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Tax Breaks And Buy-To-Let-Expansion

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'In response to the figures, Campbell Robb, Shelter’s chief executive, said: “In the context of looming welfare cuts and a dramatic shortage of homes, all those struggling to keep up with sky-high housing costs will be shocked to hear that a massive £14bn has been given in tax breaks for landlords in just a year.

“A fraction of this amount would go a long way towards fixing our housing shortage, and giving millions of priced-out families and young people the chance of a stable home.' (source Guardian)

http://www.theguardian.com/politics/2015/may/26/landlords-14bn-tax-breaks-buy-to-let-expansion-mortgage-interest

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I've thought this for a long time now. the only way to give housing a soft landing is to build traditional affordable council housing. that will slowly undermine the btl landlords and they will need to reduce rents, or sell at lower prices. the tax given away to the btl landlords can be increasingly funnelled dinto the council building programme.

its not lack of supply that's the issue, its the cornering of the market by the private sector.

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My concern about this line of argument is that you have an important question which needs to be resolved politically as it involves a conflict of economic interest between different groups; the banks, existing buy-to-let investors and existing owner-occupiers, both mortgaged and mortgage free, on the one hand and, on the other hand, people who do not presently own but would value having the option to become mortgaged owner-occupiers.

IMO the principal impact of buy-to-let is that as a consequence of the underlying scarcity of housing the present relationship between the basis on which owner-occupiers finance the purchases of homes and the basis on which buy-to-let investors finance the purchase of residential homes as investment vehicles enables speculative investors to outbid aspirant owner-occupiers using the aspirant owner-occupier’s own income, and that is totally perverse.

The mechanism of this perversity is that owner-occupiers must finance on a repayment basis and buy-to-let investors finance on an interest-only basis. In fact interest-only buy-to-let lending is the only remaining channel by which irresponsible interest-only lending continues to flow into the hands of those who for all their protestation of astuteness are in reality just mug investors and tools of a short-sighted and rapacious financial sector.

To be clear, what I mean is that if I, as someone who would like to have the option to buy, feel it is prudent to allocate no more than 40% of household income to the mortgage, then given that I am compelled to finance on a repayment basis, the price that I am able to stretch to is far less than a buy-to-let investor can stretch to when we both seek to borrow and use my income to pay the mortgage.

The buy-to-let investor can use borrowed money to finance an investment in the property, which will need, say, 30% of my income to service the investment by paying the interest-only mortgage. Residential property, over practical timescales, is inherently scarce. If the buy-to-let investor and I both eye the same property the market will not be able to magically provide additional supply. If the investor wins the bidding process then the scarcity of property means that if I want to live in that house then the buy-to-let investor may be able to compel me to hand over 35% of my income as rent. The buy-to-let investor hopes to pocket the difference between what is coming in as rent and what is going out as the mortgage interest charges.

Essentially the present structure of mortgage financing means that it appears to mug investors that somehow a supply of income in perpetuity is theirs for the borrowing – it looks to all intents and purposes as if they are being given the opportunity to borrow themselves into riches, (didn’t we just do this?). Given that we actually have is in fact a dangerously over-leveraged, hollowed out economy too heavily reliant on a corrupt and broken financial sector and afflicted by a seemingly universal psychosis regarding the investment prospects of shit houses, this is incredibly, incredibly dangerous – like first irritating the mucous membranes in your nose by snorting cocaine cut with asbestos then trying to treat resulting runny nose by snorting pure asbestos.

By avoiding a discussion of what really matters and electing instead to somewhat tendentiously paint the deduction of interest as an operating expense as a tax break, too much ground is conceded. It’s like complaining that your incurable pancreatic cancer is problematic because you’re tired all the time.

Edited by bland unsight

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My concern about this line of argument is that you have an important question which needs to be resolved politically as it involves a conflict of economic interest between different groups; the banks, existing buy-to-let investors and existing owner-occupiers, both mortgaged and mortgage free, on the one hand and, on the other hand, people who do not presently own but would value having the option to become mortgaged owner-occupiers.

