Advertisement

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

Changes in the tax relief afforded to landlords could wipe out much of the profit from buy-to-let, and drag down house prices across the board.

171004-house-prices-b
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.

Advertisement - Article continues below

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.

Advertisement
Advertisement - Article continues below

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.

Advertisement - Article continues below

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).

Advertisement
Advertisement

Recommended

UK house prices may be heading for a Boris bounce
House prices

UK house prices may be heading for a Boris bounce

The latest survey of estate agents and surveyors from the Royal Institution of Chartered Surveyors is "unambiguously positive" – suggesting house pric…
16 Jan 2020
Are UK house prices really on the rebound?
Property

Are UK house prices really on the rebound?

The latest house price data from the Office for National Statistics paint a picture of a housing market that is showing signs of rallying. That's not …
15 Jan 2020
Have UK house prices turned the corner?
House prices

Have UK house prices turned the corner?

The average price of a house in the UK rose by 0.8% on the year in November, the fastest pace since April.
5 Dec 2019
What are the best ways of raising more money in tax?
Economy

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

Most Popular

House price crash: UK property prices are falling – so where next?
Property

House price crash: UK property prices are falling – so where next?

With UK property prices falling for the first time in eight years, are we about to see a house price crash? John Stepek looks at what’s behind the sli…
2 Jul 2020
How “support” and “resistance” can help you spot trading opportunities
Sponsored

How “support” and “resistance” can help you spot trading opportunities

Technical analysis can help traders manage risk and decide where to enter and exit a trade. One simple form of technical analysis is the concept of “s…
6 Jul 2020
A first-half home run for investment trusts
Sponsored

A first-half home run for investment trusts

The investment trust sector has seen some extraordinary performance in the first half of this year. Max King looks at what's behind it, and asks: is i…
7 Jul 2020