5 reasons the buy-to-let market has turned
And why it might start a house price crash
Buy to let ( BTL) property investing has long been seen by many people as the best way to invest for an income in old age.
But is that right now?
Let’s see what’s going on.
Now, if you’ve ever attended one of those property investing seminars (see picture above) you might have been told that property prices reliably double in price every 7 to 10 years.
I attend a lot of these for research purposes and I hear that claim every time.
But that’s nonsense of course.
Property prices in the UK have been booming and busting in approximately 18 year cycles for a very long time.
The long run trend shows prices rising above earnings by about 2.5% p.a. but that could drop over the coming years as we’ll see.
After all there’s no reason why property prices should rise faster than earnings in the long run. And the BTL property market is in deep trouble right now.
BTL investing is risky
BTL investing is especially risky if you use a large percentage mortgage to purchase the property. And that’s because the mortgage creates a “geared” investment.
‘Gearing’ is something we’ll look at in more detail in a future Insight but in a nutshell this is what it means . . .
- A property with a large mortgage gives you the potential to make a massive gain (on your deposit) if property prices rise.
- It also exposes you to massive losses if prices fall – and you’re forced to sell.
And those losses can, of course, be much more than your original investment- your deposit.
So, it’s important for BTL property owners – or prospective property owners – to keep an eye on the dynamics of this market.
The truth is that BTL property investing is far less attractive than it was a few years back.
And recent regulatory changes to the market are causing a lot of buy to let owners to sell up right now.
The Telegraph, 22 July 2017, report the National Landlords Association as saying that :
20% of landlords now plan to sell one or more of their properties in the next 12 months.
And given that there are more than 1.7 million Private (BTL) landlords in the UK – owning 5 million residential homes (that’s 20% of the total stock) . . .
. . . that’s a problem for house prices.
So, what’s changed in the BTL market?
Well, when the mood changes (about any asset class – property in this case) to an expectation of falling prices rather than nice juicy gains – buyer demand falls away.
But the problems in the BTL market are much bigger than a simple change of mood.
Here are 5 reasons why the market has turned.
Stricter rules on lending
Demand for BTL properties has been dented (since January 2017) by stricter rules on mortgage lenders.
The rules are being imposed by the Prudential Regulation Authority (PRA) which is the part of the Bank of England that supervises the operations of banks and building societies.
Amongst other things, lenders now have to check that borrowers can adequately meet their mortgage interest payments (after other costs to manage the property (like management fees, council tax, insurance, repairs, and utilities etc) even if interest rates were to be 5.5% for the first 5 years.
And that makes perfect sense of course.
The trouble is that these BTL mortgage lenders have NOT been carefully checking affordability before.
So, we have a problem and there could be a lot of BTL landlords out there who are barely making a profit – or who might be taking income losses on their properties. And it’s these owners who will, understandably, sell out at the first sign of trouble.
Penal rates of stamp duty
This massive hit to buyer interest started in April 2016. And since that time, landlords have had to pay 3% extra on Stamp Duty to purchase a property.
So, this adds £9,000 to the stamp duty tax bill on the purchase of a £300,000 property. And that takes the total tax up to £14,000 (Owner occupiers pay £5,000 stamp duty on a similar priced property)
Loss of higher rate tax relief on mortgage interest.
Obviously, landlords without mortgages on the BTL properties are not be affected by this change.
But all other BTL investors will, from April 2017, start to lose higher rate income tax relief on mortgage interest payments.
The change is being phased in over 3 years and by April 2020, BTL investors will only receive a 20% tax credit on mortgage interest.
In many cases, this will significantly reduce the net income the BTL investor receives from property ownership.
In some cases, it will turn a profit-making property portfolio into a serious loss maker.
And some ‘big time’ BTL investors with large mortgaged property portfolios will be badly hit.
Now, some landlords are ‘restructuring’ their property business into a company in an attempt to sidestep the new rules. And if you’re in this situation I would suggest you take good quality tax advice. Mistakes can be very expensive in tax planning.
Penal rates of Capital gains tax (CGT)
CGT on most assets has recently been reduced to 10% (or 20% for higher rate income tax payers)
But BTL investors are still hit with CGT rates of 18% (or 28% for higher rate income tax payers) on chargeable gains when they sell their properties.
The wear and tear allowance.
Finally, from April 2016, BTL landlords have no longer been able to deduct 10% of net rent from their profits to cover ‘wear and tear’ on their properties.
They are now able to claim tax relief for the costs of replacing furniture and furnishings but in many cases this will mean another loss of tax advantage of the BTL property.
So, it’s a tough market out there for the BTL property owner.
And if this change of mood – this desire to ‘get out’ of the market – as reported above – turns into a rush for the exits . . . then house prices will fall – and they could fall very hard.
Indeed, a professor at the London School of Economics has recently predicted that the next housing price crash is upon us and that prices could fall by 40% or more.
And I tend to agree with his analysis – as you can see here.
Take care out there
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