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Why 2015 is a bad time to get into buy-to-let
With a general election looming in Britain, property is becoming a political issue. That's bad news for buy-to-let investors, says John Stepek.
Soaring demand for rental properties has buoyed their paper profits, according to research from high-end estate agent Savills, reported in the FT.
Why is rental demand soaring? Because people who don't already own homes can't afford to buy them. So they rent. That pushes rents up. In turn, that makes it more attractive for those who can invest in rental properties to do so.
Whatever your take on the rights and wrongs of all this, one thing is clear. It's becoming a political issue.
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Two of the biggest factors that make the UK property market so toxic
Two things stand out to me. It's one of the few markets in the UK where ordinary men and women are able to buy an investment asset using money borrowed at variable rates over a relatively long period.
It's also a politically critical market. One of the unspoken economic goals of every modern government has been to keep house prices stable or rising, in order to keep the voters feeling good.
Borrowed money (leverage) amplifies both returns and losses. So you get lots of got-rich-quick' stories when prices are going up.
And because the UK housing market is so politically important, there's something of a government put' under the market. If a housing crash looms, you can expect action from the central bank.
It's a bit like the way the Federal Reserve in the US clearly has an unspoken remit to keep an eye on the stockmarket. In the US, people feel rich if stocks are going up. This wealth effect' helps to keep the whole consumer show on the road. In the UK, it's the property market that supplies the wealth effect'.
The net result of these two things is that more and more people are drawn to the idea that you can't go wrong with bricks and mortar'. Particularly when the word most people over a certain age most readily associate with pensions is likely to be scandal'.
As the population of forced renters' grows, you get more and more people who no longer think of themselves as potential property millionaires, but instead see themselves as victims of a skewed market.
What's the tipping point? It's hard to say. But just try to think like a politician for a moment.
Which group forms the bigger electoral constituency: buy-to-let investors? Or potential first-time buyers and their parents who want them out of the family home, but can't subsidise their mortgages because they are optimistically relying on downsizing' to fund their retirements?
I suspect it's the latter. That makes buy-to-let investors a target.
And both left and right-wing politicians would find it easy to push through ideologically consistent changes. Ed Miliband and co can easily target investors it's what they do.
But the Conservatives can easily make a voter-friendly pitch without sounding as though they are turning into market-hostile socialists. For example, the FT quotes Conservative MP Charlie Elphicke as saying that "tax breaks that buy-to-let investors get would be better off used to help first-time buyers to own their own homes."
If you can throw in the promise of a lower housing benefit bill so you cut costs for taxpayers too then you have a very Tory-friendly argument for removing some perks from landlords.
Some politicians might worry about the impact on house prices. But you can argue that you're really only substituting one set of buyers for another. It also avoids trickier questions.
For example, the best way to make life easier for first-time buyers would actually be for house prices to drop perhaps by raising interest rates. But voters wouldn't be so keen on that idea. It's a lot easier to target one specific type of buyer.
My point is not to defend or condemn landlords. My point is that now is probably not the year to start thinking about getting into buy-to-let. This is only going to become an ever-bigger political issue in the run-up to the election and after it.
If you're looking for other investment options, you can check out MoneyWeek's complete guide to your finances in 2015 and get your first EIGHT issues free here.
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