Think the Tories were tough on landlords? Just wait for Labour’s “right-to-buy”

The Labour Party is mulling giving private tenants the right to buy the homes they are renting. Yet another good reason for investors to steer well clear of buy-to-let property.

Shadow Chancellor John McDonnell © DANIEL LEAL-OLIVAS/AFP/Getty Images
John McDonnell property is a prime political target

Buy-to-let landlords have had a pretty tough few years. Back when George Osborne was chancellor, he embarked on the process of removing tax relief on mortgage interest from buy-to-let loans. The removal of that relief which continues has really started to bite now.

More than anything else certainly more than Brexit it's the removal of this tax relief that has taken the heat out of the UK housing market and contributed to the slowdown in price growth over recent years.

Other changes, such as higher rates of stamp duty, increasing scrutiny of loan-to-value ratios, added protection for tenants, and a less hospitable environment for wealthy foreign investors, have all contributed to a decline in the appeal of buy-to-let and a rise in the number of landlords leaving the market.

Landlords you ain't seen nothing yet

However, this is nothing compared to what could happen under a Labour government, it seems.

Shadow chancellor John McDonnell suggested in a conversation with the Financial Times earlier this week that Labour could introduce a "right-to-buy" scheme which would allow private tenants to buy the home they are currently renting.

There aren't many details and it's not an official policy yet. But the idea is modelled loosely on the scheme introduced by Margaret Thatcher that gave council tenants the right to buy their council house at a discount.

How would it work? McDonnell doesn't elaborate much in the interview. "You'd want to establish what is a reasonable price, you can establish that and then that becomes the right to buy I don't think it's complicated."

Of course, a "reasonable price" may be quite different to the "market price". It's worth remembering that the official "right-to-buy" discount is up to 35%. So it certainly implies that tenants would be able to purchase at below-market value.

So not only could landlords be forced to sell up, they'd be forced to sell up at a state-specified price. That's a very different world to the one that any of us has been used to in the last few decades.

Hansen Lu of Capital Economics also points out that while some tenants might be pleased about the idea, overall "the outcome for tenants would be regressive richer tenants would gain a windfall when purchasing a rented home, but poorer tenants would rent at higher prices and see no benefit."

And of course, if this was introduced then the idea of a) becoming a landlord or b) remaining a landlord, would be incredibly unattractive. So you're looking at potentially a big sell-off of properties, driving wider house prices down, plus potentially a big rise in rents on the remaining properties, to offset the risk of being forced to sell further down the line.

In short, while the policy seems unlikely to get the go ahead, if it did, "it could have a serious detrimental effect on landlords, tenants, and the general health of the rental market," notes Lu.

You very much can go wrong with bricks and mortar

This may well just be a kite-flying exercise, and it's easy to brush off. But that would be a mistake.

This is yet another very good reason for investors in the UK to shake off the idea that "you can't go wrong with bricks and mortar". Property is not only illiquid (ie, hard to sell in a hurry), but it is also a prime political target.

When one of the main political parties of the day is apparently not even remotely nervous about discussing what amounts to expropriation of private property, right ahead of a probable general election campaign, landlords have to accept that they are being fitted up as public enemy number one.

It's ironic, given that pretty much all of the buy-to-let boom happened under Tony Blair's Labour Party, who were more than happy to see house prices rising, generating the "feel-good factor" that helped to keep them in power for so long.

But times have changed. If you are considering a retirement strategy that relies heavily on rented property, be sure that you are fully aware of the risks that entails. And if you've not already embarked on such a strategy, we'd suggest that you don't invest in something less politically contentious.

We'll have a lot more on what a Labour government could mean for your money in coming issues of MoneyWeek magazine. Get your first 12 issues for £12 here.


What are the best ways of raising more money in tax?

What are the best ways of raising more money in tax?

Given that whoever wins next week's election will be going on a massive spending spree, we're going to need to raise at least some of that money throu…
5 Dec 2019
What are the biggest mistakes investors make when it comes to tax?
Investment strategy

What are the biggest mistakes investors make when it comes to tax?

The tax implications of an investment are something we rarely consider until after the event. That could prove to be an expensive mistake, says Domini…
27 Nov 2019
Being unpopular can make life easier for companies – just ask BP and HSBC
Investment strategy

Being unpopular can make life easier for companies – just ask BP and HSBC

When you're as hated as banking and the oil sector, it doesn't take much to pull off a nice surprise. John Stepek explains what that means for investo…
27 Oct 2020
10 ways to improve your home and interiors
Advertisement Feature

10 ways to improve your home and interiors

From shepherd huts, to pool tables, smart technology to high-tech security, here are some great ideas for home improvements
26 Oct 2020

Most Popular

The Bank of England should create a "Bitpound" digital currency and take the world by storm

The Bank of England should create a "Bitpound" digital currency and take the world by storm

The Bank of England could win the race to create a respectable digital currency if it moves quickly, says Matthew Lynn.
18 Oct 2020
Don’t miss this bus: take a bet on National Express

Don’t miss this bus: take a bet on National Express

Bus operator National Express is cheap, robust and ideally placed to ride the recovery. Matthew Partridge explains how traders can play it.
19 Oct 2020
Three stocks that can cope with Covid-19
Share tips

Three stocks that can cope with Covid-19

Professional investor Zehrid Osmani of the Martin Currie Global Portfolio Trust, picks three stocks that he thinks should be able to weather the coron…
12 Oct 2020