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John Heron: Recent attacks on BTL are missing the point

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Whilst it is important that the buy-to-let market, like any market, is subject to review by external bodies, the recent Intergenerational Foundation paper around landlords and the taxation system has some noticeable flaws.

One such flaw being that it compares the position of home-owners with that of landlords and then attempts to analyse how differently these groups are treated by the tax system and regulation.

It misses the critical point that landlords, in owning and letting property, are running a business with all the costs and risks associated with this. In running their businesses landlords do not benefit from the tax regime to any greater extent than individuals running other businesses, indeed to a degree they benefit less in that landlords are not able to offset capital losses in the manner that other businesses can.

More broadly, I think it also misses the point that demand for rented property has been growing more or less consistently now for 25 years.

The growth in demand for rented property is being driven by complex social economic and demographic factors. It is obvious that this is not just about affordability, but about a growing need for flexible accommodation from young people, migrant workers, those who cannot afford to buy and those in higher education.

It also misses the important social role that the PRS plays in the face of a shrinking social rented sector (SRS). Over 20 per cent of private tenants are in receipt of benefits and the PRS provides an important safety valve for a SRS that is struggling to cope.

The fact is that the PRS does not have a binary relationship with the owner-occupied residential market – not everyone who rents is a frustrated would-be home owner.

Yes buy-to-let has been appealing to individuals because returns on property are attractive relative to returns on cash and because it has the benefit of being a tangible business that the individual can understand and influence as a result of their own effort – but it is not a business where returns are stratospheric.

The current average gross yield nationally is around 6 per cent and whilst the outlook for house price inflation might look a little better now, it has been very poor for the last five years or so anywhere outside central London.

I guess the final question we need to ask is where would we be if private landlords had not been motivated to increase the supply of rented property?

We would still have seen demand increasing because of the shortage of property in the SRS. Demand would still have increased because of the expansion of higher education and because of migration to the UK. We still would not have built enough houses (and possibly fewer) so house price inflation would still have put home ownership beyond the reach of many.

Without the work of the UKs private landlords rental property would be both much more expensive than it is now, and hard to come by for those who need to rent.

It seems unlikely that there would be any material compensation in lower house prices or a larger SRS. The private landlord is often painted as the villain of the piece, but in fact they provide an invaluable housing option for many people and will continue to do so I have no doubt.

John Heron is director of Paragon Mortgages

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. If buy-to-let landlords are businesses, they shouldn’t be borrowing from building societies. There is nothing complex about the market, it’s just overpriced. There is nothing flexible about tenants being locked into 12 month rentals. All the research points to the fact that most tenants want to buy. Without buy-to-let, the property price correction might have been more severe, eliminating the affordability problems that cause first time buyer exclusion. Cause and effect – like ‘the tragedy of the commons’.

  2. A good opinion piece as far as it goes but I’m not sure what the conclusion is. The PRS is not going away and the mooted CGT regime will not affect UK domiciled landlords.

    If you want to talk about the inherent problems in the south East housing market then they are myriad and would require a level of political capital that no politician possesses or possibly has ever possessed.

  3. But there is another point.

    How good an investment is buy to let anyway purchased through a mortgage?

    The returns from this investment always seem predicated on continually rising prices. Which is not a given. When geared the actual return is pretty meagre. Many forget that it isn’t the purchase price of the property, but the total cost – which includes Stamp Duty, Estate Agents, Surveyors and Solicitors bills etc. The gross return before tax and maintenance is often less than 5%. The of course CGT is payable on disposal, and unlike equity investment this cannot be manipulated – you can’t just sell off the living room.

    If you have a void it is perhaps the only investment that can see you in negative territory. With other investments the worst that can happen is Zero – with BTL you can end up with it actually costing you money.

    Then of course for many foolish people it is their only asset. (Eggs in baskets??)

    BTL is fine if for example you already have a spread of other investments and you want some diversity, can afford to buy outright and the outlay doesn’t represent more than (say) 20% of your overall portfolio. At least you will be getting (at present) a better return than cash – but at a lot more hassle.

    I’m not saying that it is never a good investment proposition, only that I see far too many that are a long way from suitable or ideal. Too many have a rose coloured impression of this less than ideal investment for many.

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