Ireland: A Btl Case Study

[Neverwhere]

There's a new post on Property118 that once again points to Ireland as a possible case study for the potential impacts of Clause 24 (h/t Bland Unsight for flagging on the BTL Regrouping thread) which I'm quite pleased about because it gives me a good excuse to highlight an interesting paper from the Central Bank of Ireland that was recently referenced in both HM Treasury's December 2015 Open Consultation: Financial Policy Committee powers of direction in the buy-to-let market and The Financial Policy Committee's tools over the buy-to-let mortgage market - Impact Assessment, produced jointly with the Bank of England, in October 2015.

First, though, I'm going to run through a few points from the Property118 thread in relation to the Irish PRS:

Landlords across the UK have already started to increase rents for current tenants as a consequence of George Osborne’s attack on the private rental sector (contained in Clause 24 of the Finance Bill). When a similar policy was adopted in Ireland in 1998, rents increased by almost 50% over the subsequent three years.

[. . .]

It is clear that the Chancellor did not base the idea on the lessons of history, specifically the recent history of Ireland where, in the 1990s, as in the UK now, there was a perception that prospective landlords were crowding out first-time-buyers and driving up property prices. As a result in 1998 the Irish Government sought to discourage new investment in private rented accommodation and did this by removing the deductibility of mortgage interest for tax purposes.

Following the measure, rents rose by at least 24% in 1998. This represented the biggest annual increase in rents ever experienced in Ireland. The Housing Policy Review 1990-2002 reported that 1999/2000 and 2000/2001 saw particularly high growth in private residential sector rents, which increased by 10.5 per cent and 14.6 per cent respectively during these years.

The Ronan Lyons report showed that the average monthly rent in Ireland in the third quarter of 1998 was 600 euros. The average had been climbing at a steady rate for 20 years, but it then accelerated, twice. It reached almost 900 euros in the third quarter of 2001, just before the deductibility of interest was restored, effective from January 2002; there had been an increase of almost 50% in three years.
http://www.environ.ie/en/Publications/DevelopmentandHousing/Housing/FileDownLoad,2122,en.pdf

What is more, these higher rents meant that many who were renting while waiting to buy their first homes could no longer afford to save deposits, leading to the conclusion that Government intervention designed to ease the pressure on first-time buyers quite ironically ‘made it more, rather than less, difficult, for the first-time buyers it wanted to help (chapter6) http://trap.ncirl.ie/278/4/Karl_Thomas_Connell.pdf

It was stated in the same report: ‘Too much emphasis was placed on alleviating the plight of the first-time buyer, yet to do so at the expense of the private rented sector on which the basis of sustaining economic development is built, is at best negligent, at worst almost criminal. Even then, measures aimed at ameliorating the problem for first-time buyers have proven to be inflationary, which in fact quite ironically worsened their plight.’

As a consequence, the deductibility of interest was quickly restored from 1st of January 2002, but not before the damage was done. In addition to tenants and private landlords suffering, the policy also had an extremely negative effect on construction levels, which fell drastically over the same period.

[. . .]

A strange consensus seems to have arisen across all political parties and even in housing charities like Shelter, that potential first-time-buyers are the only group now to be valued or protected and again, they think that by attacking landlords they support first-time-buyers. Do they not realise that rent hikes (an inevitable effect of Clause 24) will make it more difficult for first-time-buyers to save for a deposit, just as happened in Ireland?

[. . .]

As landlords, we are aware that very few people care about this discriminatory attack on us (the media and various groups have successfully demonised landlords for years now); however, can they not see that this is also a discriminatory attack on the poorest in society? From now on, tenants who can pay the highest rents will be favoured as landlords will have to increase rents to the maximum (some commentators think landlords can’t do that; well they did in Ireland).

[. . .]

Why would the effect of this policy be any different to the effect it had in Ireland?

How does the Government expect rents not to increase while at the same time it is imposing a massive tax burden on landlords?

It’s mad; it makes no sense and the logical consequence will be an exponential increase in rents.

The experiment was short-lived in Ireland; but not before significant damage was done to the private rental sector. We ask that the UK Government stop and think and reverse this decision before it is too late.

[. . .]

Selected references:
http://www.ronanlyons.com/wp-content/uploads/2015/06/Public-and-Private-Renting-in-Ireland-Ronan-Lyons-chapter.pdf

http://www.let.ie/articles/a-revenue-guide-to-rental-income

http://www.threshold.ie/download/pdf/investmentreportcompletefinal.pdf

The most obvious thing to mention, of course, is that the legislation in Ireland, while at certain points similar in some respects, is not identical to Clause 24. While Clause 24 ultimately disallows finance costs as a deductible expense it does allow "all financing costs incurred by a landlord [to] be given as a basic rate tax reduction" (HM Revenue & Customs, Policy Paper: Restricting finance cost relief for individual landlords, July 2015).

