569: EU Referendum Uncertainty
Market at Stand-Still: The property market has come close to a stand-still because of the impending EU Referendum which is hardly surprizing. First time buyers, second time buyers, buy-to-let investors and other investors are all sitting on the fence waiting – because if the UK leaves the EU there is likely to be a major house price correction downwards.
Uncertainty: Investors, businesses and consumers hate uncertainty – so there will be a natural slowdown prior to any type of major political shift. We expect a relief rally if the vote is “In” and a market crash of sorts if the vote is “Out”.
Offers: Canny investors might use the next six weeks to pick up some bargains – put in offers then start conveyancing with the option to bail out if the vote is an “Out”. We currently give the chance of an “Out” vote about 30% - not particularly high but still a significant risk.
Fear to win the day: The government seems to have an orchestrated “economic fear” campaign – where they wheel their buddies out at regular intervals to warn of impending economic doom if we leave the EU. We’ve had Carney, Obama, now the IMF – we can expect may be Hollande and Merkel plus some other big guns to come out with comments before the Referendum – just to instil fear into the voters. This tactic is likely to work in our view. As they say “it’s the economy stupid” – it worked for the Tories against Labour and is now likely to work for the centre leaning Tories against the more independent centre-right “Leave” campaign.
Buy-To-Let Clobbered: After massive successive tax hammerings by Osborne – most buy-to-let investors are being driven away from making any further investments. News that the new London Mayor is considering rent controls provided a further threat-risk that will further reduce housing investment. After the additional 3% stamp duty kicked in early April – we think the levels of buy-to-let investing will drop markedly moving forward, leading to a very significant tightening of the rental market. Rents will soar as demand increases, and supply reduces – particularly in London. Osborne has helped make the housing crisis worse by taxing buy-to-let investors, and the new London Mayor will follow suit if he decides to put in rent controls. These will result in higher rents rather than lower rents in our view – as investors desert the market. It will also lead to less properties being built as investors desert the market. It would lead to higher property prices as less properties are build.
Buy-To-Let Tax Assault: The multiple assaults on buy-to-let landlords will undoubtedly, in our view, lead to an escalation of the already severe property crisis as the government discourages investment in private rental properties through higher taxes. This will lead to far higher rents for tenants and a massive shortage of affordable rental properties – particularly in London and SE England - where they are most needed.
Rent Controls: Existing Landlords should not really worry too much about rent controls – because if the Mayor is stupid enough to introduce them, rental demand will rise and supply will drop – it could actually improve profitability for well established landlords. It would however be stupid – since the problem is lack of housing, not high rents. High rents are an outcome of lack of housing. The Mayor would of course be well advised to focus all his energies on housing supply to help drive both house prices and rents down in London. Alas, we think he might make matters worse by tampering with the rents and increasing regulations – a typical (possibly well meaning) left wing socialist / soviet style policy. Endlessly tampering with the market, that then makes things worse. What southern England needs is a bunch of new towns – lets say ten new towns of 50,000 homes (or 100,000 population) each. But we all know the chance of this happening is almost zero because of the world famous British Nimby factor.
Housing Crisis to Worsen: Longer term, don’t expect the housing crisis to improve – particularly if we stay in the EU – because immigration will far exceed emigration – and the population is booming because people are having larger families – also in large part a result of immigration and to a lesser extent a favourable economic climate. The growth engine behind the UK is its population boom – especially in London and southern England. If the UK needs 350,000 new homes a year to house 700,000 population increase each year – and we are only building 125,000 new homes, it does not take a rock scientist to work out that the supply-demand situation will tighten. No wander property prices and rents are rising. Of course the most acute shortage is in London. Anyone with rental properties will know – because there are about ten tenants chasing every property – letting agents are desperate for new properties particularly in the lower to mid-market ranges. If you have a room to rent for less than £600 a month, you are likely to get at least 50 telephone calls in rapid succession if you advertise yourself. This situation is about to get worse since Osborne’s tax grab is driving the buy-to-let investors away. We believe it’s a direct policy to discourage people from renting – simply because renters are far less likely to vote Tory in the future. We believe the Tory "high command" - the advisers/strategists – have modelled an increasing rental population over the next 20 years and voting trends – then concluded they would be unlikely to win a majority simply because by 2030 there would be too may renters voting Labour. They had to act and do something about it quickly – so they zapped Landlords – to reduce the rental market supply, drive up rents, release some lower end properties into the mix - then this would encourage people to go and buy property instead. The big problem in the equation – is the lack of properties being built and generally available for first time buyers – there is only a certain amount of progress one can make by forcing a few small buy-to-let landlords to sell then have these properties being bought by first time buyers. The policy has a damaging affect on labour flexibility and workers being able to move around for work, and will surely drive rents sky-high in the next 3 years - particularly if we stay in the EU. We will see the ramification of this starting in the next few months and then continue to worse for the next 3-4 years.
Worsening Housing Crisis: The government has just shot itself in the foot big time. Their tax grab from private landlords will back-fire spectacularly, particularly in London where rental property is so desperately needed. They have driven private landlords away from the business and this will exacerbate the housing crisis, not improve it. Let us explain some more fundamentals.
