Buy-to-Let Property Boom Over Despite UK House Prices Grinding Higher
Housing-Market / Buy to Let Oct 26, 2015 - 10:47 AM GMTBy: Nadeem_Walayat
Britain's 2 million strong army of buy-to-let private landlords with well over 5 million properties in their portfolios face a perfect storm of new regulations, tax hikes and benefits cuts that looks set to turn their and their tenants finances upside down, converting profits into losses, this despite UK house prices expected to continue to grind ever higher and thus increasing portfolio valuations.
The fantasy sales pitch of seminars of buying properties to rent out at huge potential returns had convinced many thousands of investors over the past decade to become buy-to-let landlords, especially given the abysmal rates of bank interest of the past 6 years. However, reality has never matched expectations for many buy to let investors who soon realise that buy to let is actually a second job rather than an invest and forget exercise, as they tended to face a string of problems at the top of the list are problem tenants, a situation greatly worsened by mass migration from eastern europe and the myriad of scams they tended to pull on unsuspecting landlords, leaving behind wrecked properties that will cost far more to rectify than any rental income gleaned from such properties.
Nevertheless, buy-to-let investors who learned from their initial mistakes and thus managed to avoid the bad tenant pitfalls have been able to build significant property portfolios that they view as their pensions to fund their retirements with, the whole business model of which is now being systematically undermined, due to the fact that 6 million private renters have now become a huge voting block that the Conservative government is attempting to attract / bribe ahead of the next general election.
Mortgage Interest Tax Relief
At the top of the buy-to-let sector hit list to be implemented from April 2017 is the end of mortgage interest tax relief, which means tax will now be due on virtually the total amount of rent earned before mortgage interest costs less a 20% tax credit on the mortgage interest as the below table illustrates:
| Now | 2017 | |
| Rent | £15,000 | £15000 |
| Interest | £10,000 | £10000 |
| Other Costs | £1000 | £1000 |
| Taxable | £4000 | £14000 |
| Total Tax due @ 20% less tax credit | £800 | £800 |
| Total Tax due @ 40% less tax credit | £1600 | £3600 |
So for most higher rate buy to let tax payers with mortgages the amount of tax due will effectively DOUBLE. And what's worse, many basic rate tax payers will be pushed into the higher rate tax bracket as taxable income will now include the mortgage interest that is currently being deducted i.e. in this example the buy to letter will see a £10k increase in taxable income. In which case transferring a property to spouses who pay little in tax would help preventing going into the higher tax bracket.
Selective Licensing
Many of Britain's major cities have seen the implementation of selective licensing schemes since the start of 2014 in select areas that amounts to an additional local council tax on landlords at a typical cost of £1000 per annum that is in addition to existing fees covering multiple occupation properties.
Immigration
From 1st of Feb 2016 landlords will effectively be required to act as UK border guards, to check that prospective tenants are not illegal migrants and face a potential fine of upto £3,000 per property rented out to illegal migrants.
Deregulation Act 2015
As of 1st of October tenants gained more rights and protections against being evicted that contains many pitfalls for landlords such as failure to supply tenants with x,y,z piece of paper on time, all aimed at making it now far more difficult for landlords to evict bad tenants that looks set to turn renting out properties into a legal mine field to the advantage of tenants such as by complaining about non existant issues and then preventing landlords from making the repairs under local authority issued improvement notices.
Universal Credit
Another impact on small buy to let investors, with perhaps just 1 or 2 properties will be the introduction of Universal Credit that replaces Working and Child Tax Credits. The big difference between the two is that Tax Credits are based on INCOME, whilst Universal Credit is based on CAPITAL, therefore many small time buy to let investors with 1 or 2 properties can and do receive substantial tax credits each year, whereas under Universal Credit no one with capital of more than £16000 will receive any benefits.
Benefits Cap and Cuts
And lastly there is the benefits cap which is set to be cut from 26,000 to 20,000 outside of London and £23,000 in London from April 2016. The reason why this will hit landlords hard is because the top / first benefit to be cut will be housing benefit and it is only when that benefit has been fully exhausted that the other benefits are cut. Similarly cuts in Working and Child Tax credits will make families over £1k worse off annually the consequences of which in large part be felt by landlords as many more tenants fall into rent arrears.
Impact on the UK Housing Market
All of the measures are clearly aimed at increasing supply of housing by forcing landlords to sell through erosion of profits, especially at the lower end of the market which should at least result in house prices significantly under performing in the worst hit areas, though more probably see outright falls in house prices in pockets of cities right across the UK that in reality have already been underway for some months. So clearly the Conservative governments measures are aimed at INCREASING the supply of housing for potential Tory voters, especially at the bottom end of the market that will attract first time buyers interest.
Another measure that will appeal to prospective Tory voters is the extension of the Right to Buy scheme to 1.3 million Housing Association tenants from April 2016. Which if following the example of council housing then within this parliament 50% of social housing could be sold off thus further increasing supply at the lower end of the market.
Therefore the Conservative government appears to be already laying the property market groundwork for the 2020 General Election, one of far higher supply of first time buyer properties, all without increasing the construction of new builds significantly as effectively many hundreds of thousands of today's renters become property owners.
Meanwhile a fall in supply of properties available for rent will logically result in an increase of rents. Whilst proving costly to renters. However, mortgage free landlords can profit from at least some of the consequences.
UK House Prices 5 Year Forecast
It is now 22 months since excerpted analysis and the concluding 5 year trend forecast from the then forthcoming UK Housing Market ebook was published as excerpted below-
UK House Prices Forecast 2014 to 2018 - Conclusion
This forecast is based on the non seasonally adjusted Halifax House prices index that I have been tracking for over 25 years. The current house prices index for November 2013 is 174,671, with the starting point for the house prices forecast being my interim forecast as of July 2013 and its existing trend forecast into Mid 2014 of 187,000. Therefore this house prices forecast seeks to extend the existing forecast from Mid 2014 into the end of 2018 i.e. for 5 full years forward.
My concluding UK house prices forecast is for the Halifax NSA house prices index to target a trend to an average price of £270,600 by the end of 2018 which represents a 55% price rise on the most recent Halifax house prices data £174,671, that will make the the great bear market of 2008-2009 appear as a mere blip on the charts as the following forecast trend trajectory chart illustrates:
In terms of the current state of the UK housing bull market, the Halifax average house prices (NSA) data for Sept 2015 of £202,781 is currently showing a 4.5% deviation against the forecast trend trajectory, which if it continued to persist then in terms of the long-term trend forecast for a 55% rise in average UK house prices by the end of 2018 would translate into an 11% reduction in the forecast outcome to approx a 44% rise by the end of 2018.
The decline in momentum remains in line with my long standing expectations for house prices momentum to fall in the months following the general election. However, again don't take this post election slowdown as a harbinger of anything other than a mild correction as I expect the over-riding bull market trend to reassert as the fundamental drivers reassert themselves.
The bottom line is that the mega-trend drivers of out of control immigration, lack of house building, flood of foreign capital, and the UK governments perpetual inflation of the debt bubble ensures that the UK housing bull market will continue despite the hit that the buy to let sector is and will be taking right upto the 2020 general election. All of which ensures that probability continues to strongly favour an outright Conservative election victory in 2020. - 08 May 2015 - UK House Prices Correctly Forecast / Predicted Conservative Election Win 2015.
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By Nadeem Walayat
Copyright © 2005-2015 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.
Nadeem Walayat has over 25 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of five ebook's in the The Inflation Mega-Trend and Stocks Stealth Bull Market series that can be downloaded for Free.
Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 1000 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk
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