IMO the principal impact of buy-to-let is that as a consequence of the underlying scarcity of housing the present relationship between the basis on which owner-occupiers finance the purchases of homes and the basis on which buy-to-let investors finance the purchase of residential homes as investment vehicles enables speculative investors to outbid aspirant owner-occupiers using the aspirant owner-occupier’s own income, and that is totally perverse.

The mechanism of this perversity is that owner-occupiers must finance on a repayment basis and buy-to-let investors finance on an interest-only basis. In fact interest-only buy-to-let lending is the only remaining channel by which irresponsible interest-only lending continues to flow into the hands of those who for all their protestation of astuteness are in reality just mug investors and tools of a short-sighted and rapacious financial sector.

To be clear, what I mean is that if I, as someone who would like to have the option to buy, feel it is prudent to allocate no more than 40% of household income to the mortgage, then given that I am compelled to finance on a repayment basis, the price that I am able to stretch to is far less than a buy-to-let investor can stretch to when we both seek to borrow and use my income to pay the mortgage.

The buy-to-let investor can use borrowed money to finance an investment in the property, which will need, say, 30% of my income to service the investment by paying the interest-only mortgage. Residential property, over practical timescales, is inherently scarce. If the buy-to-let investor and I both eye the same property the market will not be able to magically provide additional supply. If the investor wins the bidding process then the scarcity of property means that if I want to live in that house then the buy-to-let investor may be able to compel me to hand over 35% of my income as rent. The buy-to-let investor hopes to pocket the difference between what is coming in as rent and what is going out as the mortgage interest charges.

Essentially the present structure of mortgage financing means that it appears to mug investors that somehow a supply of income in perpetuity is theirs for the borrowing – it looks to all intents and purposes as if they are being given the opportunity to borrow themselves into riches, (didn’t we just do this?). Given that we actually have is in fact a dangerously over-leveraged, hollowed out economy too heavily reliant on a corrupt and broken financial sector and afflicted by a seemingly universal psychosis regarding the investment prospects of shit houses, this is incredibly, incredibly dangerous – like first irritating the mucous membranes in your nose by snorting cocaine cut with asbestos then trying to treat resulting runny nose by snorting pure asbestos.

By avoiding a discussion of what really matters and electing instead to somewhat tendentiously paint the deduction of interest as an operating expense as a tax break, too much ground is conceded. It’s like complaining that your incurable pancreatic cancer is problematic because you’re tired all the time.

The interesting thing is that the dichotomy you note only really applies when base rates are very low in historical terms (c. 4% or less). At base rates higher than this the repayment element of a 25 year repayment mortgage is a relatively small proportion of the monthly payment for the OO lender, while the risk premium attached to the BTL loan outweights the cash saving inherent in an OO mortgage. (see the model posted in another thread for a worked example of this).

So fundamentally the situation you describe is a function of QE. The "BTL Affordability Frontier" is very sensitive to interest rate increases when starting from a low base. If I owned a BTL (which I don't) I'd be nervously eyeing what the sensitivity of my profit margin was to interest rates; as when/if they rise it is quite likely that a number of currently cash generative BTL properties (post mortgage interest) will become cash negative. There is a risk of getting crushed in the rush for the door......

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Can you still get BTL IO mortgages?

AFAICT banks are running away from both BTL and IO.

The only BTL lending they seem keen on is where the sucker investor puts in a large cash deposit and can cover the BTL loan with equity in the OO.

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To be clear, what I mean is that if I, as someone who would like to have the option to buy, feel it is prudent to allocate no more than 40% of household income to the mortgage, then given that I am compelled to finance on a repayment basis, the price that I am able to stretch to is far less than a buy-to-let investor can stretch to when we both seek to borrow and use my income to pay the mortgage.

Very clear, the best way I've seen the situation described.

I remember someone from the IFS (Insitute of Fiscal Studies) saying that they thought BTL was already tax-disadvantaged compared to owner occupiers (CGT-free). They must be assuming that BTL's actually pay income tax on their profits and cough up the CGT when sold.

For those that have leveraged up, withdrawn equity and spent it, I suspect they will never be able to afford the CGT so will just not declare it.

