First off please let me set the scene.
It’s taken me a month or two since the news of the budget broke, before I wanted to write this article.
Mainly because I wanted to see how the different sections of the property industry were reacting to the budget news and wait till the initial panic had died down.
After reviewing many different opinions, comments and news pieces, the general consensus to this budget is that it’s bad news for investors… but I disagree.
Now don’t get me wrong, this would be very easy for me to simply agree with the main stream and see the budget proposals as bad news… because let’s be honest who wants to pay more tax!
Of course nobody does, certainly I don’t.
But I don’t just want to pay lip service to this important change in tax policy and jump on the band-wagon, I wanted to instead look deeper at the potential long term impact.
Now for those of you dead against this upcoming tax change, (and I completely understand your reasons) please click here – Parliament – Petition to Reverse the Planned Tax Restriction on Individual Landlords and sign the petition trying to challenge it.
But if your interested in an alternate thought on this…. please read on.
Now there are lots of nuances in the budget and these don’t affect every property strategy adversely (property trading/flipping is less impacted due to it’s usual method of financing, trading nature and the fact that it’s often connected with Ltd companies) but the main 2 points that I feel affect the large majority of us as property investors (and buy to let landlords) are
- The government will restrict the relief on finance costs that landlords of residential property can get to the basic rate of income tax. The restriction will be phased in over 4 years, starting from April 2017.
- The government will also reform how landlords of residential property can account for the costs they incur in improving and maintaining rental property. Currently, landlords of furnished properties can deduct 10% of their rent from their profit to account for wear and tear. irrespective of their expenditure. From April 2016, the government will replace this allowance with a new system that enables all landlords of residential property to only deduct costs they actually incur.
Will These Budget Changes Definitely Happen?
Now the caveat to this, what goes in the Chancellors budget isn’t always a cast iron guarantee that this is the finished article.
There are often revisions to policies that are seen in the initial announcement and when the dust settles what actually becomes reality is often a watered down version that has passed through many panels, assessments and various meetings to ensure a policy meets a real world test.
That being said, I see the latest announcements by the government as a good move for Investors and the property market in general.
Why Could This Be Good News For Property Investors?
Now if you read any of the mainstream Property Press, forums or articles this is likely to be extremely contrary to what everyone else has been saying with many predicting the end of buy to let or panicking about costs being forced on to tenants… I disagree, but please let me explain.
If we can take a step back for the moment and consider buy-to-let and property investing for the service it provides and how the market ‘should’ function.
We’re talking about People’s homes and Communities, an essential part of what our nation needs to function.
So as a market we all need this to be as stable as possible.
Tenants. Homeowners. Investors. Builders. Land Owners. Mortgage Companies.
Balance Out The Market
In any country, economy or industry, an unstable market leads to price discrepancies.
Which can fluctuate widely whilst the market tries to level and ease it’s self out, underlined and ultimately fuelled by supply and demand.
Unstable markets aren’t good for anyone other than individuals or organisations trying to cash in on niche advantages and short term gains.
I view Property as providing a service and importantly as a long term business, so I want a stable market to operate in.
With this in mind, if we analyse the current property market, there’s too many areas of instability and there has been for years.
If nothing is done to change this then it will never improve.
One sweeping change won’t fix this over night, but on-going improvements will.
The instability can be seen easily by just looking at the current property market over a projected period of time.
This situation below is typical of the current market.
One year people are fighting over properties in a particular postcode or street with multiple viewings and multiple offers going in within 24hrs of it hitting the market (happening right now as we speak in many areas across Manchester and other areas of the UK).
Don’t believe me, I’ve seen it happen first hand on some properties recently when we’ve attended viewings for clients in Salford and a handful of other places across the North West.
Check out these newspaper reports too
In 2014 from the Guardian, with Nationwide Building Society claiming growth of 21% in a year.
Now in 2015 from another property boom in Prestwich as shown in the MEN.
Boom & Bust
So right now house prices are flying up and confidence is high….Or is it.
The message is very confusing from the main stream media and is meant to purposefully be sensationalist.
This google search for house price growth shows how confusing the media can make it, with reports one day of growth and the next of decline.
In a market that impacts so many and fuelled by confidence, with the general public often following the media headlines, there’s no wonder there’s such peaks, troughs and cycles.
Fast forward a couple of years, and these same properties, that same location, postcode and street and it could take you months to find a buyer and only after many price reductions.
