The number of properties bought by landlords has almost halved in a year after a tax and regulatory clampdown, prompting a leading banking body to downgrade its forecasts for buy-to-let lending in 2017 and 2018.
The Council of Mortgage Lenders said buy to let had had a weak start to 2017, with lending falling faster than expected as landlords withdrew from the market in response to major tax changes and tighter lending rules.
The data follows a series of recent surveys and indices suggesting the housing market is running out of steam. However, the crackdown on buy to let may have helped young people trying to get a foot on the property ladder. CML said house purchase activity was being driven predominantly by first-time buyers, with their numbers up 8% in the 12 months to April.
Buy-to-let homebuying activity was “nearly half what it was a year ago” and had averaged around 6,000 purchases a month over the last 12 months, said the body, which represents banks and building societies. The number of landlord purchases involving a mortgage was 5,300 in April this year. This compared with 10,300 in February 2016 and 11,800 in July 2015.
As a result, the CML has cut its forecast for buy-to-let lending from £38bn being lent in both 2017 and 2018 to £35bn in 2017 and £33bn in 2018.
The organisation warned against hitting landlords with any further changes to taxation and lending rules, saying the figures “re-emphasise the case for avoiding further changes to the tax and regulatory framework until the effect of these already in train have been properly assessed”.
Some landlords have claimed that major tax changes being phased in gradually between April 2017 and April 2020 meant letting not longer made financial sense and some would end up making a net loss. At the moment, landlords can deduct mortgage interest and other finance-related costs from their rental income before calculating their tax liability. But this interest relief is being slashed from 100% to zero. Instead, the income tax on someone’s property profits and any other income sources will be added up, and they will then be granted a “tax credit” worth 20% of the mortgage interest cost to offset against income tax.
Since January the Prudential Regulation Authority (PRA) has required lenders to apply stress tests to new lending, putting further pressure on landlords’ finances.
A CML spokesman said: “For the time being, regulators and policymakers have not registered concern with regards to buy-to-let sluggishness. We expect to see the market continuing to be soft, as the implemented measures work through.”
Mark Harris, chief executive of mortgage broker SPF Private Clients, said it was no surprise that buy-to-let lending had been subdued, as the sector was still coming to terms with various changes, such as the reduction in mortgage interest tax relief, tougher lender criteria and the 3% hike in stamp duty that took effect in April 2016.
He added: “Landlords are being more cautious when it comes to expanding portfolios while others are considering whether incorporation is the sensible way forward. With further PRA guidelines set to be introduced in October, there are new challenges ahead for the sector, and we are awaiting detail from lenders as to how they are going to deal with these.”