The big question hanging over the buy-to-let market is whether the chancellor intends to squeeze it so hard that it starts to implode under the pressure, or whether the tax and regulatory changes being introduced will simply bring about the next phase in the market’s development?
There can be little doubt that the chancellor sees the buy-to-let sector as a threat to the wider housing market, particularly in terms of making life more difficult for first-time buyers wanting to get a foot on the first rung of the housing ladder. When the chancellor announced the increase in stamp duty for landlords he said: “People buying a home to let should not be squeezing out families who can’t afford a home to buy.”
The tax changes being phased in from 2017 are effectively imposing a tax on turnover rather than on profit, which is not the way tax is usually levied in the UK. Landlords have good reason to be concerned, because for some higher rate taxpayers it could turn profitable businesses into loss makers.
To add to the challenges facing landlords, the Prudential Regulation Authority (PRA) is also planning to introduce new underwriting standards for buy-to-let mortgages. The changes being proposed in CP11/16 are designed to ensure that landlords will be able to afford the mortgages for which they are applying, taking into consideration the additional financial burden of the tax changes being implemented. At the end of April, for example, TMW made the announcement that it’s increasing its rental coverage calculation to 145% whilst at the same time reducing its maximum LTV to 75%.
It will be interesting to see if this move from one of the market’s biggest mainstream buy-to-let lenders triggers a spate of similar changes from other lenders and whether it creates an opportunity for new and specialist lenders to fill the gap being created?
There is a danger with a string of such announcements being made one after the other that we jump to the conclusion that the end is nigh, but I feel that would be wrong. I don’t believe these developments will have the profound impact that some people are suggesting and my guess is that the buy-to-let market will remain in good health for some time to come.
The reality is that a number of lenders have already been making changes to their affordability models. Whether 145% rental cover and 75% LTV will become the new norm for mainstream buy-to-let lenders only time will tell, but I suspect a number of specialist lenders will tweak their business strategies to exploit potential new opportunities.
For example, some lenders will introduce different rental stress tests for limited companies and individuals, as the tax changes have less impact on limited companies than they do on higher rate taxpayers. In fact, such changes are already happening.
It also needs to be borne in mind that the PRAs proposed new underwriting standards will not apply to remortgages where there is no additional borrowing being undertaken. When you consider that approximately 60% of all buy-to-let transactions are remortgages, then there should be no reason for some landlords to become mortgage prisoners as a result of the proposed changes. This does need to be caveated as not all lenders will have the technological capability to address this within their processing systems.
I suspect we’ll also see those lenders who do not impose a limit on the number of properties that can be mortgaged with other lenders, being quicker to respond to the opportunities. Smaller and newer lenders may also be more fleet of foot in making the systems upgrades that are necessary to accommodate product and criteria changes.
The buy-to-let market faces challenges in getting the balance right as it responds to the changes being enforced on the market. The lending industry has an impressive track record for being able to take most things, regulatory or otherwise, in its stride. There is, therefore, an argument that says the market will go through a period of adjustment but, in the longer-term, will continue its upward trajectory.
However, the industry also needs to show that the tax and regulatory changes have made a difference and not give the chancellor cause to create further measures to dampen-down buy-to-let lending. Perhaps a period during which the market flatlines for a couple of years could be what’s needed?
The irony, of course, is that the chancellor needs property investors to supply rental property into a market which neither the government not local authorities are doing much to satisfy themselves. It the supply of rental accommodation starts to dry-up, then many youngsters could find themselves stuck between a rock and a hard place, unable to raise a sufficiently large deposit to buy and unable to afford rising rents pushed up by a diminishing supply of rental property.
My view is that the buy-to-let market is going through an interesting phase in its evolution but is not in danger of extinction. The chancellor may squeeze investors hard, but he can’t afford to kill them off altogether because that would give him a far more difficult problem to resolve.
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