In the UK there are currently 635,000 empty homes according to the latest statistics from the government, and around 72,100 in London alone.
This is startling. At best, these empty homes are reducing the number of homes and available housing stock in the area (at a time when housing is already seriously strained) and at worst actually damaging local communities
Recently I was invited on to BBC Radio 4’s Today Programme with John Humphrys and Councillor James Murray to discuss a very modern phenomenon which is adding to London’s empty home crisis, called ‘buy-to-leave’.
I hope you enjoy the discussion! But after the programme had gone out I thought about this topic a little more and wanted to expand on what I’d said, looking at the real issues causing the housing crisis and more importantly the solutions.
What Is Buy To Leave?
Buy-to-Leave is a strange concept as it goes against many core, investment principles.
It’s a very high-risk strategy that relies on heavily on capital growth.
Because of this, it’s a very niche issue, that only really affects the most affluent areas. This means only a very small section of the London housing market and the UK housing market overall are touched by buy-to-leave.
However, it exists and it is not unique to the UK. New York, Vancouver, Hong Kong, and other major international cities are seeing it as well.
So, the existence of buy-to-leave, as an investment model, is not ideal. I think we can all agree on this. But focusing our attention on buy-to-leave or laying the blame at its door for London’s Housing Crisis not going to bring many benefits. It is a drop in the ocean, compared to the real issues caused by a sputtering supply of housing, overshadowed by vast and growing demand.
There are, simply, not enough homes. We are just not supplying the stock, needed by local communities across the country and this is especially true in London.
In this article, I want to look in detail at how I think we should be tackling London’s housing crisis, from my perspective, as an investor. I will also be looking at the real underlying reasons for it. To this end, I’ll be examining…
- Why ‘buy-to-leave’ isn’t really the problem.
- The problem of supply.
- How best to tackle the crisis.
Why I Think ‘Buy-To-Leave’ Isn’t A Big Issue
Before we look at the various ways to tackle the issue of empty homes, I want to tie up the issues around buy-to-leave that we touched on in the Today Programme.
This includes why buy-to-leave is a non-issue, in terms of London’s long-term plan for tackling the housing crisis.
Firstly, as an investor, there are fundamental criteria for investing in property. These include a return on investment, an exit strategy and maintaining a certain level of liquidity. Arguably, the most important aspect is the ‘security of the principal investment’.
Property in London is very appealing for many investors but unlike stocks and shares, there are significant costs and large timeframes involved, in buying and selling houses.
Forgetting, for a moment, the cost of the legal fees and estate agency fees to actually purchase or sell a property, the tax alone adds a significant amount to any property deal.
And it is these difficulties, timeframes and costs that mean investors do not step lightly into the process of buying property, especially at the higher end of the residential market, without, firstly, putting a good strategy in place.
When looking at the types of properties, that you might associate with buy-to-leave, for instance in Islington, stamp duty, is not insignificant.
For example, a one bedroom flat in the Bezier Building (flats in the Bezier Building have been used to illustrate the buy-to-leave problem) can be purchased today for £850,000. At that price, the stamp duty, on purchase alone, is £32,500, not to be sniffed at.
Property owners are, of course, liable for council tax on their properties. If the property is tenanted then the tenant usually pays. If the property is empty then the owner foots the bill.
Again, taking the Bezier Building, the council tax bands are mainly E & F. So, for Islington Council (2014/2015) that would be a bill for £1,541 and £1,821 per year in these brackets, respectively.
Capital Gains Tax
Depending on how an investment property has been purchased (as an individual to rent out or as a limited company or special purpose vehicle) selling it could mean that there is tax payable on the profits on the re-sale. For private individuals, this could be as much as 28%, if that individual is a higher rate taxpayer.
It is not insignificant!
As we have shown, the cost implications, from tax alone, are high, when you buy and sell an investment property, particularly in London.
But we can add to this mix the ongoing costs of ownership that are incurred just to keep the property running.
Examples of such costs include:
- Ground rent
- Leasehold management and maintenance fees
These fees will, easily, add another £3,500+ per year to the costs of holding the property.
Finance Costs and Opportunity Costs
Often, investors will buy properties using some kind of finance such as a mortgage and there are costs in arranging and servicing that debt. But even if a property was bought with cash, every investor will expect that cash to provide the best possible return based on a risk/reward calculation.
An investment in an £850,000 property, once stamp duty and purchasing costs are factored in, is going to cost nearly £900,000.
If a 5% ROI can be achieved on 900k by some other means, a less risky investment, then why would an investor gamble on something like house price growth in London or something that might be nothing more than a bubble? Why would they take that risk?
Lara Hoffman at Forbes defines opportunity costs as being “the risk of making decisions now that result in lower returns over the long-term than you would have gotten otherwise.”
So, is it worth the risk, gambling money on capital growth, when there are such big, upfront and ongoing costs to take into account? Because, to my eyes, buy-to-leave looks like a very high-risk strategy.
