This year has been a tumultuous one for the property market. In March, changes to the pension rules meant anyone over 55 with a defined contribution scheme could withdraw 25 per cent from the pot, tax free to do with what they choose.
Many chose to take advantage of the low interest rates to invest in property – specifically buy-to-lets to make the most of their retirement funds.
By July, the Bank of England was making concerned noises that buy-to-let mortgages had accounted for 15 per cent of all new loans, not least because these are the usually riskier interest-only mortgages but also because it inflates prices and drives property beyond the means of residential buyers. More worrying still, was the idea that this could undermine the stability of the UK economy.
In echoes of the mortgage issues that contributed to the 2008 banking crisis, the government took heed. In July, the emergency budget heralded a reduction in the 45 per cent tax relief on buy-to-let monthly interest repayments to 20 per cent from 2017. In addition, the 10 per cent ‘wear and tear’ tax allowance will, from next year, only be valid on furnishings that are actually replaced. Suddenly buy-to-lets weren’t such a straight-forward option for pension pot investors who then had to factor costs from fees, insurance, maintenance and repair, council tax and ground rent into their profit margins – not to mention paying income tax on any amount above 25 per cent that they drew from the pension scheme in the first place.
Come 2017, the market could well experience a surge in ex-buy-to-let properties for sale. It may happen sooner if the Financial Policy Committee annual report is anything to go by. The FPC believes that 40 per cent of buy-to-let investors would sell their property if the rental income falls below the interest repayments.
August in the UK saw residential property sales at their highest for 18 months, according to HMRC. As the catalyst for much of the change, rumors the Bank of England was about to raise interest rates had prompted a surge in new mortgages being taken out. By September the “impending interest rate rise” had been put on the back burner, now set vaguely for 2016. Is the Bank of England keeping interest rates low to ensure buy-to-let investors don’t sell and cause property prices to fall?
The FPC commented: “Buy-to-let mortgage lending has the potential to amplify the housing and credit cycles, though the extent of the amplification is hard to judge because the market has only recently grown to significant levels. Any increase in buy-to-let activity in an upswing could add further pressure to house prices.” It’s a balancing act, especially when you consider the facts that buy-to-let mortgage lending has increased by more than 40 per cent since the 2008 banking crisis, while owner-occupied lending has increased by 2 per cent over the same period according to the Bank of England.
So what’s next for the market? The FPC has requested the government be given powers to intervene in the same way it can for the residential mortgage market. This suggests that both the Bank of England and the FPC don’t know what the buy-to-let market will do next. Given its size and the interest-only nature of many of the mortgages, they are watching the situation closely. So the outcome of the bank “stress tests” will make for interesting reading in December. They examine UK banks’ ability to withstand global risks and will be as good a barometer for the state of the buy-to-let and residential mortgage market as anything. Watch this space in January for an assessment of the December findings.