How changes to landlords’ tax rules could force house prices down

People looking in an estate agent's window © Getty Images
Buyers should maybe hold off for a while

We wrote last year that if you were in the market for a two-bedroom flat you’d be wise to wait a year or two before you bought, because the changes to the tax relief around buy-to-let would bring a flood of property on to the market. We will soon find out if we were right.

So this year, 25% of the mortgage interest costs of anyone who has borrowed to buy to let will get tax relief at only the basic rate of 20%. Next year it will be 50% and so on. The effect of this is nasty.

An illustration from RSM. Consider someone with a £600,000 property getting a 4% yield. After running costs, repairs, insurance and other costs, their net yield may only be just under 3% – say around £17,700 per annum. With a mortgage at 60% loan-to-value and 4% interest, they would be paying out £14,400 in interest costs. So they would be making a net profit of £3,300.

This year (assuming they are a 45% taxpayer) their bill is £1,485. Next year it will be just under £3,300 – that’s all the profit they currently make. In the year after, it will be £4,185, and just over £5,000 thereafter. By the time this is done, it will be costing them £1,700 to keep the show on the road – and that assumes an interest-only mortgage and no rise in the rate.

Some numbers will be higher, some will be lower, and for all those who own outright none of this will make any difference. But as RSM says “the truth is that margins are getting tight for landlords”. Rents could go up in some areas to cover the difference, but in most cases landlords will have already been charging what the market can bear – and, of course, should Jeremy Corbyn end up as prime minister, rent controls are a given anyway.

This all matters. Lots of landlords don’t feel they need to make much positive cash flow on their houses on an annual basis: their aim is to own a property outright at some point (so just getting the mortgage paid and being cash neutral will do) or to sell it on for capital gains.

But if their houses actually start to cost them on a monthly basis, the equation changes. Will they dig into non property income or savings to meet the gap, or will they sell? We suspect they will sell, something that will drag prices down across the board.

This is something landlords might want to think about sooner rather than later (best to sell before everyone else does ) and buyers will want to think about later rather than sooner (best to buy at the tail end of the rush to sell).

  • TheLandlordWhisperer

    This is precisely the usual anti-landlord tripe that caused me to cancel my moneyweek subscription a couple of years back. MSW is a bit of a twerp who masquerades as someone with economic knowledge. You know how the govt is always right, and are doing the right thing in attacking landlords (their own supporters, derr)? Well, they say no such price reduction will happen, and since the BoE is so keenly against it, MSW must be wrong! Right?

    Also, note how interesting it is that so many of these articles talk about homeowners buying from the selling landlord without ever once acknowledging that the tenant family already occupying that house has to be evicted for this to happen. How caring. And how intelligent of them not to realise how much this will and is contributing to the quickly-snowballing homelessnes crisis!

    Moneyweek will no doubt follow the Guardian’s path – whining about how landlords house millions of people and how awful that is, then whining even louder when the landlord sells and evicts his tenant to do so! Attacking the landlord for doing what no govt or company has done in the last 20 years is sheer stupidity, unless we have millions of homes ready and waiting for the evictees – which of course we don’t.

    The carnage is only just beginning.

    • JamesTennant

      You seriously believe all that?

      • TheLandlordWhisperer

        Which bit?

        That MSW is a twerp? That Moneyweek publishes some utter tripe? That the govt and boe think they know it all (but are wrong)? That many journos call on landlords to sell then complain when they do? That homelessness is and will increase as a result of the tax hikes on home providers (as in Ireland – twice)?? That we don’thave the houses available for the likely number of evictions (as many towns are already discovering)??

        Yes. I seriously believe all that.

    • BarryinWilts

      Nail on the head TLW

  • Peter Edwards

    How do you get lots of comments, post an article about Houses!

