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Let it be

At its annual conference last week, the Chartered Institute of Housing claimed that tax relief on buy-to-let mortgages is contributing to the problems faced by first-time buyers and called on the Government to close what it called the loophole that allows BTL landlords to offset the costs of running a rental property, such as service charges, repairs and letting agent fees, as well as mortgage interest. This is also a common theme in letters to the press from frustrated would-be first-time buyers.

CIH president Paul Diggory said: “The Government has acknowledged that there is an acute lack of affordable housing across the country so it does not make sense to still offer tax relief to those who buy simply to rent. Buy-to-let owners have a financial advantage over those trying to buy their first home, as well as pushing house prices higher.”

Comments such as these demonstrate a lack of understanding of life in the real world, as well as ignoring the needs of people who choose to, or have to, rent. The principal reason for the shortage of so-called affordable housing follows from the most basic law of economics – more demand than supply.

Ever since the Barker review three years ago, the Government has been good at talking about the need to build more residential units but with new household formation at about 230,000 a year, compared with new housing starts last year of only 165,000, you do not need an economics degree to work out why there is pressure on prices.

BTL investors get tax relief on their mortgage interest because they are carrying on a trade and a basic tax rule is that expenses incurred wholly, exclusively and necessarily in the course of business are tax-deductible. BTL does result in property prices being higher than would otherwise be the case but I suspect not by very much. Whether someone rents or buys, the amount of property required to meet demand for accommodation is the same. What is different is who owns it but because additional finance is available to fund BTL mortgages, this will cause prices to be higher than they would otherwise be.

The Government appears to want to only half solve it. Gordon Brown said last month that his medium-term goal was to get the number of new homes built increased to 200,000 a year. There is no indication that the rate of new household formation is likely to fall and so the shortfall of new supply over demand will continue for the foreseeable future, even if the gap is reduced.

As a result of the BTL revolution, the quality and choice of property available to those who want to rent has increased enormously over the last 10 years.

Ray Boulger is senior technical manager at John Charcol.

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