The next four years will see a drastic change in the property market landscape, thanks to chancellor George Osborne’s plan to “level” the playing field between homeowners and investors by cutting the tax breaks landlords have previously been able to claim on buy-to-let property mortgages. Moving forward, the claimable amount will be fixed at a basic rate of 20 per cent.
This is the first budget in recent memory that has the potential to devastate the housing market, after a number of goodwill policies such as the ‘help to buy’ scheme.
“The better off the landlord, the more tax relief they get,” says Osborne of the current system. “Buy-to-let landlords have a huge advantage in the market as they can offset their mortgage interest payments against their income, whereas homebuyers cannot.”
What Osborne seems to miss entirely is that any decision with an impact on landlords will have a trickle-down effect on tenants — or, in this case, less a trickle-down and more a potential avalanche. Where, exactly, are these potential homebuyers supposed to live while they are saving up for their mortgage?
“This is a major blow to a sector that is heavily reliant on private investors and who provide a crucial supply of property to the private rental sector,” says Nicholas Leeming, chairman of the Jackson-Stops & Staff estate agency. There is a widespread concern that this new ruling could have a detrimental effect on the availability of rental properties, which will only make things worse for individuals and families seeking to rent. “The single biggest impact will be to tenants rather than landlords,” says of Sequre Property Investment’s MD Graham Davidson.
According to Deloitte’s real estate tax partner Phil Nicklin, this will have a smothering effect on the free market: “A landlord who borrows at even a modest level might end up paying more in tax than he makes in profit,” he says. “This measure must make buy-to-let investment a less attractive proposition in future and may reduce the options for those who see it as an alternative to a pension.”
Since Osborne’s plan was announced, shares in house building firms have plummeted, with the largest losing more than £1.5 billion in value. Barratt Developments, Redrow, Persimmon, Taylor Wimpey, Crest Nicholson, and Bellway have all been affected, with share drops of over 5 per cent. Property search engine Zoopla and high street agent Foxtons have also been hit by 4 per cent share decreases.
“The phasing is important,” says Paul Smee of the Council of Mortgage Lenders. “We will need to understand whether this will have a behavioural impact on higher rate buy-to-let landlords, but a four year timetable does at least reduce the risk of sudden market shocks.”
In other words, thanks to Osborne this looks set to be a lengthy struggle, rather than a short-term issue.
George Spencer is CEO at Rentify.