  • BarryinWilts

    There isn’t a cliff edge in mortgage interest relief restriction aka Sec.24 which would cause a mass exodus but it is stepped over 4 years which will mitigate it effects and spread the sale of rental properties over a much longer period averting a dramatic drop in prices.
    The Govt doesn’t want house prices to fall significantly, as that cause more serious problems to the economy.

    • quark

      The question of tax is minor compared to the threat of rent controls. Yes, some landlords will sell up. Many however will hang on in the hope of Capital Gains. The people who will suffer are those “twerps” who borrowed money and rushed to buy just before the stamp duty penalties took effect. With no immediate prospect of Capital Gains, plus the new tax burdens, they may be forced to sell up. The prospect of a hard left Government however, people who despise private property, plus the expectation of rent controls will cause a rush to the exit. The result will be a shortage of property to let and the return of Rachmanism. Seamus Milne, the policy advisor admires the old East German system (“without the Stasi of course”) and we all know what the Shadow Chancellor believes. God help the landlords then. God help Britain.

      Merryn. You run an investment magazine. Most of us I imagine invest in the Stockmarket. Instead of banging on about property, tell us how to protect our portfolios before these neo Marxists take over. It’s as if the Conservative Party was taken over by neo-Nazis. There is danger ahead. Politics and Economics will be inextricably bound together. Wake up and smell the coffee!

      • BarryinWilts

        “The question of tax is minor compared to the threat of rent controls. ”

        If the tax rate is 100%+ then I’d take rent controls.

  • A Frith

    There is one logical error in the Landlord Whisperers argument – he assumes that selling properties rather than letting them alters the real supply of houses, which it cannot do.
    My own experience is A) Some tenants will buy the property they live in if offered the opportunity. An easy solution all round, and having no impact on the housing market.
    Or B) The landlord will wait for the next change of tenant (most property changes tenant every few years) and then sell it. Again,no impact on the homeless numbers.
    Evicting tenants who are not in breach of contract is one of the evils of the current private rented housing market, and make no mistake, it will be banned sooner or later.

    • Bill Wyllie

      It will soon get worse for Landlords. As of April 1st 2018 (not sure of any significance to that date) it will be illegal to sign a new rental agreement for any property that falls into the lowest two Energy Performance Certificate bands, F & G. Government estimates are that represents 10% of rental properties. These are mainly older Victorian solid brick, sash window houses often off the mains gas grid.
      Expect to see many such properties to come onto the market as Landlords find out how much it will cost them to make the necessary improvements.

      Worse still is that by 2020, April 1st once again, it will be illegal to rent out any domestic property that falls into the F& G band.

      In my time as an Energy Assessor I have come across scores of such properties in leafy affluent Surrey and an alarming lack of awareness amongst Landlords.
      Another headache for the BTL Landlord.

    • BarryinWilts

      If Tenants can afford to buy why have they not done so already?

      If the Landlord’s effective tax rate is 100%+ do you really think he’s going to wait a couple of years until the Tenant leaves, especially in a climate when the supply of rental property is going down and rents going up and so is less likely to move?

      If a Tenant is not in breach of contract i.e pays rent on time, respects the property and neighbours then why would a Landlords evict? and risk a void period, incur refurbishment costs, advertising and vetting costs and still risk getting a bad Tenant?

    • disqus_x5UmkDRb7H

      A Frith

      Your analysis is exactly correct. Irrespective of who owns the property, we need enough property for people to live in. So changing the owner by disincentivising the landlord will in no way improve the quantity of housing stock!

      Except landlords have a strong incentive to maintain the quality of housing stock, their income/pension depends on it. You may argue that the public sector can do that, but with very few exceptions the public sector never does anything as well or as efficiently as the private sector – I support the NHS, education, police and roads as the exceptions although I have my doubts about education.

      I have never seen anything which makes me think that the public sector will provide housing when and where it is needed, at a reasonable cost. The recent tragedy in London, the sink estates of the 60s and 70s, all show me that the public sector will provide what it decides is needed, rather than what people themselves decide through free expression as the private sector enables.

