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How Britain betrayed the buy-to-let generation

For many landlords, government attacks on property investors are the final straw

The Telegraph - By Melissa Lawford, Property Correspondent 10 Jul 2022

Landlord Peter Butler, 62, started investing in property in the 1980s when he was 25. It was an era when Margaret Thatcher was urging investors to put their money into property, and he caught the first wave of the buy-to-let boom.

Since then, he has built and maintained a successful portfolio of 37 properties through the downturn of the early 1990s and the global financial crisis. But now he wants out.

After close to four decades, the landlord is putting his properties up for sale. He made the decision last month when the Government published its Renters’ Reform Bill White Paper. Pushed out by recently sacked housing secretary Michael Gove, the shake-up includes landmark policies to scrap “no-fault” evictions and fixed-term tenancies.

For Mr Butler, it’s the final straw after a string of policies that have taken the shine off property investing. He lets his homes to students and the new plans mean it will become impossible to guarantee that tenants will leave at the end of the academic year in time for the following year’s student intake.

“My decision to walk away has been brought about by Michael Gove. I can’t believe that it is a Tory government that is driving me out of business. I feel absolutely gutted really,” said Mr Butler. “I hope to be out of the business completely by Christmas 2023.”

His words echo the feelings of a generation of British buy-to-let landlords who have seen their business plans hit hard by a long succession of government policies that seem to be geared to turn the buy-to-let boom to bust.

Except, of course, Michael Gove is no longer housing secretary. After he was sacked unceremoniously last week by prime minister Boris Johnson, who in turn announced his own resignation, there is now a question mark over the future of government housing policy.

The landlord exodus

The Tories were once the party of landlords, seeing rental as a legitimate business which benefits tenants and investors alike. But after more than a decade of repeated interventions by Conservative Chancellors, landlords have become overtaxed, over-regulated and increasingly likely to give up altogether.

A once thriving market is collapsing – with terrible economic consequences. Residential property lawyer David Smith, of JMW solicitors, said: “The White Paper was very much Michael Gove’s thing, but there is no Gove in the housing department anymore.”

Much of the levelling-up rhetoric behind it was also from Boris Johnson. “Nothing will happen until someone else is installed to lead the country,” said Mr Smith.

The White Paper was a blueprint for the Renters Reform Bill, which was planned for the end of this year, but this could be delayed while the Conservatives find a new leader.

If the Tory leadership battle is drawn out until October, the Bill would be unlikely to pass until the end of 2023, meaning the policies would come into effect in late 2024 at the earliest, said Mr Smith, who adds: “And by then, of course, we will be heading towards another general election cycle, could this just disappear?”

However, the freshly installed Housing Secretary Greg Clark has already stated his intent to continue with the reforms. A Housing Department spokesman said: “The Secretary of State is committed to the clear vision and direction that has been set for the department.” This includes reforming the private rented sector.

Still, two things could change. Plans to scrap fixed-term tenancies and introduce a landlord register in the form of a so-called property portal are two radical policies that were specific to Mr Gove and could now be scrapped.

Yet many of the policies in the White Paper were not Mr Gove’s but were part of wider, long-term government plans. Scrapping Section 21 “no-fault” evictions, for example, was in the Conservatives’ 2019 election manifesto and will almost certainly go ahead regardless.

The current government turmoil is likely to only be a blip in the timeline of the buy-to-let exodus, which began during the coalition years. Landlords know that the trajectory is clear. Mr Butler, by many accounts, is late to the exit game.

In the year to date – statistics that will not yet reflect any impact from the White Paper – landlords have accounted for more than one in six property sales in the country.

In total, 16pc of all homes sold this year were previously let, according to Hamptons estate agents, which analysed data from Countrywide, Britain’s largest property group. In 2013, the share was just 10pc.

Many have been squeezed out by the reduction in tax relief on buy-to-let mortgages that began in 2017. Others have been deterred by a wave of bureaucracy. All feel burned by a government that had previously encouraged them to invest.

A liberalisation of the housing market

The seeds of buy-to-let Britain began under Margaret Thatcher. Chris Norris, of the Residential Landlords Association, a trade body, said: “The growth of the private rental sector came from the theology in Thatcher’s government that assets were very important. Rental policy was part of a package of policies about liberalising markets. Nigel Lawson was liberalising financial markets, there was a mirror image of this in housing.”

Thatcher brought in the 1988 Housing Act. This introduced Section 21 “no-fault” evictions, which meant that landlords could repossess properties without needing to prove tenant wrongdoing. Later, the 1996 Housing Act states that Section 21 could apply to assured shorthold tenancies.

In turn, this kickstarted the buy-to-let mortgage market in 1996. Previously, investors could purchase buy-to-lets either using a commercial loan, or a residential mortgage with permission from their lender to let the property.

What changed with the introduction of buy-to-let mortgages was that banks started lending based on the property’s expected rental income, rather than purely on a landlord’s personal income. Buy-to-let investment became democratised.

Not only did prospective investors have new access to borrowing, but house prices were cheap. The years-long housing downturn of the early 90s saw waves of forced sales and mega discounts. And buy-to-let offered opportunities for the newly-unemployed, many of whom had also seen their pension pots destroyed by the recession.

