Is Buy to Let Dead?

There’s a reason chancellor George Osborne delivers good news with half a smile. It’s because all too often, he’s only giving away half the picture. Take the cash bonanza he handed almost two years ago to anyone over 55 with a private pension. Giving people free access to their funds, enabling them to take it as a lump sum, marked the biggest shake up in the pensions sector in 50 years.

And while fund-holding companies stood by and watched their share values tumble, pensioners applauded the move, knowing they would soon be able to invest their money in property, gaining an assured net income, capital growth and also a tangible legacy. But, through all this, the chancellor maintained his wry half-smile. Why? Because another change lay beyond the visible horizon that would force anybody considering investing in residential property to think again.

Today, the shine is off buy-to-let, tarnished, as it has been, by a raft of rough new measures which were announced in the last budget and are about to be implemented. For high-rate taxpaying landlords with high mortgage interest to rental yield ratios the outlook is bleak. Taxing turnover, not profit, is the key change that will drive many landlords buoyantly in the black toward sinking in the red. With tax relief effectively being slashed from as much as 45% down to 20% in many cases, the pain for those holding large mortgages will be too much to stand. Buy-to-let investor trade body the National Landlords Association (NLA) suggests that as many as half-a-million properties will find their way back to the market in the next 12 months as a result of the changes.

Coupled with a new 3% additional stamp duty being applied to all second home and buy-to-let purchases, people with spare capital who were about to dabble in property, including the aforementioned pensioners, will either pull out before it’s too late or be left licking their wounds as they try to sell. Osborne couldn’t have made himself clearer: buy-to-let as a profit-making mechanism was already centred in his crosshairs, and now he’s just about ready to pull the trigger.

The budget bombshell has prompted troubled investors to liaise with their accountants and solicitors to examine what the ramifications of the changes might be, and what, if anything, can be done to reduce or offset the damage. Indeed, one high profile court case seeking a reversal is already underway. But these things take time, and the public is more likely to sympathise with prospective first-time buyers trying to get a foothold on the property ladder than landlords with ballooning portfolios. For now the fact remains that, unless individuals are in a position to buy with significant down payments, the majority of buy to let properties won’t realise any profit at all. It doesn’t take an evening with Warren Buffet to learn that an investment with a zero yield based on an underlying asset whose value can go down as well as up, simply isn’t attractive. Throw in the possibility of an interest rate rise in the next year or two, and the vista appears even more arid. In short, what was once an investment no-brainer has become a no-go for any but the savviest professional investors.

Of course, it’s not uncommon for governments to manipulate markets in this way; having the ability to manipulate markets is one of the rewards bestowed upon those who gain power. What the chancellor has done with this power is instigate a series of apparently separate but in fact interconnected acts of vote-winning genius, with a little double-dealing thrown in for good measure. He’s made pensioners happy by giving them access to their own money. Vote winner. He’s made first-time buyers happy by giving them the Help to Buy scheme. Vote winner. And now, in attacking landlord investors, the archenemy of every first-time buyer, he’s revealed his true populist colours. But above all–and here’s where the double-dealing comes in–by forcing old stock back onto the market and throwing an extra stamp duty into the mix, he stands to make a bundle of new money for the government. It’s what you might call the ultimate double-dip.

Some would argue that calming down the market in this way is no bad thing, that to make an omelette you have to crack a few eggs, but this point of view will provide little comfort to landlords who are about to see their income dry up, or to the tenants they might have to evict when forced to sell up, or renovate to re-rent at a higher rate. For buy-to-let landlords, Osborne has become the evil financial wizard who, with a quick spell has transformed what was once a golden-egg-laying goose into a wizened old chicken that’s past its sell-by date.

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