      I do however agree with you that tenants who are maintaining a property correctly in line with their lease and paying their rent should have security of tenure for the period of that lease. That seems inherently fair and obvious to me. If a landlord or a bank runs short of money, that is their problem not the tenants.

  • Anne marie Simpson

    Im a pensioner and I own my 2 bedroom flat outright. Im thinking of letting it out next year for a short period as Im wary of letting. Is this not advisable given the tax changes, don’t quite understand what you mean when you say even if you own outright it may not be worth it? please clarify.
    many thanks

    • AJ

      I think the assumption is that you are a higher rate tax payer for this not to be worth it.

  • FinanciallyFreeInvestor

    Some landlords will sell-up, when the numbers don’t stack up anymore, and that will shrink the supply of rental property. And in a classic free-market response, the lack of supply will push up rental prices and so for those landlords who can afford to hold on, they will benefit and tenants will suffer. Another well thought out Government policy 😉

    • AJ

      I was a landlord, but did the sums and as a higher rate tax payer decided to sell my property. However, I sold it to the tenants who were keen to buy. Although the property is not available for rent now, the people who were renting it are now the owners, so in such a case the removal of property in this way from the rental sector is going to have no bearing on the rental prices. The demand and competition remain the same.

      • BarryinWilts

        True but I would say that is the exception rather than the rule. If Tenants are in a position to buy then why would they wait on the off chance their Landlords decides to sell?

  • kevin thomson

    I read somewhere that recent anti-landlord policies (C in England; SNP in Scotland) were borrowed from the Green Party.

    The Greens Party lose no opportunity to say they are ‘progressive’…

    ‘Progressive’ held up of course as a good thing. One thing the progressive
    Greens proposed and the Conservatives adopted was ‘the tenant
    tax’. Osborne removed mortgage interest relief meaning most landlords will be
    taxed on something closer to their turnover than their profit margin.

    ‘Excellent!’ many people will say. Well, maybe not Moneyweek people.

    Reality of this progressiveness, if that’s a word, is that rents will rise to
    compensate the hit to landlord profits.

    Ireland tried the same thing about 20 years ago. Rents spiralled up. Ever tried
    renting in Dublin? Ireland are now trying to gradually withdraw this policy and
    get back to where they were 20 years ago.

    What is good or progressive about that? A cheap vote winner to bash landlords
    when the reality is tenants will pay. Classic unintended consequences.

    Yet, this was a policy Moneyweek supported, and I believe still supports.

    Further pressure on rents would come with rent controls. Very likely to be a reality shortly in parts of Scotland. Rent controls create an incentive to rent to people who are unlikely to stay a long time. So, students, foreigners, transient people are preferred over families looking to put down roots. A very sorry state of affairs…but more or less every political party has had a hand in creating this.

    The tenant tax and rent controls will probably have to be left to run their course, for the damage to be very evident before reality hits and there is a political will to backtrack.

    • BarryinWilts

      Accurate summary of the situation and how it will play out.

  • damian carson

    Evictions by private landlords are on the up as predicted . No council housing available to house the evicted . The consequences of ill thought policy . No sane landlord is going to keep a property that will now lose money . The increase in sales and subsequent house price falls will all be blamed on the private landlord . I sold half my portfolio last year – swallowed on the capital gains – I just couldn’t leave myself exposed to the potential carnage that could / will follow .
    However , this pales into insignificance of the damage to the UK as a whole if the country elects a Corbyn led government . It won,t be socialism of the 70,s but much worse . Planned economy , nationalisations , punitive taxation , land grabs , rent controls ,etc .
    By then the question won’t be should I sell my houses but should I leave the country . Numbers of people left the UK in the 70’s – why won’t this be repeated again ? Note the number of Frenchmen living in London after France’s latest dabble with socialism .
    Would be very interested to hear what money week think people should do if a labour government starts to look likely – surely every investment will tank !!! Maybe not Bitcoin ?