“The older demographic in our membership were made redundant in the early 1990s and used their pay-offs to buy previously repossessed properties at auction,” said Mr Norris.

Not all of the boom in lending was responsible. There was a surge in “get rich quick” property buying clubs and so-called “back-to-backing”, whereby landlords bought and remortgaged rapidly.

“Landlords were growing their portfolios quickly, too quickly. They could buy a property on a Monday and then remortgage for 30pc more the following week. And these were often 100pc mortgages,” said Mr Norris.

Many landlords were therefore hit hard by the global financial crisis in 2007 and 2008. But the ensuing recession ironically spurred further investment. Interest rates fell, credit became cheaper, and investors again needed alternatives to their pension pots. There was also a major tax incentive.

The following years under Tony Blair were a lucrative period for landlords. Aspiration was a big part of the philosophy of New Labour and government intervention in buy-to-let was minimal, said Mr Norris. “The demographic of buy-to-let investors was a fit with New Labour just as they were under the Tories.”

“You had a lot of people investing, partly because they had been let down by their pension funds. They felt encouraged to do so by the government.” said Mr Norris.

At the time, landlords were able to offset the interest payments on their mortgages against their tax bills. At the time, mortgage interest payments were deductible from their tax bills. Then chancellor Gordon Brown even announced plans to allow for property to be included in private pensions, though this never materialised.

Between 2005 and 2015, the private rental sector doubled in size, from 10pc of homes to nearly a fifth of all dwellings. But the growth of the sector also began its downfall.

Landlords had become a large, wealthy group, who caught the eye of the taxman.

The rhetoric began to shift when Mr Brown became prime minister. Then chancellor Alastair Darling made the capital gains tax regime more punitive for buy-to-let investors, by removing taper relief and indexation. Mr Brown also had plans to create a landlord register and scrap Section 21 – an approach that sounds very familiar today.

Osborne's death of a thousand cuts

But the real sea change came during the coalition years. The logic was two-pronged. “During austerity, the Treasury spotted landlords as a wealthy group that they could attack,” said Mr Norris. Post-financial crisis, then chancellor George Osborne needed cash and landlords were sitting ducks.

Second, the number of renters had swelled so significantly, they suddenly became an important group of voters that needed to be courted – an approach that this government has continued. Since buy-to-let mortgages were introduced in 1996, the number of private renters in England soared from less than two million to 4.4 million.

“The Tories increasingly realised that renters do vote and that they want those votes,” said Mr Smith.

From 2010, the coalition years began the shift in policy to what Mr Norris terms “a thousand cuts”.

The key flagship policies under Osborne came in 2015, when he announced a three percentage point stamp duty surcharge for additional properties, which came into effect in 2016, and cut tax relief on buy-to-let mortgages.

Previously, landlords could offset all of their interest payments against their tax bill. This perk was scrapped entirely from April 2020. Since then, landlords receive only a 20pc tax credit on their mortgage interest payments.

This hammered their profit margins. Adam Kingswood, of Kingswood Residential Investment Management, a buy-to-let specialist in Nottingham, said: “On paper, some landlords now are making a loss.”

“Mr Osborne absolutely threw landlords’ business plans out of the window,” said Mr Norris.

The tax relief cut began the real squeeze on small-scale landlords, who are the ultimate casualty of the Government’s approach. They are getting replaced by full-time landlords with larger portfolios who have the scale to be able to absorb the extra burden.

This can be seen through the number of buy-to-let incorporations. Landlords can escape the tax crackdown by registering their properties under a limited company, but this only makes financial sense to do so if they have a significant portfolio.

Between January and June this year, there were 27,081 buy-to-let incorporations, according to Hamptons analysis of Companies House data. This was nearly triple the number during the same period in 2016, before the Government started cutting tax relief on buy-to-let mortgages, and the largest number on record for the first half of a year.

A raft of smaller legislative and regulatory changes, such as the 2016 Immigration Act, which introduced a requirement for landlords to determine whether tenants have a right to rent, have increased the bureaucratic burden on landlords. “The last seven or eight years have been a drip drip effect,” said Mr Norris.

The sector was creaking when the pandemic hit, and brought a fresh nightmare for landlords. The eviction ban, announced during lockdown, protected tenants from homelessness. But it also meant that landlords with rogue tenants were financially crippled.

Many were unable to evict problem, non-paying tenants for a year. When they eventually reopened, the courts were overwhelmed. After the eviction ban lifted in May 2021, the median wait time from a landlord claim to repossession was 16 months.

This highlights the major problem with the Government’s White Paper proposals today. The Government says that good landlords have nothing to fear from losing Section 21 because they will have new mandatory grounds for repossession in cases of serious arrears and antisocial behaviour.

But the effectiveness of the Government’s efforts to improve landlords’ rights rests entirely on their ability to improve the court system. The Government has said that it will work to reduce the backlog for eviction hearings and make the court process more efficient.

