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Will buy-to-let tax changes push rents up even more?



Rising landlord costs will threaten housing supply and hit sitting tenants, argues LSE academic


Will buy-to-let tax changes push rents up even more?

A major tax assault on the buy-to-let sector due to be ramped up next April could make it even harder for already squeezed tenants to get by financially, according to one housing academic.

Kath Scanlon of the London School of Economics told the Daily Telegraph it is "not clear what the government wants these policies to accomplish".

"They seem to reflect the public unpopularity of landlords, who are easy objects of blame for the current situation in the housing market, especially in London… Shrinking the sector does not seem sensible given what we know about unmet demand and need," said Scanlon, who has published a report on the issue along with colleagues Christine Whitehead and Peter Williams.

"It is said that tenants cannot pay more than they already are – yet a lot of sitting tenants have not had recent rent increases," she added. "That may change."

Scanlon argues that the real enemy of housing affordability is lack of adequate supply and that without a huge increase in building, buying a home will remain unaffordable and the number of people being forced to rent will rise. In this context, the squeeze on private landlords will only threaten supply further and almost certainly drive up already high rental costs.

So far, the government has introduced a three per cent stamp duty surcharge on new investment purchases and excluded landlords from a cut to capital gains taxes. From next year, cuts to mortgage interest relief will double the tax paid annually by landlords paying higher rate tax – but these cuts will also drag more landlords into upper tax brackets.

Such reforms will hit the yield on landlords' properties and, it is hoped, cool the rampant demand for buy-to-let investments. They could also result in many landlords selling their second homes, thereby increasing the supply of houses for sale. This should help to moderate house price growth, making it easier for renters to become first-time buyers instead.

But landlords will feel squeezed if they keep rents largely unchanged, rather than raising them to cover lost income. If market forces alone are not able to contain price rises, political intervention may be needed.

That is precisely what the new Mayor of London has pledged. Sadiq Khan wants to introduce a London living rent, which would require the support of the government and be set in each area at a third of local average earnings, with increases indexed to inflation.

The Financial Times reckons that at least larger developers will not be as opposed to such a scheme as might be assumed. There is evidence from similar schemes in Germany and New York that certainty over rent increases is useful to investors and encourages tenants to stay on for longer. This reduces other expenses such as the opportunity cost of a property standing empty.

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