  • Momoko Miyamoto

    None of this will make the slightest bit of difference to Chinese cash buyers who are snapping up most new build flats in London and keeping them empty. Indeed some developments don’t even bother marketing to UK buyers. Recent pound devaluation has made the London market even more attractive to foreign buyers. Landlord regulation makes no difference because they have no intention of being landlords. They are buying to either speculate and/or lock up their capital in a foreign safe haven before Beijing imposes capital controls, seizes private assets, communist party collapses or all of the above.

    MSW and MW at it again talking down the London housing market – after 10+ years – GIVE IT A REST. Basic economics, supply and demand, the new supply is limited and is being snapped up by cash buyers who don’t give a toss about yield. China has more billionaires than the USA and a correspondingly large and growing middle class. The US is hostile and dangerous so the UK is the obvious choice to buy overseas property. Don’t expect this tidal wave of cash to stop coming anytime soon.

    I’ll never renew my MW subs until they admit they were 100% wrong on the London property market consistently for well over a decade. I sold a house in 2007 thanks to being influenced by MW and I’m at least £500k worse off. If MW was some sort of financial institution it would have been litigated out of existence for offering persistently poor advice.

  • Peter

    Enjoying the early stages of grief on display here by the BTLers. Self righteous indignation manifesting itself in calling MSW names. Brilliant.

  • Andrew Crow

    If LTV is 60% that implies capital cost to the landlord of £240,000 and on the figure of £3,300 that would be 1.375% p.a return on capital.

    Am I doing the sums wrong. Or the wrong sum? or is BTL a really poor return on capital, aswell as a lot of hassle and effort.

    Longterm profit is predicated on continued house price inflation then? (subject of course to CGT when realised)

    I think I’ll stick with my piggy bank for now.

  • ecoken

    There is a chronic shortage of housing in the UK caused by the monopoly that the national builders have on land supply with the option agreements that they buy on any developable land around our major towns and cities. The government needs to take over some of this land and build social housing on it to a “Zero Carbon” standard which is perfectly possible.

    They need to be judicious in the numbers that they build so that they don’t cause a fall in house prices but they need to announce that they intend to keep house prices steady for the foreseeable future until prices are affordable again. Affordable means about 3 times average earnings. That should stop Chinese and other foreign buyers purchasing houses for the capital gain or to launder money.

    Too much money is going into house purchases/rental and it is having a deleterious effect on the general economy: people haven’t much spare cash to buy the stuff that they are producing. Until this is cured and bosses realise that paying more than a living wage instead of aggrandising their own remuneration is necessary for the world’s economy to work the world economy will be in the doldrums.

    Henry Ford realised this in the 1930s and the world economy boomed after WW2 as a result. Since then the bosses and bankers have got greedy again.

  • Simon Peacock

    The landlord whisperer is incorrect. MSW is not attacking landlords at all, she is simply pointing out that market conditions are becoming increasingly difficult for private residential landlords, especially those who rely on buy-to-let financing. It is undoubtedly the case that yields are being driven down by high acquisition costs, taxation, licensing, stamp duty and increased rental arrears. In addition, the spectre of Brexit, increased base rates and a Corbyn government are likely to impact future values. Consequently, it may be prudent before investing, to consider where the market will be a couple of years hence. Failure to grasp these self-evident truths suggests lack of understanding and imagination. We live in strange times; 10 year German government bonds were sold in 2016 with negative yields before adjusting for inflation. A reversion to mean is probable when governments abandon ‘extend and pretend’ policies. At that point mortgagors may find themselves holding 30 year nonrecourse obligations on assets with significantly lower realisable values than the amount owed i.e. lifelong debt peonage. A cautionary note is entirely appropriate since the shadow of the 2008 correction is less than a decade past. Before questioning MSW’s qualifications you should read the article fully and examine your own credentials rather than traducing her’s.