stumbled, with gross lending down 7 per cent to £20.5bn from August.

"I think this is just a blip. The total number of mortgage products has increased over the last 19 months to an eye watering 24,415, pointing to fierce competition.

"House prices fell by 0.5 per cent in Q3 2016, the first quarterly decline seen in four years according to Halifax’s House Price Index which - combined with the August base rate cut – may still tempt borrowers to remortgage or move house."

He added the impending closure of the government's help to buy scheme at the end of the year will also likely see a "last-minute rush by low deposit borrowers" to secure those attractive deals.