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Is not BTL now making up a large proportion of the social housing?.....they expect to be remunerated for their risk, helping out and all that, they are also protecting the lenders by providing double security/guarantor by often risking their own homes if all turns sour.

BTL leverage apart from everything else is a risky proposition because they rely on people to pay the rent from the wages and welfare they can secure.

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I do find it difficult to understand why the CGT allowance per person (up to £22k for a couple per year) applies to a 'business asset' - all other assets are normally personal and CGT allowance is relevant.



in addition there is this anomaly (quoting from this is money)



'Lettings relief


A further element called lettings relief can further reduce your CGT bill.


Lettings relief applies where the property has at some point been an individual's only or main residence


Letting relief is worth the lowest of three amounts: private residence relief already claimed, the value of the increase in capital gains which occurred during the period when the property was being let, or £40,000.


When combined with the annual £11,000 CGT allowance, these two reliefs can often take bills down to zero.'


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Don't worry as we know the government is bankrupt and failing, some of the new policies have already hinted at going after the BTL brigade. Its a big fat juicy revenue stream not being exploited and the state will turn on it like a vampire as the screws tighten. The government will sacrifice all else to protect itself. It will shoot you if it has too so hammering landlords is inevitable as we head towards collapse. They are not a "liked " bunch so getting policies through to extract wealth from them will come.

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The interesting thing is that the dichotomy you note only really applies when base rates are very low in historical terms (c. 4% or less). At base rates higher than this the repayment element of a 25 year repayment mortgage is a relatively small proportion of the monthly payment for the OO lender, while the risk premium attached to the BTL loan outweights the cash saving inherent in an OO mortgage. (see the model posted in another thread for a worked example of this).

...

Absolutely, (though arguable that the dichotomy springs from the mortgage rate considered when assessing affordability and not the base rate).

I mention the distinction not to be pedantic but for two separate but related and important reasons.

Firstly, as noted elsewhere, whilst the rates on two-year fixes have been tracking (no pun intended) to incredible lows, SVRs continue to track off their post-2009 lows and back up towards pre-crisis levels,( as has been discussed on other threads).There is a whole zoo of mortgage rate behaviour, with different products pricing of different swap rates and materially influenced by other factors.

Secondly, the availability of very low rates is of little use to owner-occupiers in outbidding buy-to-letters as owner-occupiers are subject to MMR affordability tests which are based on market expectations of the movement of rates over the first five years of the mortgage, (see paragraphs 1.58 to 1.63 of FCA CP11/31, published December 2011), PS12/16 confirmed in October 2012 that these proposals would be implemented without amendment, and, of course, they were implemented in April 2014 when MMR came into force. Without wishing to get into the grim detail of how such an assessment might be made there is a headline answer which nobody could disagree with - regardless of where rates actually go, current market expectation is that the relevant swap rates will be higher, and separate to these key elements of mortgage rate pricing, the expectation is that FLS will be gone. As a direct consequence of the failure to regulate buy-to-let lending at all whilst regulating owner-occupied lending we have a situation where buy-to-let affordability is being assessed by judging rental income against current bonkers low teaser rates whilst at the same time owner-occupiers are having affordability assessed on the basis of restricted income multiples and future mortgage rates which are expected to be materially higher than present mortgage rates. (And then people are surprised when there is so little affordable supply in London, FFS.)

With the prices paid by current buy-to-let investors linked to current very low mortgage rates and prices paid by current owner-occupiers linked to future mortgage rates which are expected to be higher, the difference between the basis on which financing occurs (i.e. repayment vs interest-only) is compounded by a disparity in the mortgage rates used when assessing affordability.

Edited by bland unsight

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I do find it difficult to understand why the CGT allowance per person (up to £22k for a couple per year) applies to a 'business asset' - all other assets are normally personal and CGT allowance is relevant.

in addition there is this anomaly (quoting from this is money)

'Lettings relief

A further element called lettings relief can further reduce your CGT bill.

