Are we sitting on a buy to let timebomb?
Did you know that there are now two million private landlords across the UK?
Well that is a fact that may not seem that important at the moment but could play a vital role if the property market starts to falter and one that could have a significant impact on house prices if we see a downturn in the housing market. The number has increased by nearly 600,000 since the financial crisis in 2008 with more and more private landlords being created every day.
Buy to let mortgages accounts for £200bn of borrowing
The reason for the explosion in the number of landlords is down to the availability of buy to let products. In 2000 the buy to let market only accounted for around 2% of the total amount of money lent. Now the figure stands at a staggering 18% and is currently said to be worth around £200bn. This is an eye watering amount and is equivalent to the national debt of Greece. What is now concerning experts is that owning a property for many is not about owning your own home but is about pure property speculation.
The Chancellor took aim recently at buy to let landlords with a change to the tax rules and looks as though it is a warning shot that he intends to level the playing field so that fewer homes are bought by buy to let investors. Considered by many as a no no the Chancellor did not hesitate to increase the taxes that buy to let landlords must pay and he could well come back for more if landlords continue to splash out on more homes.
Government fires a warning shot to landlords
The government has said that it will no longer subsidise landlords with tax breaks as it is unfair to first time buyers who suffer as a result. Could this be a warning to landlords that he has not finished with them yet and careful consideration must be given before they decide to buy their next property portfolio?.
It is clear that landlords are in direct competition with first time buyers as they tend to hoover up any one or two bed flats that come onto the market in most cities. Some blocks are sold to speculators from plan and many local people don't even get a look in.
Tax break has been cut in half and will cost landlords £2bn a year
Currently a landlord is able to claim tax relief on interest that is paid. In effect this means that a borrower can deduct the interest payment from the rent before they pay tax. The tax break costs the treasury around £5b every year. Whilst the tax break has not been abolished it has been cut by half and will cost landlords around £2bn in annual tax. Now the concern will be that the tax relief will be completely removed in the next budget. It looks as though the Bank of England has had enough of the buy to let market and has decided to act.
Interest rates could also pile pressure on landlords
The next thing coming down the road is going to be a rise in interest rate which buy to let is particularly sensitive to. A rise of one or two percentage points will leave many landlords out of pocket. This could cause many of them to try and sell which is what concerns experts in the property industry. A surge of homes coming onto the market would cause a glut and price drops would ensue. It is very possible that many would be forced to sell because they could no longer afford the mortgage payments.
All of this has not gone unnoticed by the Bank of England who have warned lenders who are increasingly taking on riskier loans in order to compete. This is where the last crisis started and is possibly where the next one may come from. Borrowers have been warned that rates are going up and they must sit up and take notice.
Landlords could be badly affected by a downswing
Last week the Governor of the Bank of England went as far as saying that in a 'in a downswing landlords could be forced to sell into an illiquid market and could amplify falls in house prices. It is also likely that banks would be impatient with arrears on loans which could also exacerbate the problems faced by landlords. At best they could be faced with negative equity and mounting losses which could force many to sell their own homes.
Tightening of lending criteria not affected landlords
This is a cause for concern for the government who have been unable to take the heat out of the buy to let market despite the tightening up of lending criteria that was implemented last year. None of this has made a blind bit of difference on landlords and has only affected the ability of first time buyers to get on the housing ladder. Let's hope that for all our sakes this has a good ending and the buy to let market doesn't implode.