It just doesn’t make a great deal of sense to buy a property to, simply, leave vacant in the hope of growth when there are all these associated costs. London may be unique. It has its own bubbles and the rate of capital growth is high. But the property market, by its nature, can be volatile. There are risks and there is a property cycle in London, same as anywhere else.
If an investor finds that prices aren’t increasing to their expected level then they run the very real risk of losing a significant amount of money on the deal and their costs will carry on building up until they can sell, (when selling also incurs a cost). Pretty much, this is a nightmare scenario that could easily be avoided by making sure that the costs of the property are covered by having a tenant in place.
Why are London Councils Targeting Buy-to-Leave?
Hopefully, I’ve made it clear why, I think, it doesn’t make sense for the average investor to adopt a buy-to-leave strategy. Yet, buy-to-leave is something that happens, although rarely.
The question is, therefore, does buy-to-leave create a problem that needs to be addressed?
Councils claim that this kind of investment strategy isn’t a practice of normal property investors. They say the issue is wealthy, overseas investors who buy property to leave it empty, forcing up prices.
Islington Council has stated that they have identified bringing empty housing back into use, as a priority. In principle, I agree with this as an idea.
But the way in which councils like Islington are seeking to tackle the issue is short-sighted and intended, primarily, as a vote-winning exercise.
Wealthy, overseas investors are an easy target, after all. No one is going to want to be seen sticking up for them, or very few. So, it’s an easy horse for the council to back…
But it won’t solve the issue of the crisis because that is driven, first-and-foremost, by a lack of housing supply. The crisis is fundamentally quite simple. Supply isn’t meeting demand and that demand is growing.
And we can flesh that idea out.
There has been an increase of 540,000 households in London over the last ten years but in that same timeframe, only 430,000 new homes have been built.
This is startling. It means a deficit of 110,000 households. 110,000 homes that were needed but not delivered! And it’s a statistic that is getting worse, year-on-year.
Buy-to-Leave is Not The Problem
Fining or (at worst) imprisoning investors because they were following a buy-to-leave investment strategy might make headlines but it is not going to be the solution to London’s housing crisis.
The truth is that no amount of empty homes programmes or bringing the existing stock back into use is really going to solve the issues that we face.
It’s a sticking plaster.
I don’t mean to say that I think ignoring empty homes is the answer. Quite the contrary, bringing empty homes back into use is going to be necessary for increasing our housing stock and improving our local communities. But the focus on empty homes needs to involve a full-spectrum commitment to bring all our buildings into use, not just a small handful.
Although at risk of repeating myself, buy-to-leave involves a small, minority of homes that very few investors will ever choose to adopt. Most investors will always prefer to buy and rent out the property.
The Electoral Roll
One issue facing us is the criteria that Islington (and other) council(s) are using to determine whether a property is left empty or not, is flawed. Principally, they are looking is at whether anyone is on the electoral roll, at that address.
(Although it’s worth noting that other councils use different criteria, including council tax records and as the housing shortage deepens, local authorities are getting better at identifying genuinely vacant properties.)
But if a council is only using the electoral roll to identify empty homes, is this enough?
Doubtful. There are many reasons an owner might not show up on the Voter’s Register. There is no requirement to vote and while registration is a legal imperative, that doesn’t mean that everyone signs up and punishment for failing to register is rare.
Besides, there are good reasons why someone wouldn’t register. For instance, they may have purchased the property as a second home, they may be travelling. They may only use the property as a bolthole for when they are working in London.
Does this mean they should be penalised by the council for owning a property under threat of fines or even imprisonment?
Surely, there are conflicts here with the right of a homeowner to be able to simply enjoy the property that they own, in peace.
Is New Legislation or a Policy Change Required?
There are many, legitimate reasons for owning a property and not living in it for, say, 3 months or 6. As well as the reasons I have already listed there are also probate, ill-health or refurbishment projects.
Once all the instances of properties being left empty for normal, valid reasons have been stripped away, what is left are those properties that have been purposefully purchased by investors to leave empty. This will be, in my opinion, a very small number.
So, with that in mind, is new some new legislation required to tackle the buy-to-leave problem? And what would that legislation look like? Should something that threatens homeowners with imprisonment for not living in a property that they own even be considered?
Because if you disagree with the points I’ve already covered and feel like buy-to-leave puts a damaging amount of pressure on the housing supply in Islington and elsewhere this doesn’t mean that this policy, being put forward by Islington Council, is the right solution or is even possible to implement.
Why the Protection of Property Policy Can’t be Implemented
- If the owner of a particular property registers on the electoral roll and pays council tax, does the property get listed as empty?
- Does the council have any way of knowing whether a property is empty or not?
- Even if the council requires utility bills as a further way of proving that a property is not empty, does this provide proof, either way?
- Is there any legal route by which a council can target wealthy, overseas investors, specifically.