London Badly Affected: Most buy to let landlords are in the 40-50% income tax belt because they need significant income to risk mitigate against bad tenants and the risks of being a landlord. These are the people that will be affected by the new tax grab – namely only being about to offset 20% of the tax against mortgage interest payment – rather than the 45%. This means paying tax on losses for most buy to let landlords which renters the business sub-economic and forces them to sell. This will reduce the amount of rental properties on the market, lead to a tightening of the rental market and rents will then skyrocket. There is already a massive shortage or rental properties in London and SE England – these the landlords that will be hit hardest because property prices are the highest requiring the highest mortgage payment that will then not be offset against income tax at 45% (rather 20% from 2020 onwards). If and when interest rates rise, this will make the situation even worse for landlords and there will be many forced sales. In fact this new tax could lead to a property price collapse – it would certainly put very big pressure on the property market if interest rates rose, just when other people are also feeling the pressure of higher mortgage payments.
Shortage of Rental Homes: This week the government announced record levels of immigration – net migration into the UK of 336,000 people a year. On top of this, the population is growing strongly – with 60% of the increase coming from migrant families that tend to have larger families than the indigenous people. The population is in therefore increasing at around 650,000 people a year, but only 130,000 properties are being build. Seasonally adjusted sales of properties dropped to record level levels – the lowest levels since the 1970s this week end November 2015 in a further sign of a dearth of properties available to purchase.
Higher Rents: Landlords will be forced to put up rents to offset some of the huge impact of the tax hikes - this may well one of the intended consequences of this tax - or an unintended consequence. Indeed, it has already started to happen - on 1 Dec 2015, news came out that rents had risen in London by 5% in just four months - after the Landlord tax increases were announced. That's no surprize - we predict at least a further 10% in the next 12 months as the crippling shortage of rental property in London is significantly worsened by the punitive Tory policies and tax increases on Landlords.
A Tory Strategy To Win Votes: We can only conclude that the Tories want to reduce the amount of people renting out a property because they are less likely to vote Tory. They want more home owners. The best way of achieving this – for them - seems to be hit buy-to-let landlords with new taxes to discourage the rental sector. As advised, this will lead to a massive increase in rents and both the tenants and the landlords will all suffer as this attack on the private rental market goes into full effect. Then the landlords will get the blame – landlords are being attacked from all sides at the moment and if your reputation is at risk whilst you are paying taxes on losses, why bother being in this industry? No other business is taxed like the private rental sector – landlords provide a service, take huge risks and run a business but are not treated like a business owner, they are treated like inactive “armchair investors”. The new tax will put huge pressures on the rental sector as buy-to-let owners start to desert the market.
Stamp Duty Hike: A further assault on buy-to-let landlord started early April with the introduction of the 3% increase or premium in stamp duty for purchases of buy-to-let properties (and second homes, holiday homes and holiday lets). Again, this will dissuade new investment in the private rental sector and cause a further shortage of private sector rental properties. This will make the crisis in London turn into a super crisis. Properties will have to be knocked into smaller units and rentals will become more cramped – it is being squeezed in all directions. The quality of rental homes is likely to reduce as an un-intended consequence. The bottom line is, the Tories don’t want to make it easy to rent it seems. Many people prefer to rent ad want spacious high quality homes, but the Tories seem to be putting barriers in place where-ever one turns at this time and its only likely to get worse looking at their track record. They are killing off the rental sector like they killed off the North Sea oil industry with multiple tax hikes in a declining business.
Holiday Homes: The 3% stamp duty premium also targets second home owners, hence areas where second home owners are increasing are likely to be hit quite hard by this punitive tax. This will particularly affect:
· London – West End property
· Cornwall – coastal areas
· South Devon
· Dorset coast
It will also reduce the supply of property for purchase and available for holiday homes/lets – therefore holiday let rental prices are likely to rise because of this – making yields higher. The stamp duty will negatively affect the tourist industries in Cornwall, South Devon and other UK seaside areas and the property prices in National Parks, many of which are second home.
Buy To Let Dying: We believe buy-to-let has become increasingly unattractive as an investment, particularly for new entrants. This will lead to a gigantic shortage of rental properties in the most popular areas that also have the highest property prices like London, SE England and southern England as a whole. This will drive up rentals sharply and make the situation of tenants more challenging. Any additional regulation to prevent such consequences like rent controls will likely make matters even worse, as supply further drops and demand explodes with increasing immigration. The government have badly affected the market – and the unintended consequence of this draconian tax on property owners will manifest itself in problems attracting people into London because they cannot find suitable rental accommodation with prices being far too high.
Outcome: We wish we could be more positive about these new taxes, but regrettably for buy to let owners, holiday let owners and anyone involved in the property rental business – it’s been a calamitous seven months that we are not likely to recover from. It might be time to sell up and get out of this business since it does not seem economic anymore. The government is killing the goose that lays the golden eggs. For potential new entrants into buy-to-let, regrettably its just too late. For existing buy-to-let investors, you should be seriously considering either selling up and putting up your rents - because any interest rate rises will be sure to make your investment even more sub-economic. We're not sure if this is the government intension, in all likelihood it is. In any case, someone has to pay the punitive additional tax bills - and the property
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