On top of what has been a politically turbulent year, 2017 was something of a policy rollercoaster for the buy-to-let sector. From significant tax and regulatory changes to a number of underlying economic forces including rising inflation, stagnating wages, and an interest rate hike, the year was spent adjusting to the new normal.
The changes are a good thing for the ongoing sustainability of the buy-to-let sector but, whichever way you look at it, they were never going to be without their teething problems.
One of the most talked about changes in 2017 is the Prudential Regulation Authority’s (PRA) new rules. The first bout in January included stricter affordability tests, requiring lenders to implement into their criteria either an interest coverage ratio test or a personal income affordability test. Stricter underwriting criteria for portfolio landlords then followed in September, meaning that any landlord with four or more mortgaged properties faced robust new underwriting standards.
Through these changes, the PRA is encouraging lenders to be more prudent but it’s important that this doesn’t drive lenders or brokers to step away from cases with specialist needs. Ultimately, an experienced professional landlord will, nine times out of ten, provide better quality housing for their tenants and we should be encouraging this professional approach. The increased workload and administrative responsibilities did cause some general lenders to exit the market, whereas many specialist lenders already had many of the regulation frameworks in place.
Beyond the PRA changes, tax reform was also a radical change for the sector. From April, mortgage tax relief changes meant that landlords could only claim mortgage interest tax relief based on the basic rate of income tax, affecting higher-rate tax payers especially. It means that landlords will see the amount of mortgage interest and other allowable costs that they can write off against tax drop by 25% each tax year until 2020 when they will have to declare all of their rent as income, pay income tax on the total and then claim back for 20% of it as a credit.
Understandably for the estimated 440,000 basic rate tax-paying landlords who will find themselves moving into the higher rate tax bracket by 2020, these changes weren’t entirely popular. The additional costs may add to the lack of supply across lettings if landlords choose to withdraw from the market but ultimately it is another move targeting ‘dinner party landlords’ due to the rising costs of this form of investment. In this context however, the professionalisation of the buy-to-let market will continue apace.
The catalogue of changes for the buy-to-let sector have all been a part of the government’s efforts to tackle the housing crisis, shore up economic stability, and improve conditions for renters. The UK’s housing shortfall needs plugging, but the initiatives designed to address the problem are a little blinkered. Yes, putting professionalisation of the market at the forefront is undoubtedly a step in the right direction, but unless the supply of new homes is seriously addressed, fewer buy-to-let landlords will simply result in higher rents, and ongoing pressure for aspiring homeowners.
Housing white paper
A more legitimate move should prompt further commitment to construction, adding to the housing stock and enlarging the sector’s supply to meet its demand. Cast your mind back to the start of the year when the government’s flagship housing white paper was released.
The white paper finally showed some acknowledgment of the importance of the private rental sector to the UK housing market, encouraging more institutional investment in large scale developments specifically designed to rent rather than buy.
However, we’re still yet to see substantial improvements here, and, apart from the announced plans for five new Garden Towns, it was disappointing not to have further commitments made in the Autumn Budget. That being said, it was a relief to not see further tax or regulatory changes.
Long-term gratification seems to be the theme of 2017 for the buy-to-let market, with many changes implemented which will eventually be positive for the sector in general and specialist lenders in particular, but as welcome as that long-term stability will be, the changes are already showing signs of hindering market growth in the near term.
Source: Mortgage Finance Gazette