Landlords vs first time buyers: Who’ll win the buy-to-let battle?

Learn how the Brexit vote has affected the property market

In the blue corner, attempting to roughhouse the Treasury, are investment champions, landlords.

In the red corner, renowned for rolling with the punches and coming out swinging, are resilient underdogs, first-time buyers.

With the EU referendum clinching Brexit, and a new restrictive tax on landlords gating investment properties, this good clean fight just became an out-and-out brawl. Who will exchange first? It’s anyone’s guess.

Round one: The technical knockout

The 2016 Budget saw an early flash knockdown for landlords when the Treasury decided to tax rental turnover rather than profit. Doomed to pay tax on income they haven’t yet earned, landlords were faced with £0 income and 100% tax.

According to accountants Smith & Williamson, any higher-rate taxpayer landlord whose mortgage interest is 75% or more of their rental income, net of other expenses, will see all of their returns eradicated by 2020.

This buy-to-let calculator reveals the viability of investment property, but the charge is intended to curb landlords deducting their mortgage interest from rental income. That, combined with the uncertainty of Brexit, would spell the end of buy-to-let landlords, with even the Landlord’s Guild warning property prices and buy-to-let predictions were hard to predict as the economy entered ‘unchartered waters’. It’s thought that landlords at greatest risk of losing out are parents buying their child a university home.

Round two: Landlords fight back with multiple mortgages

Saved by the bell. Mark Novel, Managing Director of Castle Residential Sales and Lettings in Swindon, says the end is not in sight quite yet: “There is still a supply and demand issue in the rental sector with prices remaining strong. We recently marketed a property for £625 per calendar month (PCM) but because five tenants offered on the property and eventually let the property at £675, £50 above the asking price. This uplift will help cover some of the costs of the tax liability and although this doesn’t happen every time, if you choose the right agent then you increase the chances of getting the best rental yield for your property.”

If the landlord has large sums of cash to invest, they could put down several deposits across multiple properties and obtain small mortgages, advises Mark. It’s a tactic which allows the landlord to collect several rent payments each month and stay lucrative, should income dry up from another property. “Should you wish to release some capital, you can sell one of the properties,” says Mark. “If you only have one property, any void period is very costly and if you wish to release capital, invariably you will end up selling your only rental property, eventually paying out all the fees again if you want to venture back into the rental market again.”

Round three: First-time buyers weigh in

Without an expert guiding your purchase and in light of the 100% tax liability, it’s understandable that most landlords would be dissuaded from purchasing multiple properties. Therefore, more first-time buyers have an opportunity to swoop in and scoop up the spoils. However, in the wake of Brexit, even they might be wary of parting with their deposits too quickly and, according to the latest data set from the Office for National Statistics (ONS) keeping hold of their cash was a good bet in this critical third round.

Round four: An economic shock! house prices rise

On 23rd June, Britain chose to leave the EU and the world and its markets braced for impact, anticipating the housing market to stagnate or plummet and for the pound to drop in value. While the pound did drop, surprisingly, the housing market recovered in June despite the political turbulence, dusting itself off after a steep 55.4% fall in April as reported by the UK House Price Index. The stats show the average UK house price was £213,927, an annual increase of £17,000 and up 8.7% since June 2015. In real terms, house hunters searching throughout May and June will have noticed a month-on-month price increase of £2,100. Buyers hoping to snap up a bargain in the immediate wake of Brexit, to pipp landlords to the post, had to rethink their strategy.

Round five: Brexit back on top

The pricing dip buyers had been waiting for emerged in July and prices continued to fall in August. According to the RightMove House Price Index, the property market fell in August by 1.2% decreasing the average house price by £3,602 lower than prices in July. But even in July, prices fell by 0.9%. Sensing a ‘carpe diem’ moment of weakness in the housing market, would-be landlords and first-time buyers had the opportunity to get the upper hand. But, it seems the buying public missed their moment to spend.

Round six: Investment tax and Brexit tag team

The RICS Residential Market Survey noted that price growth slowed in the UK in July — good news for first-time buyers and landlords — but that no-one was biting.

The survey registered the lack of housing stock in the marketplace (outlining 33% fewer new instructions) and pointed the finger at a shy seller and buyer market, with 34% respondents to the survey noticing a dip in transactions. RICS described the stagnation as a direct result of the investment properties tax and ‘the mood in the marketplace’ following the EU referendum. However, it was largely positive, reassuring agents that after an immediate short and sharp impact shortly after Brexit, transactional activity has returned to normal and the forecast for the next 12 months is similarly positive.

The final bell: The housing crisis

The housing crisis is a national problem, however, the average house price data from the latest ONS survey is skewed by England, and England’s data is skewed by London. The average prices around the UK in June were:

● England: £229,383
● Wales: £145,238
● London: £472,204

Buyers in Western Isles of Scotland will have been the worst hit, with prices increasing by 28.1%, with Slough following closely behind with a 24.6% hike. At the other end of the spectrum, County Durham’s house prices dropped by 3% and even Hammersmith and Fulham dipped by 3.2% implying that the capital city’s house prices have peaked, for the moment.

Everyone’s a winner

This was tipped to be the fight of the year, first-time buyers were finally going to get one over on portfolio-hungry landlords. However, with house prices still rising and landlords grappling with the new tax laws, there are no apparent winners as first-time buyers struggle to see the light at the end of the tunnel and landlords scratch their heads over worthless mortgages.

The fallout of the last six months has revealed so much more than one group of buyers dominating the other. The new tax will always clobber landlords with large mortgages, but if they buy small and more, they’ll escape 100% tax. Brexit should inspire first-time buyers, but actually it toppled confidence. And finally, despite an accelerating market there are still bargains to be had if you succumb to location, location, location.

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