Over the last few years, the government has introduced a raft of measures seemingly intended to end (or at the very least) curtail property investment in an attempt to fix the housing crisis. The logic seems to be that these ‘unwanted’ investors would be driven from the market and be replaced by professional landlords and first time buyers, whilst increasing housing supply. Will this huge gamble pay off? Or will it simply change the type of investors who enter the market and how they behave?
According to a recent YouGov report almost 5 million households (21% of the total) currently reside in private rented accommodation. Whilst there is a growing demand from institutional investors to participate in this market, the vast majority of this accommodation has been provided by private landlords. Of these private landlords, the overwhelming majority are ‘mum and dad’ investors who have purchased one or more buy-to-let (BtL) properties to let in the private rental market with the intention of relying on the income generated throughout their retirement.
How the government has tried to fix the housing crisis
As have many administrations, the UK government has been battling the competing interests of investors and its local communities. To try and ‘level the playing field’ the government has imposed a number of tax measures designed to raise the costs in the private-rented housing sector. These include re-balancing CGT exit costs for international investors and increasing stamp duty for purchases. These measures alone are not unusual and similar measures have been introduced by governments in Australia, China, Canada, Hong Kong and Singapore.
However, unlike many of its global contemporaries, the UK government has gone one step further; it has introduced measures which impact the net operating income for investors and the way in which they can operate a buy to let property. These changes are well documented and include:
|Section 24 of the Finance Act||Introduced in April 2017 and phased in over a 4 year period, stops landlords being able to claim the cost of mortgage interest and other financing cost against income. Ultimately, meaning that net incomes generated by investors will be significantly reduced and could lead to the absurd scenario where the tax paid by a buy-to-let landlord is greater than the income received.|
|Ban on Tenant Fees||The Tenant Fees Act was introduced in February 2019. Key measures in the Act prevent landlords and agents passing on costs on to tenants associated with entering new Tenancies and place restrictions on levels of Tenancy Deposits.|
|Section 21 Notices||Section 21 Notice is the first step a landlord would take to regain possession of a property. It is a written notice to terminate an Assured Shorthold Tenancy on a ‘no fault’ basis (without providing a reason for wishing to take possession). On 21st of July the Government launched their consultation on the abolition of Section 21 Notices. If they come into effect they will make it far more difficult for landlords to regain possession of their property once let.|
|Rental Controls (Proposed)||Whilst there is little evidence around the world to suggest they meet their intended aims, a key plank of Mayor Sadiq Khan’s bid for re-election is the introduction of wide-ranging rent controls.|
By all accounts the above measures have worked and the number of new buy to let investors entering the UK market in particular has slowed substantially, with net redemption of buy-to-let mortgages between Q1 2017 and Q2 2018, declining by 40%. During which time there were just 10,000 Build to Rent Units completed.
The flip side is that with the reduction in demand, supply has also suffered; for housebuilders and developers with fewer potential customers, confidence has decreased – particularly within the Inner London market, where new construction starts have reduced by 64% over the period between 2015 and 2018.
But these changes have taken place alongside perhaps one of the most significant economic events in recent UK history – BREXIT. Ultimately, I suspect international investors will find the heady mix of a weak currency and a dramatically under-supplied housing market a temptation too great and will return to the market. But will it be the same investors? I suspect not.
Investors are a relatively predictable bunch and typically buy for one of two reasons (or indeed a combination of both). Firstly income, like the majority of buy to let landlords in the UK (domestic and international) the intention was to purchase an investment which could generate long-term income as a form of retirement income. However, there are other investors who invest generally in more speculative real estate markets around the world and look for short-term growth opportunities.
The issue now for the government is that the combination of these new measures make it far less attractive for investors to actually let the property in the private rental market. Faced with the significantly reduced returns caused by taxation, issues with regaining control of their asset and the costs involved as well as the threat of rent control, investors who already own may simply decide to leave the property vacant. Prospective investors may not invest at all, or may invest for the long term capital gain and, again, in the short term leave the property vacant. All such actions put pressure on the housing crisis and may well push a crisis to a catastrophe – all of which makes the government’s actions seem somewhat counterproductive.