Letting Agent Today’s Conor Shilling was in the audience of The Great Buy To Let Debate - always one of the key industry events of the year.
It was hosted by Paragon Mortgages and held in Westminster yesterday with John Wriglesworth, managing partner at Instinctif Partners, chairing a Question Time style panel.
The panel consisted of many names familiar within the buy to let industry - John Heron, managing director of Paragon Mortgages; David Whittaker, chief executive of Mortgages for Business; David Cox, managing director of ARLA: Jeff Prestridge, personal finance editor of the Mail on Sunday; and Professor David Miles CBE, Imperial College London and ex-member of the Bank of England Monetary Policy Committee.
Miles' presentation, kicking off the event, focused chiefly on the phasing out of mortgage interest tax relief beginning next month, April. He argued that despite the ambition of former Chancellor George Osborne to 'level the playing field' between landlords and owner-occupiers, it was already in favour of the latter. This was thanks to Capital Gains Tax and tax paid by landlords on rental income which exceeds allowable costs.
Miles argued, therefore, that April's tax changes alongside the introduction of the three per cent additional homes stamp duty surcharge last year, will significantly weight things further in favour of owner-occupiers.
As reported recently on Letting Agent Today, Miles calculates that from April many landlords may have to raise rents 25 per cent to secure the same return as now.
He tempered the calculation by saying it wasn't a prediction for how much rents will rise, but rather it shows how much landlords' returns will be squeezed over the next few years, something which won't help aspiring first-time buyers.
Q1 - Stamp Duty Surcharge: Has it severely impacted the UK housing market, and the buy-to-let sector in particular?
John Heron said the number of transactions recorded since the measure was introduced were some of the lowest for 50 years. However, transaction levels have generally struggled since the financial crisis anyway. Heron said that stamp duty is "distorting the housing market in general, and buy-to-let in particular."
He pointed out that there has been around a 40 per cent drop in the number of BTL transactions with no sign of improvement. On the future of the stamp duty surcharge, Heron said: "Let's rethink it, let's reform it now."
David Miles described the surcharge as an “unfortunate move” with the government's reasoning for introducing it “bogus”. Miles went on to say, however, that additional stamp duty for higher tax paying landlords can be spread over a longer period of time and is therefore a smaller part of lost income. He argued that the restriction of mortgage interest tax relief is a much more serious problem for landlords.
David Whittaker then spoke of the surge in landlords incorporating to minimise tax liability. His firm now witnesses 75 per cent of landlord purchases made via limited company vehicles. He stressed that incorporation was a safe bet “for the time being”. He said smaller landlords were sitting it out, hoping the tax change may be reversed - but he does not believe this will happen.
David Cox said that the government's tax changes were not coherent and that owner occupiers were not buying the homes previously snapped up by investors - they buy completely different property types, he said.
On the same subject, Jeff Prestridge said: "It's another attack by a Tory government on people's ability to build long-term wealth. There's a contradiction within the heart of government and it deeply disappoints me."
Q2 - Housing White Paper, longer tenancies and letting agents’ fees ban
Audience member Sarah Woolf, head of sales at Shawbrook Bank, referenced the government's Housing White Paper measures on longer tenancies and a ban on letting agent fees charged to tenants. She asked the panel if these issues - agents being able to charge fees and one year tenancy contracts as standard - make renting unfair.
Jeff Prestridge said he agreed with the idea of offering greater flexibility in tenancy agreements and - as a private tenant himself - would like to see three to five year tenancies. On the fee ban he said: "It's tokenism on behalf of the government." He said that a fee cap would be better and argued that the tenant will still have to pay letting agent fees in another form.
David Cox disagreed. "If the market wanted long-term tenancies, it would have reacted" he said, arguing that tenants rarely walk into letting agents' offices and ask for three or five-year tenancy contracts. He did say, however, that he welcomed the initiative in the White Paper to make Build to Rent agreements longer.
Commenting on the proposed fee ban, Cox said that letting agents' fees need to be “open, up-front and transparent” but that ARLA disagreed with an outright ban. He believed that the government was “trying to make the cost of moving cheaper” for tenants but that letting fees are “the tiniest slice of the pie they could go after.” Cox said it would be easier if people framed letting fees as a comparison to home moving fees, and that a ban would lead to reduced standards of negotiating and referencing.
John Heron said there was a myth about long-term tenancies not currently being offered, suggesting several lenders - including his own firm and Nationwide - went out of their way to accommodate long-term tenancies. He said the reason that they are relatively uncommon could be to do with landlords not wanting to offer them, tenants not wanting to sign up to them or the “entrenched interests of the lettings industry.”
Q3 - Brexit and its effect on buy to let
Rob Sinclair, chief executive of the Association of Mortgage Intermediaries, then asked if the panel think Brexit would affect buy to let, especially if migration was reduced.
David Miles said: "I rather doubt Brexit will pose a threat - I don't believe there'll be a compelled exodus of EU citizens" He said, however, that the Brexit vote may have stemmed the inward flow of EU migrants. He went on to say that Brexit could represent a positive sign for the private rental sector due to migrants who were possibly thinking about buying a property in the UK now putting that decision on hold and staying in private rental accommodation.
David Whittaker said he can't see a direct link between migration and Brexit which should concern landlords. "I don't see it as a causational factor for landlords to feel more bearish than they do already" he said.
John Heron agreed, saying that “migration misses the point”. He said that underinvestment in social housing is a bigger issue. However, he did say that a marginal reduction on EU migration could reduce the pressure on the rental sector.
Jeff Prestridge said that there are bigger factors in play than Brexit. He said that the taxation changes are the biggest concern and we “underestimate them at our peril” as they could turn profit-making landlords into loss-makers.
John Wriglesworth then asked the room who voted for Brexit and who voted for Remain. In an audience of approximately 100, 7 people said they voted for Brexit while the vast majority said they voted to remain.
Q4. Tenures: Owner occupancy vs private renting
One of the final questions came from Fionnuala Earley, residential research director at Countrywide/Hamptons International. She cited figures which show that the private rental sector and private tenants make up around 19 per cent of households, with owner-occupancy down to 63 per cent. She asked the panel if this is the right balance and what they thought the split would be in the future.
David Cox said it's a question of affordability - there is a generation of graduates who'll never be able to afford to buy a property.He predicted the proportion of people renting will hit 25 to 35 per cent by 2020.
Jeff Prestridge said: "The fact is it's impossible for most people to buy property in their 20s and 30s. The rental market is here to stay and play an increasing part of the overall market." The journalist predicted that over the next five years, owner-occupancy would drop to 60 per cent, while the proportion of people privately renting would increase from 19 to 22 per cent.
David Miles said it was pleasing that the government's Housing White Paper had less of an obsession with owner-occupancy and suggested we may be heading for a 50/50 split - although it would take a long time to reach that point. He said that if we do reach that point, it should certainly not be viewed as negative.
From the audience, CML director general Paul Smee said that he thinks the balance will stay the same as it currently is. He said that this will be due to a 'series of currents working in opposite directions'. Smee said the biggest challenge will be dealing with an ageing population.
John Wriglesworth then asked the audience if they thought the balance would stay the same or whether the proportion of renters would increase in the next few years. The vast majority said they think the proportion of renters would continue to rise.
(All reporting by Conor Shilling)