I have worked in the property market for 15 years now and it is clear we are living in fascinating times. I cannot remember a period which has seen such legislative interference and macroturbulence. It all began with the changes that the government made to end the old slab system of stamp duty. This acted as a small tax reduction for properties under 1m but hugely increased the tax burden on properties above this level with the highest band rising to 12% on the portion purchased over £1.5m. This has slowed the prime market, particularly in London.
The next Stamp Duty tinker came in April 2016 with an extra 3% stamp duty levied against buy to let properties and second homes. We saw a rush of people buying properties to beat the deadline, in March 2016 transactions were 80% higher than the year before, and a lot of this stock found its way onto the rental market. This phenomenon was heavily weighted towards London and the South East.
Looking at the latest data from Rightmove there are now 14% more rental properties on the market compared to last year. There is a lot more competition for tenants and, for the first time in a long time, a downward pressure on rents. It is becoming harder to let your property out, harder to get the level of rent you would like, and harder to get the very best calibre tenants. That is why picking the very best lettings agent in your area, and having a defined marketing strategy for your property is incredibly important.
I believe that there are several factors that mean that the supply of property onto the lettings market will start to decrease from Quarter 2 2017 onwards. Firstly; the 3% extra stamp duty is likely to deter investors, secondly; there are some changes coming in April that change how Landlords can claim interest rate relief on their income tax.
For Landlords who are higher rate tax payers and have highly geared investments, this is likely to have a significant impact on the amount of tax they pay. Over the next 18 months, we may see landlords start to sell off their investments. Earlier this week I listened to an Economist (who used to sit on the MPC) speak who estimated that the effect of this income tax change would be three times the impact of 3% extra stamp duty policy. He estimated that rents would need to increase by 20-30% for landlords to see the same net return on their property investments post this change.
You may well see a rebalancing of landlords moving their investment money from “the south” further north. We are hearing from a lot of agents around the country that this is starting to happen as confidence in capital appreciation in London decreases and the high yields available in the North start to look more attractive.
Fewer landlords buying, more landlords selling, is likely to mean a decrease in supply and therefore and increase in rents so that those that can hold their nerve are likely to end up winning. The key now is to take proper tax advice so that you are aware of the implications. There is a lot of talk about “build to rent” and institutional investment but it will take several years before this significantly affects supply to any material degree.
Property has been a great investment and remains attractive compared to most asset classes. We have a long-term structural lack of supply in the market that insulates the sales and lettings market from significant price adjustments. What the country needs is more housing to satisfy the demands of buyers and tenants. Every government since I have been alive has acknowledged this but none yet have solved it.
