Ripples throughout the property market in 2018

Until April 2017, landlords would be able to get tax relief on the mortgage interest they pay on their rental properties. Thus they would only be taxed on the true profit they receive.

One year after it’s implementation, the 2017-18 tax period has arrived and landlords are going to see their first tax bills with a 25% reduction in tax relief for mortgage interest

Some landlords are still recovering after the 3% Stamp Duty surcharge when buying additional residential property. Two years later, the costs keep mounting and at the start of 2018, 1 in 5 landlords was considering giving up on property investment.

Letting agents are finding theirself between a rock and a hard place. The government sided with the people and is working its way towards implementing a full ban on letting fees to tenants. They are looking for ways to pass these costs down the line but will have a hard time achieving that.

And while landlords and agents faced these cuts and changes with a grudge on their face, home buyers and renters are arguably taking a breath of fresh air.

What does it mean for the property industry ?

The property industry voiced many concerns warning of a mass exodus by landlords who are no longer seeing any returns from their properties.

Earlier in the year, chief executive of the NLA, Richard Lambert, said:

“It is our view that these policies are undermining the viability of many landlords’ businesses and removing the incentives to invest in residential property for business purposes,”.

Despite the grim predictions, that has not happened yet. In fact, there are more landlords than there have ever been. There are 2.5 million landlords in the UK – a 5% percent increase from the last tax year and almost a third since 2011.

Landlords are just yet to appreciate the increased costs resulting from the changes to tax, so we’re yet to see the true effect on the market.

On the other hand, letting agents are feeling the full heat of the government’s move to ban fees to tenants.

Agents have been profiting for years and have gotten comfortable at doing so, but they are now frantically looking for ways to offset the potential loss of income. In fact, agents rely so much on tenants fees that a number of them are expected to close shop or shrink their franchise portfolio as they could not support run the books without this money.

Some agents have already adapted. However, it’s inevitable that part of them will pass their losses on landlords, increasing the pressure to bail out or raise rents.

What does it mean for home buyers?

These measures were met with loud cheers from many potential buyers keen on ‘getting their chance’.

Homeowners don’t get tax relief on their rent or mortgages so why should the landlord? Slashing the tax relief on mortgage interest landlords were able to claim simply levels the playing field.

A further 3% added to Stamp Duty for second home buyers means millions of extra pounds in tax whilst simultaneously providing a disincentive to landlords to buy. Less people tempted to buy to let means more opportunity to owner occupier buyers.

Interest rates, even with a small increase recently, are incredibly low and buying a home is becoming more affordable for many. The Government is spending additional money into schemes that incentivise first time buyers. And indeed, many first time buyers are now taking steps to purchase their first home.

Housing minister Dominic Raab said: “Through schemes like Help to Buy, we’re helping more people onto the housing ladder and last year saw the highest number of first-time buyers in the UK since 2006.”

But there is, as ever, another side to the coin.

The tax changes were meant to help people buy but without a huge increase in available stock, the effect on prices has been at best, a drop in the ocean. If you can’t afford to buy a £300,000 house, chances are you still can’t afford it if it drops to £290,000.

By data from the Institute for Financial Studies, for nearly 90% of 25- to 34-year-olds, average house prices are more than four times their annual income after tax. The average first-time buyer is now 30 years old and has a salary of £41,000 a year.

Another research by Savills concurs there is a highly disproportionate spread of property equity over different age groups. The study concluded that 75% of all property is owned by people of 50 years or more while just 6% was owned by people of 35 years or less.

In order to see real improvement, especially for young people, we need to increase the supply dramatically and put more pressure on developers to build affordable properties which normal people can actually buy.

Alternatively, the government can also invest into areas where housing already exists but people don’t choose to live (it’s possible to buy a home in Lancashire for 20% of the rebuild cost). If these areas become more attractable and offer work opportunities and reliable wages, many people will chose to leave London.

What does it mean for tenants ?

Tenants are fed up by the numerous problems and the ever increasing cost of renting. Seeing their landlords effectively get government subsidies (by not paying tax) for charging them rent is not making their day any better. Even though a slash to these subsidies may actually drive rents up, most renters are welcoming the tax changes with a smile.

Accompanied with the ban on letting fees, it will be challenging for tenants to push back on the industry’s urge to raise the rents. There will undoubtedly many landlords, who will raise the rent, pressured by both letting agents and legislative changes. Often, for the very tenants who never wanted (or were never able) to buy.

Jonathan Rolande of House Buy Fast predicts that 2018-19 is going to be hard on tenants, as the market will rock itself back and forth and settles into a place following these changes.

“Tenants should be aware that the next year is likely to see pressure on rents as landlords desperately try to put the profit back in to their investment.”

Jonathan also adds “If it suits your circumstances, try to renew your agreement as soon as possible, ideally for as long as you can. If you would rather move, waiting until early 2019 may save you hundreds in agent’s fees so delaying could make sense.”

It’s not all bad. The ban on fees will free up a huge amount of capital when moving and will increase tenants ability to fight for their rights by giving them the freedom to move.

A lot of tenants put up with horrible conditions just because they can’t afford to move. The cost of moving can set a single person thousands of pounds back. Many low income households have no way of forking out such money in advance.

Keeping hundreds of pounds in the budget gives tenants a degree of freedom, which allows them to effectively negotiate for a better deal.

Jon says “Finally, just because your landlord asks for a rent increase, it doesn’t mean that you have to agree. There is no harm in trying to negotiate.”

“Explain how bills have recently gone up (utilities and council tax have both jumped this year) and of course, what a great tenant you are! A sensible landlord will take everything in to account, not just the rent figure. A safe £600 per month is better than a troublesome £650 for most owners.”

Lastly if you’re feel like you’re voice is not being heard Jonathan suggests contacting your local MP “if you’re feeling particularly rebellious, write to your local MP to explain your position and push them to allow more new homes to be built and existing ones to be put to good use.”