I get a lot of adverts popping up on FB for all manner of crackpot landlord-rentier/buy-to-let nonsense. I quite often amuse myself by airing my views. Usually they are angrily dismissed, or ignored. Tonight I had a lengthy debate with an 'entrepreneur'. Thought you might be interested in reading it (very long!)...
Me (answering the Q of whether the new tax regime will affect my plans): It won't affect my decision, as I'm not a greedy parasitical *******, so I'll maintain my "portfolio" at zero, and stick to working or investing in the productive economy, rather than sponging off the state and people-farming.
Him: Interesting point of view. I would be interested if you could justify your comments? From my point of view - investing in property is just as valid a business as any other. I personally employ 4 members of staff and subcontract a variety of work to many other individuals thus contributing a huge amount to the productive economy as well as providing stability and support to our tenants. Of course - there will always be some rogues in any industry which I accept although do not condone of course. Sadly, I fear the state is not doing much to help the situation (hence my OP) and is also failing to provide adequate housing full stop which means the private sector has to fulfil a very import function in a macro economic sense - without the PRS the issue of homelessness would be exponentially worse...?. Any way - would be great to hear you back up your comments?
Me: I think there's a pretty high proportion of rogues. But that aside, it competes with those who simply want to buy somewhere to live, driving up prices. The competition isn't even, because of the ability to offset mortgage interest against tax, and greater access to interest-only mortgages. The majority have effectively been propped up by ridiculously low interest rates, at the expense of anyone trying to save for a deposit. They (typically) don't add to the housing stock - they just seek to monopolise it and make others pay their mortgages. It's clear in lots of the comments above - "it's all about the capital appreciation". What are they doing to earn that capital appreciation? Nothing. It comes at the direct expense of those who need somewhere to live. Look at your comments suggesting people get into "rent-to-rent" - a ridiculous system which drives up rents and crams ever-more people into houses. The blame lies fundamentally with successive governments and their policies, hence it's good to see the woefully bad Osborne at least making some efforts to at least appear to redress the balance. But I wish landlords would stop pretending they're somehow doing everyone a favour by providing them with somewhere to live. This has been particularly prevalent with the "threats" that half a million or so landlords will sell up because of the tax changes - "then all the tenants will have nowhere to live". As if the houses will somehow disappear.
Him: Thanks for your reply :-)
I welcome open and healthy debate - hence the thread!
- Do you think your view on house price rises is maybe too simplistic? London - for sure foreign investment has spiked that market - but the rest of the country? The main factors that will always drive up house prices are lack of supply vs demand (we are only building about 50% of what we need to keep up with population growth) and natural inflation over a period of time. Generally I see people competing (and hence pushing prices up) to be within the owner occupier market as people buy with their hearts if they are going to live in the property themselves, whereas investors have tighter criteria.
- I'm not sure where this argument has come from about the competition not being equal between investors and owner occupiers regarding interest rate relief. Investors are running a business whereas homeowners are just that - homeowners. In fact, all investors will either own or rent their own residence and so are subject to this anyway. It's not like investors suddenly get to offset tax from their primary residence against property income...
- Also - is it right that some investors will now find themselves in a position that they are actually making real time cashflow loses but still being taxed on it? I am not an MBA, but something seems fundamentally wrong with that concept. :-(
- Homeowners get access to schemes such as help to buy (low deposit), lower mortgage fees and lower interest rates than BTL investors. Using the argument of competition - does this not redress the balance somewhat? Also - BTL investors still have to save a deposit just like everyone else - it's not like there are 100% LTV mortgages around anymore!
- Rent to rent actually reduces rent rates. In our area you can get an average 1 bed flat for £500pcm, plus council tax and utilities that will probably come in at around £300pcm. Lets say £800pcm total. Living in an HMO room - again in our area you could get a very high quality, ensuite room with all bills, furniture and maybe even Sky included for £400pcm - about half the cost. Using those figures - you would be saving almost £5000 a year living in the HMO - or a 10% deposit on a £100k house in 2 years! :-)
- There will always be (and should always be) a large demographic who will not want to be, are not able to be or shouldn't be homeowners. These individuals need rented accommodation. If all of the private investors sell up and owner occupiers buy the stock - the basics of supply and demand dictate there will be less stock to service the demographic and rents will go up - penalizing the renters even more... If only the state could provide more housing - but sadly they can't at the moment.
- Why does investing for capital appreciation come at the expense of those who need somewhere to live?
- I do agree that the low interest rates are propping up many a portfolio and when interest rates rise there will be plenty of landlords offloading. I believe this will cause a market correction and should make property more affordable again :-)
I am running an event in london in March - it's all about build a proper business around property - it would be great to see you there as my guest - maybe I can convince you that not everyone is a rogue in the industry?
Me: Long one! In order (roughly):
- Not really. Supply and demand, absolutely (and there is plenty of blame elsewhere for undersupply, and increased demand through immigration). But demand isn't the same as demand for crisps, or iPads even. It's limited by what people can afford - or are allowed - to borrow. Again, I'd largely lay the blame here with governments/BoE/FSA etc. and I think it will all unravel fairly soon in a disastrous mess. London is the worst example, of course, and foreign "investors" are a major problem. But with millions of homes bought to let nationally, which 20-30 years ago wouldn't have been, I don't for a moment believe that the extra demand from BtL hasn't had a big impact. No doubt some OOs bid each other up too, but I think most first-time buyers don't have the luxury of 'buying with their hearts', given then current bubble in prices.
