Why many landlords are likely to increase rents after higher stamp duty rates for buy-to-let investors come into force in April
When Chancellor George Osborne announced that buy-to-let investors will be forced to pay an additional 3% stamp duty from April, many property market experts predicted this could force landlords to push up rental prices.
The government claims the move will help more first-time buyers into their own homes. But estate agents point out that if tenants have to pay more rent they will be unable to save enough money needed to purchase their first home.
According to Assetgrove – a London-based rent guarantee specialist that helps landlords generate rental income on their properties –a first home in London cost an average of £367,990 in 2015 and required purchasers to raise a deposit of £91,409.
A study Halifax also shows the number of first-time buyers who took out a mortgage on the property dropped 0.5% in 2015 to 310,000 when compared with the previous 12 months.
Stamp duty costs
But it is not just first-time buyers who face difficulties raising the finance required to purchase a property.
Landlords who add to their property portfolio from April will have to raise more. Paramount Propertiesreports thatthe stamp duty payable on a property worth between £250,000 and £925,000 will rise from 5% to 8% for investors who are purchasing a buy-to-let property.
As if that isn’t enough, they’ll also face a much heavier tax on their profits and a rise in capital gains tax if they choose to sell it on. Another less trumpeted change will see the maximum tax relief dropping from 45% to 20%, meaning many landlords with outstanding mortgages will see a collapse in their profits.
Once letting fees, maintenance costs and those periods when the property is unoccupied are taken into account, profits could be wiped out altogether and a future interest rate rise could find many landlords beginning to operate at a loss.
The changes will hit those with small mortgages hardest and the 3% stamp duty premium could lock out new entrants to the market, according to central London estate agent Best Gapp, paving the way for a transfer of housing stock from small investors to larger corporations.
Hammersmith estate agent Lawsons& Daughters is predicting a short-term surge in sales before the new rates come into force in on 1 April. Beyond that, a reluctance of existing landlords to buy any further properties and enlarge their holdings is widely anticipated.
With figures showing that buying a property to rent in 2017 will cost, on average, three times as much as it does today, the attractiveness of buy-to-let property as an investment is likely to decrease sharply. After-tax profits for buy-to-let investors will take a serious knock, with a significant amount deciding that they can make better returns elsewhere.
These changes may initially be seen as good news for first time buyers, with buy-to-let landlords priced out of the market and more properties becoming available as a consequence. However, with fewer landlords coming into the market it’s also likely to herald an increase in rental levels to meet increased demand.
With remaining private landlords potentially hiking rents to offset their losses as well, it may ultimately mean that generation rent will have even less chance to save for a deposit and will find themselves suffering worse housing conditions to boot.
Even now, mortgage lenders are making it more difficult for buy-to-let investors to access loans because they are concerned that a large scale sell-off of rental properties could herald a renewed financial downturn.
With a much less competitive private rental sector dominated by uncompromising large investors, it may end up being bad news all round.
In short, the pain to come may not be restricted to the small buy-to-let investor, but also to those currently living in rental properties and seeking their own place on the property ladder.
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