Lord Flight is Chairman of Flight & Partners Recovery Fund, and is a former Shadow Chief Secretary to the Treasury.
I hope the Government will re-think its sudden attack on Buy to Let this summer and autumn. Otherwise, it risks the very crisis in the Buy to Let housing and lending markets of which the Governor of the Bank of England has recently warned.
Buy to Let has been an entirely sensible market economy development, in most cases as an alternative to saving for old age via pension schemes. Up to World War II, investing in rented property was the main method of providing for an income in old age. Given the poor performance of the stock market over the last 20 years, it is hardly surprising that many people have opted for Buy to Let investment as an alternative, and more successful, retirement provisioning investment. Buy to Let has, moreover, provided some three million homes for those not able yet to afford to buy their homes – especially in London.
Buy to Let does not enjoy any of the major tax advantages of pension saving: i.e. tax credits on the amount invested and accumulation of income and capital gains free of tax within a pension scheme. The only Buy to Let “tax advantage” has been the ability for the interest cost to be offset against an individual’s income to determine their tax bills – the very thing which the Finance Act measure has hit by limiting the tax deductibility of mortgage interest to a 20 per cent tax rate. This will hit more modest Buy to Let investors the most, while many of the more sophisticated have their Buy to Let properties held via a company.
On top of this came the announcement that an additional three per cent Stamp Duty will apply on new Buy to Let investments from next April. The risk is self-evidently, that as some Buy to Let investors are motivated to sell as a result of the reduction in the tax offset of mortgage interest, potential buyers will be put off by the additional three per cdent Stamp Duty on top of what are already confiscatory rates of Stamp Duty applying in London (where properties are generally more valuable). More sellers and less buyers clearly has the ability to create a sharp fall in prices, if not a crash. A significant increase in those selling Buy to Let properties may also put thousands of tenants’ security at risk as buyers will want to sell with vacant possession.
If the Government’s thinking is that Buy to Let investment has squeezed young buyers out of the market, this is misconceived. The fundamental problems creating scarcity value have been our nightmare planning arrangements and the hoarding of land with planning permission by developers. Furthermore, the new high rates of Stamp Duty are a major “disable” when first time buyers cannot borrow to finance large Stamp Duty costs. Politically, the Government may lose more votes over this issue than they realise: there are many thousand Buy to Let investors living in marginal constituencies.
On a wider front, the risks of a significant fall in house prices in London and the South East have risen considerably, partly as a result of the penal rates of Stamp Duty which have already served to reduce, substantially, the volume of transactions. In addition, a recent announcement by the banks indicates that 100,000 or more middle to senior ranking staff are likely to be made redundant over the next year or so. Many will be looking to sell their London properties and move to a cheaper part of the country. Younger buyers cannot afford market prices in London and the South East, and cannot borrow to finance the substantial Stamp Duty costs of acquisition. The flux of foreign buyers is reducing in the wake of substantial extra UK taxation. The coming rise in interest rates will also, inevitably, exert downward pressure on house values.
If there is a crash in property prices in the Greater London area, this will have a major impact on the banks and on the economy as a whole, for which the Government will be blamed. I suggest, apart from anything else, that now is precisely the wrong time to be attacking the Buy to Let market when the balance of supply and demand is shifting. Moreover, at the least, it would have been much fairer for the reduced 20 per cent allowable offset tax on mortgage interest to apply to new, and not existing, Buy to Let investments. Changing the tax rules on existing Buy to Let investments is, in principle, retrospective in its impact.