Will buy-to-let clampdown work?
04-10-2016
"Short of attacking them with flame-throwers, or impaling them on stakes, it is hard to know what else the Bank and the government can throw at landlords," writes Matthew Lynn in the Daily Telegraph.
Today a new stamp duty land tax surcharge that is targeted at prospective private landlords comes into force, adding a hefty three per cent to the up-front tax bill facing those buying investment homes. In an effort to avoid the charge, a stampede of buy-to-let investors has ramped up activity in the property market in recent months, pushing house prices to a fresh record in the process.
That's not all. From next year rules that allow landlords to offset all of their mortgage interest against their tax bill will be phased out, which means that by the end of the decade higher-rate tax payers will get half the relief they do now. And then this week the Bank of England proposed new rules to make it harder for landlords to get a mortgage, which could prevent one in five loans being issued.
Will all of this work? Well, first of all you need to separate the objectives of the government and the Bank of England clampdowns.
Tax hits
The government is concerned that first-time and younger buyers are finding it tough to get into the housing market and that private landlords have a competitive advantage. They are bidding for the same properties but are able to offset mortgage costs at a time when rental demand is driving up potential income.
As more would-be new homeowners are forced to rent this increases demand and fuels a vicious cycle, the theory goes. By removing a lot of the tax benefit and hitting landlords with higher initial costs it is hoped this demand will cool, easing the pressure on prices and levelling the playing field for first-timers.
Some fear all this will limit the supply of rental housing in an already squeezed market – and that it could add to the financial burden on younger households as landlords will simply increase rents. Only time will tell, but if the latter comes to pass expect to see calls for the sort of rent controls advocated by former Labour leader Ed Miliband at the last election.
Lending controls
As for the Bank of England, it is concerned with financial stability. In short: it is worried that the huge demand for buy-to-let property represents a bubble and that if there were to be an economic shock landlords might abandon the market en masse, causing a painful crash that would be felt across the economy.
So it wants to make it harder to get a loan and to get rid of the practice of basing lending decisions simply on whether or not mortgage interest is covered by rental income, as it is now. Money Observer notes, for example, that the current system does not prevent purchases by those who will make a loss on their investment and are thus higher risk.
That's all relatively sound in principle. The problem, critics argue, is that this is unlikely to stop the rampant demand from investors starved of yield elsewhere and, as above, that it could serve to limit the already scarce housing supply.
"There is certainly a problem with house prices in this country," concludes Lynn. "But the only way to fix that is to build a lot more homes, free up planning restrictions and raise interest rates back to realistic levels to choke off speculative demand."