- Your wording re. investors matches my problem with tax relief. Is it a business, or an investment? If it's a business, you should pay business rates. If it's an investment, to make money from capital increase, which many of your commenters suggest, then you shouldn't be able to borrow to invest - you can't do so to invest in the stock market.
Him: Fair point about business vs investment - I view a portfolio as a business (it's all about cashflow and yield for me - capital increase is not even factored into my calcs unless it's a refurb and flip - which is also a trading business rather than an investment but still means no interest rate relief for the mortgage...
You can borrow to invest in property because it's a tangible asset and the mortgage company takes security on it - this would not be possible in the stock market.
So - this raises an interesting question...
Is property a trading business or an investment?
Should different property models be treated differently for interest rate relief purposes....
This, of course, would be virtually impossible to administer...
Me: Sorry, stopped mid-flow:
- It does seem a bit odd that you can be making a loss but still pay tax. I understand this will largely affect those who have significant mortgage debt on their property, and won't affect those who don't, so I have no problem with it, but not sure it's the best approach. Likewise the exemption for large numbers of properties seems pretty arbitrary.
- Homeowners do get Help to Buy etc. but I'd say these are a major part of the problem. They allow a few people to buy by allowing them to borrow more, but in doing so this has inflated the bubble further, making the problem worse. BtL investors typically don't save for a deposit once they're started, though, do they? Surely many of them just use the magic equity from the house price fairy, caused in part by their own demand, to put down as a deposit on the next one. That seems to be the model I most commonly hear touted by 'experts'.
- Rent to rent clearly doesn't reduce rates. It increases them by adding another person sucking money out of the renters between them and the landlord. What you're saying is you'll pay less rent, but for a smaller space. Clearly if the people in the HMO rented the house between themselves, or the landlord were to convert it to squeeze more of them in himself, they would pay less money without the extra 'entrepreneur' taking his slice (again, for doing very little).
- There are an awful lot of people who would like to buy their own home, and earn decent salaries, but can't or won't because of the ridiculous bubble in prices. The huge surge in BtL exacerbates this and capitalises on it. Yes, we need rental property, but there's a balance to be had, and we're well on the wrong side of it. What if 70% of people were renting? 80%? 90%? When is it too much? Your argument re. prices and rents omits two things. If loads of rentiers sold up, then your argument re. supply and demand suggests sale prices would fall, which should have an effect on rents. And if lots of owner-occupiers were to buy, there'd be less demand for rental.
- Capital growth, i.e. housing cost inflation, quite clearly comes at a cost to anyone who doesn't own a home. The young, and renters, and the less well-off, on the whole. Every £10,000 your "portfolio" rises is an extra £10,000 someone without a home will have to pay to buy one, or an increase in rent in line with rising house prices. Where do you think all the extra 'wealth' has come from when your houses go up in value? If it weren't at the impoverishment of others, it would be lovely - we could just make sure everyone had a house, then sit around and get rich by watching them go up in value. Which seems to be the main economic plan of the last few Chancellors.
- I'm not proper RAF; just an officer with the cadets, and a member of an RAF flying club. How about you?
- I don't all landlords are rogues, of course - although I think rather a lot are. Tenants are hugely at the mercy of, particularly, the smaller mum-and-dad "it's my pension" BtL types, given they can generally be turfed out of their home at 2 months' notice, with the huge expense this inevitable entails. It's a particular problem for those with children. From experience, I do find the majority of them tend to be rather greedy, though, aiming to cram as many people into houses as they can, with little regard for anything other than their profit margin. Somewhere to live is an absolute necessity, and if any other essential commodity - food, water - were effectively bought up by a small group of people, using huge amounts of borrowed money, driving up prices and charging extortionate rates for them, there's rightly be an outcry.
- Just a bit of background, since I suspect you might take me for a rampaging socialist: I am generally very conservative/centre-right-wing. I am not anti-business, anti-capitalist or anti-profit. None of the problems above affect me directly, as I live rent-free because of my job. I'm therefore in the perfect position to buy somewhere and let it out, and am regularly urged to by many colleagues. I won't do it because a) I think house prices are in an almighty bubble and it would be economic madness, and I can't bring myself to try to snaffle a house which I don't need and don't live in, to try to get some other poor sod to pay off a mortgage for me. My mother regularly offers to 'help' me with more than enough money for a deposit, and I have a fair bit saved myself, but I won't take it. If I ever decide prices seem reasonable I probably will buy a house, so that I have somewhere to live in retirement, and I'll let it out for a fraction of 'market' rate, to cover running costs (not my mortgage), if that. The strength of feeling is huge on this, and growing, as those without a home are increasingly exploited. The majority of friends of a similar age (36) think similarly, and again, many of them are far from inherently left-wing. Quite a few of them are homeowners, but they can see the gross unfairness and looming disaster of the current situation. House price inflation has largely destroyed the link between hard work/a good career and reward. You can make a fortune by borrowing a load of money and having someone else hand over a big chunk of theirs to pay it back for you. But if you aspire to own a modest house, to give you a stable family home, you either have to take on a ludicrous debt, or rely on rich parents. Although I disagree with Jeremy Corbyn's politics in just about every way (I'm more naturally an admirer of the likes of Farage, Thatcher, or Tebbit, say), I would sooner vote for Corbyn than Cameron/Osborne on the basis of housing policy. Quite frankly, if he said all BtL landlords would have their "investments" compulsorily purchased at 10% of current prices, I'd cheer him from the rafters. For someone as conservative as I am (and a lot of people I know) to be pushed to that extent says a lot, I think. And, of course, just to rub salt into the wounds, the typical landlord usually seems to attribute the situation to 'young people spending their money on iPads/holidays/eating out/trainers/going to the pub'.