Unfortunately, the most likely outcome of any attempt to implement this legislation is that everyone would be affected, that anyone who left their property empty for longer than 3 months would be subject to a penalty.
And this could mean that this policy could end up hurting the very people and communities that it claims to be protecting.
Because let’s say that you buy a house with a view to living in it and at the last minute your circumstances change. Your employer decides that they don’t want you to relocate, after all, you get a better job… yourself or a close family member get sick.
These are all legitimate reasons to end up with a second, empty home. And, according to Islington Council, under these conditions, you could end up being on the receiving end of a large fine and face the threat of imprisonment.
Are Policy Changes the Best Solution?
Probably not but of course the level to which the government should interfere with matters of the free market is not something that can be covered in the scope of this article.
Let’s just say that the property market is, of course, a political issue, arguably more so than other markets. Issues around homes and communities are deeply political in nature.
But fundamentally the housing market is still driven by supply and demand and government interference, legislation and more red tape isn’t always helpful and the impact of bad legislation on a market can be devastating.
For a local housing market to be stable, there needs a mix of ownership. For instance, if all the properties in a new-build block of flats were owned by investors who kept them vacant, then the appeal of the development would go downhill and the balance of buyers would eventually shift.
This is the same as any market, guided by regulation but not ruled by it. If left to their own devices, markets will always find their own level. They will equilibrate.
So, implementing a long-term policy that is founded on tackling short-term issues like buy-to-leave, probably won’t work to achieve the actual intended result over the long-term. It is a mistake to employ rigid policies to try and tackle fluid situations.
Think about it. The small number of buy-to-leave properties are a result of a probable London-based housing bubble meeting higher-than-normal currency fluctuations. Are these short-term conditions something that local politics should be seeking to mitigate the effects of?
Personally, I think this looks like a fool’s errand.
Successful Policies Embrace Change
Change is inevitable. Like high streets up and down the country, residential housing is changing as well, in requirements, demand and in use.
Just look at the likes of Airbnb, Spareroom and Housing Guardians. These are all new organisations, created to meet demands that existed in the housing market.
These companies don’t directly relate the housing issues identified by the ‘buy-to-leave’ phenomenon but they do reflect a sea-change in the way that housing is viewed and used.
The truth is that, whether we like it or not, short-term housing is a necessity in modern life and the demand for it is growing. As such rigid, out-dated planning laws need to change and adapt to that fact. Seeking to stay rooted in the past and pursue penalties for owners seeking to engage with this trend instead of working with them is as reckless as it is dogmatic.
In some ways, the central government should be applauded for helping with some of our housing issues. Recent changes in stamp duty and changes in planning regulations to allow commercial premises to be converted back to residential are a step in the right direction.
But these changes are not going to help local communities, especially where authorities are opting out, choosing to carve their own path to try and tackle the issues.
And the carrot approach often sees more benefit than the stick approach.
In Holland, they have had success with getting the community involved in bringing properties back in to use.
In New York, Urban Homesteading is proving a great success.
Closer to home, in Manchester, leasing programmes and empty homes loans have had a massive impact in reducing the overall number of empty homes and bringing more housing stock in to use, which is, let’s face it, ultimately, the desired result.
Furthermore, policies, giving more autonomy to people, wanting to build their own home, must be considered, as a way of tackling the housing crisis.
Buy-to-Leave: Summing Up
To be fair to Islington Council, they do have a few schemes in place to bring empty homes back into use, which is the right approach in my view.
But their intention to target so-called ‘buy-to-leave’, with a proposal that can very easily end up hurting the community it is trying to protect, is short-sighted, difficult to implement and won’t solve the issue, at least, in my opinion.
It may win votes initially but I think it is deeply flawed. We don’t need to solve the buy-to-leave issue but we do need to tackle the issue of empty homes.
And we know that there are schemes that work. The projects in Holland and New York have seen drastic reductions in the number of empty homes because they are projects that empower people to make changes not penalise them for not following arbitrary rules.
If we were to combine these approaches with a solution that actually addresses the real issue of housing supply, that would be a way of really addressing the problems we face.
So, What’s the Answer?
This is a debate that think-tanks around the country are being paid large sums to solve but, in essence, there often tasked to create a solution that is ‘voter friendly’.
Unfortunately, this seems they will skirt around the problem and won’t face it head-on. The bigger picture, in simple terms, is that we need to meet demand with supply and this also requires an understanding of what is being demanded by the market, including temporary and sometimes vacant property.
My shortlist of ideas about how to improve market conditions, however, would be:
- Bring more land into use.
- Improve planning regulations so that they help, not hinder. Empower homeowners to bring more housing stock back in to use.
- Support owners to change more buildings to residential property with permitted development rights.
- Improve planning processes to allow planning applications to be cheaper, quicker and easier to process.
- For central and local government to work more closely with homeowners and property investors with a carrot approach (improved access to resources, right to build, homesteading and other open source models) rather than a stick approach (taxes, the threat of court action and imprisonment).