Again don’t believe me.
Check out the same stats for the property mentioned above in Prestwich.
What’s the difference in these two dates.
The demand for housing is the same if not consistently growing, so why the fluctuations, decline, growth.
Has a gold mine been discovered under that street during this time? And prices have shot up
Has oil been struck in the area and every homeowner gets a piece of the pie?
Or something more real world, has the quality of living improved in that area during this time ?
The only difference.
The property market is confidence driven there’s no doubt about that.
Added to this there’s far to much demand for the supply, and this demand is increasing literally by the day with population growth and changing trends of smaller house-holds.
See this article I wrote here specifically about the London housing crisis.
The Future of Property Investment – Demand
Now from a purely demand point of view. Does the chancellors report affect this?
Of course not.
People still need homes. People still want and need to rent.
Home-ownership is not for everyone for a whole host of reasons and the underlying issue of demand for housing is stronger than ever.
Now let’s view this from a property investor’s viewpoint and bring it back to the statement I posed in the headline of this article.
Why the Controversial 2015 Chancellors Budget on Mortgage Relief Can Be Good For Property Investors
I’m an investor.
The definition of an investor (courtesy of the Cambridge English Dictionary).
“A person who puts money into something in order to make a profit or get an advantage”
Now that doesn’t make us investors evil as some TV programmes try and make us out to be.
I pride myself on providing and maintaining homes to a high standard that my tenants want to live in.
Providing a very much needed service that the government is failing to provide in sufficient quantity and standard.
It’s a fallacy to think that the property market’s troubles is caused by investors.
On the contrary. We’re trying to fix the problem.
If as an investor I supply a service or product that’s substandard, what do you think happens?
Got it in one… no one uses or wants it.
As Professional Property Investors and Landlords our aims should be directly aligned with our tenants.
When I buy a property to let it out I am doing so with the aim of finding a tenant that looks after, respects and treats the property as their home and pays a fair market rent (that’s in line with the cost of owning and maintaining a property).
My tenant’s aims are for a well maintained home in an area they want to live in at a fair rent.
A Perfect match.
So if the supply for the service I provide is stronger than ever, then for me I want to support and help that market continue, not help distort it.
The Future of Property Investment – Supply
That’s why I view the announcement by the chancellor as a positive one.
Unlike many investors and landlords, I view the changes that they’re looking to implement as important for the property market.
The Tax changes really are designed to impact the higher rate tax payer only, which the government is viewing as one potential distortion of the market with people stock piling homes, building very large portfolios with very high leverage.
The Aim & Outcome of The 2015 Budget
My personal view on this is that the budget is designed to level the market and try and reduce the rapid demand on property from investors in times where confidence is high on house price growth.
Out of everything I’m seeing, it certainly looks like their pushing people to make more long term business decisions within property and run them more like a business than a hobby.
With the influx of legislation across the property sector this certainly seems the push on policy by the government.
Overall the outcome is still to be seen and there will be some unintended consequences as with any tax and legislation, but the likely scenario…
For the lower rate tax payer you shouldn’t be impacted with the current tax changes and business should be as usual for most investors in this bracket.
For the higher rate tax payer with low gearing. If you buy your properties with cash or only leverage with mortgages at low loan to values the impact will be minimal.
Where it will likely hit hardest is higher rate tax payers with high gearing, buying with maximum loan to value mortgages, who were benefiting most from the previous tax allowance.
I see this ultimately as an approach by the government to limit the influx of these buyers in the market.
Forcing many in this bracket to either
1).Take the tax hit (because they maybe perceived as being able to afford it),
2). Change strategy by doing more flips and trading (buy-refurbish-sell)
3). Focus on purchasing Buy to let properties in lower value areas (instead of high value, low yield, high potential for capital growth, locations) where they have higher yields, and the margins allow for more cushion and profit to pay any increased tax
4). or by purchasing future properties as a ltd company instead and therefore falling in to a different tax setup.
Overall what I would say is most importantly whatever your tax position and your current portfolio setup don’t panic, especially if you find yourself in the high tax payer with high gearing bracket.
There’s plenty of time to adjust and implement so you don’t get hit hard by the planned changes.
Either way, whatever your situation, the next step is to sit down with your accountant and…
Review. Plan. Take Action and Continue to Grow.
To Your Success