But scrapping Section 21 will also bring a surge in eviction claims that must now go through the courts. The evictions that are normally done using Section 21 will simply be redirected into the court system, said Mr Smith. This could potentially double the burden on court time.

“The best tenure legislation in the world comes to nothing if you have to wait for six months to get to court,” said Mr Norris.

The White Paper also comes on top of plans to introduce new energy performance certificate targets for the private rental sector. By 2025, all newly let rental properties will need to have an EPC rating of C, with a deadline for all existing lets of 2028.

Under the proposals, landlords will have to spend up to £10,000 per property to keep them rentable, or face a fine of up to £30,000.

For Mr Butler, the impact is clear-cut. “It’s a double whammy, having the loss of control and the uncertainty at the same time as having the new expenses,” he said.

Supply and demand

The tax crackdown has compounded market forces. Rents might be soaring, but so have house prices. This means that gross rental yields hit a record low of 4.38pc at the start of this year, according to Capital Economics. They are forecast to fall further to 4.26pc by the end of this year.

Just as new landlords’ return on investment is squeezed, rising interest rates mean their overheads will climb. Buy-to-let mortgage rates will hit 3.6pc next year, Capital Economics forecast, up from 1.82pc in January. This jump will hammer investment particularly hard because landlords can no longer offset their interest payments against their tax bill.

It is not a blanket exodus. High rent growth and cheap mortgages (which are now disappearing) mean that landlords have still been buying. In March 2022, there were 9,600 buy-to-let mortgage approvals for house purchase, according to UK Finance. Excluding 2021 and 2016 when there were artificial surges due to stamp duty changes, this was the highest total for any March in at least a decade.

But the new landlord buyers cannot keep pace with tenant demand. The supply of available listings is down 50 per cent year-on-year, according to property website Rightmove. Mr Kingswood said: “The buy-to-let market is not in a good place right now. There is not enough supply for demand.”

Rents are soaring. In May, rents on newly let properties rose to £1,152, according to Hamptons estate agents. This was £119 more per month compared to in May 2021 – a jump of 11.5pc. This surpassed the previous record of 9.8pc set in April and was the first time rent growth hit double digits since Hamptons’ lettings index began in 2012.

In London, where the market saw a year-long period of rent falls following the 2020 lockdown but bounced quickly after restrictions eased, growth hit 15.7pc.

“The market in Nottingham has never seen rents grow so fast and has never seen stock so short. The reason is that buy-to-let has been strangled by government policy. Supply is down because laws have pushed landlords out of the market and deterred them from coming in,” said Mr Kingswood.

This highlights the problems with the Government’s approach. The buy-to-let crackdown is easy to sell to voters. House prices are at record highs and an increasing share of the population cannot afford to get on the property ladder. They are locked out of an asset class, which means that the wealth divide is becoming a chasm. Investors have contributed to soaring house prices, particularly in poorer areas, such as the North East, where lower property values mean they can get higher rental yields. If there were no landlords, these properties would be available to first-time buyers. Properties would only be homes, not investments.

The argument is compelling, but it ignores the reality of the process to get there. Buy-to-let has become ubiquitous. That means it cannot be killed off without causing huge pain to the people who are supposed to benefit from its death.

The reasons are two-fold. First, assuming that pushing buy-to-let investors to sell will free up homes for first-time buyers and therefore reduce tenant demand is problematic.

Mr Butler’s buy-to-lets are a case in point. “I have four or five tenants in each of my houses. If I sell one of them to a first-time buyer, maybe two people will live in it. That is accommodation for three people that won’t exist anymore,” he said.

Mr Smith said: “Landlords have been selling in the South East for years but we have not been seeing a reduction in tenant demand.”

If landlord sales do end up in the hands of first-time buyers, this is an exchange that only benefits the wealthiest renters for whom the housing ladder is in reach. High house prices mean that the poorest renters will still be locked out, and will instead be stuck shouldering the burden of shrinking rental supply.

'Where do you expect people to live?'

The second, crucial point, which is consistently overlooked, is that the buy-to-let sector has become interwoven with social housing.

Fifty years ago, if a family could not afford to house themselves, they were given a council house. Under Thatcher’s Right to Buy scheme, nearly two million of these properties were sold to the families that lived in them. They were replaced at a rate of less than 20 per cent.

Social house building in the following years plunged. In the last financial year, 1,650 local authority properties were built. This was a drop of 99 per cent compared to the late 1970s.

Instead of providing welfare housing, the Government now largely simply funds it. This transition began in 1982, when the government introduced housing benefits payments to help low income tenants pay their rent.

“Until then, all investment for welfare had been in bricks and mortar,” said Mr Norris. This system has evolved steadily alongside the expansion of the private rental sector.

Today, a third of private renters, an estimated 1.8 million people, receive housing benefit to help pay their rent, according to Shelter, a housing charity. This has surged by a quarter since the start of the pandemic.

Essentially, the buy-to-let sector has become a pillar of social housing policy in lieu of the provision of council houses.

And as Mr Smith adds: “If you disincentivise buy-to-let and there is not a significant volume of social housing, where do you expect people to live?”

Investment Synergy - we think this post is highly relevant and quite ´apt´ given the current political climate .....

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