Lettings relief applies where the property has at some point been an individual's only or main residence

Letting relief is worth the lowest of three amounts: private residence relief already claimed, the value of the increase in capital gains which occurred during the period when the property was being let, or £40,000.

When combined with the annual £11,000 CGT allowance, these two reliefs can often take bills down to zero.'

It's part of a broader set of measures enacted over decades by both the Tories, Old Labour and New Labour intended to replace a property owning democracy with a property owning plutocracy. Or as northshore and others have more succinctly stated, it's a return to feudalism. A kind of Field of Dreams aphorism re-imagined, "If you don't tax, they will come."

Edited by bland unsight

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I think that you've nailed the current problem (can't use quote buttons unfortunately).

The BOE is only focused on overall financial stability. It seems that their present view is that BTL lending with the implied "double equity" protection for lenders does not create a systematic risk to bank stability. One could argue this, but it's not on the face of it a wholly unreasonable position.

The problem is that the BOE has no remit to police the fairness of the property market, and in particular has no remit to ensure that OO borrowers and BTL borrowers are on a level playing field - that would seem to me to be a political issue.

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Not sure which thread is the most suitable to post this on, so I'll post it here. Paragraph from a new story on an EA industry website:

ARLA also says the number of landlords selling their buy-to-let properties has increased, particularly in London. ARLA agents in London saw the number of landlords selling their buy-to-let properties double between March and April, rising from three to six properties on average per branch.

The national average increased from three to four buy-to-let properties being put up for sale on average per branch.

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I think that you've nailed the current problem (can't use quote buttons unfortunately).

The BOE is only focused on overall financial stability. It seems that their present view is that BTL lending with the implied "double equity" protection for lenders does not create a systematic risk to bank stability. One could argue this, but it's not on the face of it a wholly unreasonable position.

The problem is that the BOE has no remit to police the fairness of the property market, and in particular has no remit to ensure that OO borrowers and BTL borrowers are on a level playing field - that would seem to me to be a political issue.

I'm much more optimistic on this than I was a couple of years back.

The sheer volume of BTL lending means that lots of private households are betting their savings on UK property. That amplifies the traditional financial stability effect arising from the fact that for many households their home is their only (or principal) capital asset. Essentially there is a huge financial stability risk from allowing a situation to persist where everyone is motivated to bet everything on property, especially as the overwhelming majority of these bets are leveraged bets and the source of the borrowed money is the licensed banks.

If the structure of mortgage finance determines investment preferences and sets up a pro-cyclical mechanism channelling capital into property, you have a pretty clear financial stability issue. When this is set in the context of a central bank apparently keen achieve private sector deleveraging by ensuring that private households, at the very least, do not increase nominal borrowing at a rate that exceeds nominal GDP growth, a need to intervene sits at the heart of the remit.

Whilst the Bank has no direct interest in house prices, the same cannot be said of the borrowing that underpins those prices and the manner in which investment incentives which are themselves artefacts of Bank policy inform prole investment preferences. Through FCA implementation of MMR and other Bank interventions, principally QE and FLS, the Bank have put in place the structures that are the root cause of these pro-cyclical investment flows. They better be looking for a solution to the problem, because they'll be clearing up the mess sooner or later.

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That's certainly an arguable position. I'm not sure if the BoE's remit is limited to the financial position of licensed banks - or is it more broad and encompasses households, businesses etc?

If it's the latter the question then arises as to how much analysis they are undertaking on the BTL market, and how they are modelling its potential impacts. Central Banks can be a bit like generals (always trying to fight the last war). As such will they spot the potential risks in time to take corrective action?

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The argument for BTL receiving tax relief on interest on borrowings is that being a landlord is a business. However, along with banking it happens to be one that can derives a not inconsiderable portion of financial protection from vagaries of the market thanks to the state propping up its earnings stream via such thing as Housing Benefit, Tax Credits etc. Without those props it would be a lot harder for many landlords to turn a profit. Of course as governments struggle to fund the deficit those supports are going to be slowly eaten away. The problem for all enterprises that drink from that pool of state spending is that if it shrinks they end up fighting each other for an evaporating resource

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That's certainly an arguable position. I'm not sure if the BoE's remit is limited to the financial position of licensed banks - or is it more broad and encompasses households, businesses etc?

If it's the latter the question then arises as to how much analysis they are undertaking on the BTL market, and how they are modelling its potential impacts. Central Banks can be a bit like generals (always trying to fight the last war). As such will they spot the potential risks in time to take corrective action?

Well, as we've noted on other threads in October 2014 the FT ran a piece entitled Bank of England seeks powers to curb risky buy-to-let lending and in February this year Bloomberg ran a piece entitled Buy-to-Let Booms as BOE Awaits Powers to Curb Mortgages, in March Carney went to the trouble of rubbishing speculation surrounding a wall of pension money flooding into buy-to-let at the Lords Select Committee on Economic Affairs and then in the April 2015 Trends in Lending we had a whacking great pull out section dedicated to buy-to-let.

If you really want to close the file on this with confidence, there's this 2nd October 2014 statement from the FPC which is essentially the source of the FT article, ;) :

Following discussion of this issue at its meeting on 26 September, the FPC recommends that HM Treasury exercise its statutory power to enable the FPC to direct, if necessary to protect and enhance financial stability, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) to require regulated lenders to place limits on residential mortgage lending, both owner-occupied and buy-to-let, by reference to:

( a ) loan to value ratios;
( b ) debt to income ratios, including interest coverage ratios in respect of buy-to-let lending.
These instruments would sit alongside the FPC’s power of Direction on sectoral capital requirements and its responsibility for setting the countercyclical capital buffer (CCB) rate, and complement the FPC’s existing powers of Recommendation. The instruments would apply to all regulated lenders, and would cover residential lending in both the owner-occupied and buy-to-let sectors. The FPC judged that, taken together, these instruments were necessary, and should be sufficient, to tackle risks to financial stability that could emerge from the housing market in the future, rather than indicating likely FPC policy decisions in the short term.
The housing market can pose direct and indirect risks to financial stability, as has been seen in the United Kingdom and internationally.
The direct threat arises because mortgage lending is the single largest asset class held by UK banks in aggregate. It is therefore important to ensure that banks are resilient to risks emanating from the housing market.
The indirect threat arises because mortgages are the single largest liability of UK households, representing 80% of household debt. Highly indebted households cut back spending sharply when the unexpected happens, which is why recessions that follow periods of rapid credit growth tend to be deeper and longer lasting.
Furthermore, housing is the main source of collateral for the real economy, and so can give rise to a self-reinforcing loop of rising house prices and overextension of credit growth that acts as an amplifier of these risks.
It is not the FPC’s role to control house prices, nor can it address underlying structural issues related to the supply of houses. Its role, as set out by Parliament, is to manage risks to financial stability, including from the build-up of unsustainable levels of leverage, debt or credit growth. The recommendation in this statement will allow it to fulfil that role in relation to the housing market.
Macroprudential tools, which can where needed be applied to specific sectors such as housing, lessen the need for monetary policy to be diverted to address these risks, allowing monetary policy to be reserved as the last line of defence against risks to financial stability.

Source: Financial Policy Committee statement on housing market powers of Direction from its policy meeting, 26 September 2014

The fact that the Bank see the problem and are gunning for it is not really up for debate IMO. Osborne is not presently giving the Bank the powers it needs directly via statutory channels that Osborne has control over, so my contention, which I've tried to flesh out on other threads, is that Carney has elected to drive round Osborne by using the Basel risk-weightings, (the possibility exists that Osborne is keen for BTL to be killed off, now that we are on the right side of the GE, and is on board with Carney using the risk weightings, i.e. the bone of contention between Osborne and Carney may just have been timing - September 2014 was too early to call a stop to Osborne's nice little boom...)

Edited by bland unsight

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The Government said they will deal with BTL after the election. Obviously they don't want to lose the votes of the rentiers so it was not done before. Hopefully they will nip it in the bud before Basel comes along and does it for them.

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Aside from the tax breaks there will be the tie in to the public sector net debt - BTL's owned by public sector workers, welfare, etc.

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