Clause 24 is therefore significantly less onerous than Ireland's full removal of deductibility and all tax reliefs on landlords' finance costs (barring certain restricted exemptions) between 1998 and 2002, and potentially much more akin to the limited reduction in tax breaks for landlords' finance costs (achieved simply by limiting deductibility to 75% of the interest on the loan) that has been in effect in Ireland since 2009:

9. Temporary restriction on interest deductibility for residential premises (Bacon Report)

Finance (No 2) Act 1998 terminated the deductibility for interest on borrowed money used on or after 23 April 1998 in the purchase, improvement or repair of residential premises in the State, and on or after 7 May 1998 in relation to foreign residential premises. Notwithstanding what the premises was when acquired or how it was previously utilised, the restriction applied for any tax year or accounting period during which the premises was, at any time during that period, a rented residential premises. The restriction also applied where, at any time after 23 April 1998, a person vacated his or her principle private residence and turned it into rented accommodation. This restriction applied from the date of change of use, irrespective of when the borrowed money was used.

Finance Act 2002 restored interest relief for residential premises where the interest accrued on or after 1 January 2002, regardless of when the property was purchased.

It was possible to avoid the temporary interest restriction where certain transitional conditions were met or where a particular type of residential premises was exempted. Full details of the transitional arrangements and exemptions are contained in Tax Briefing 32, page 30.

[. . .]

11. Restriction of interest relief for rented residential property

Where a loan has been used to purchase, improve or repair a rented residential property and the interest on the loan accrues on or after 7 April 2009 (Budget Day), only 75% of the interest on the loan can be deducted as a rental expense instead of the normal 100%.⁶ For the purposes of the restriction, the interest is treated as accruing on a daily basis. The date the loan is taken out is not relevant.

The restriction does not apply to loans taken out to finance non-residential property and the full amount of interest continues to be deductible in such cases. In the case of mixed residential and non-residential properties interest should be apportioned on a just and reasonable basis before the restriction is applied to the residential part of the interest.

See section 8 above for the effect of the interest restriction on fees for interest rate caps and cancellation fines.

Irish Tax & Customs Tax & Duty Manuals - Section 16 Part 04-08-06 (PDF, 116 KB) - Deductibility of Loan Interest (section 97(2)(e))

With this in mind concerns over the implications for a post-Clause 24 United Kingdom of rent price increases over the earlier period in Ireland seem somewhat exaggerated. This is further emphasised when said increases are considered in real, rather than nominal, terms.

To begin with the uncited claim that "[f]ollowing the measure, rents rose by at least 24% in 1998" does not, as far as I can see, appear to be well supported by the cited literature.

For instance, the Housing Policy Review 1999-2002, Michelle Norris, The Housing Unit and Nessa Winston, Department of Social Policy and Social Work, University College Dublin directly contradicts this claim (emphasis added): "The available evidence in this regard is set out in FIGURE 2.5 [. . .] It reveals that rent inflation averaged at 3 per cent per annum between 1990 and 1996, but that this jumped to 5.3 per cent between 1997 and 1998.1999/2000 and 2000/2001 saw particularly high growth in private residential sector rents, which increased by 10.5 per cent and 14.6 per cent respectively during these years."

This apparent error may have crept in from either a direct misreading of FIGURE 2.5 in the above social policy paper (I would personally tend to have more faith in the authors' interpretation of their own chart) or a reference to a 1998 24% increase in Dublin-specific rents in The Housing Crisis in Dublin, BA Dissertation, National College of Ireland, April 2001, Karl Thomas Connell. As the deductibility of landlords' finance costs was removed across the whole of Ireland and not just in Dublin any regional variation in rent movements obviously cannot be attributed directly to this legislative measure and so either source would render the claim incorrect.

(As an aside the third pre-financial crisis paper cited in the Property118 post, OPPORTUNITY KNOCKS?: Institutional Investment in the Private Rented Sector in Ireland, July 2004, Professor ADH Crook and Dr Steven Crowley, University of Sheffield notes that "[t]he Private Rented Sector in Ireland has grown at an unprecedented rate in the last six years for reasons" i.e. between 1998 and 2004.

It also expresses concerns over the predominance of individual investors in the Irish PRS:

The supply of housing in the PRS market is currently dominated by small-scale individual landlords with one or two properties, motivated in the main by capital gain. This leaves the sector vulnerable to a decline in property values or other external shock such as rising interest rates [. . .] Small scale individual landlords currently dominate supply. Institutional involvement would prompt a longer term investment view of the rented sector and a more professional and responsible management approach.

And goes on to detail an increase in Irish first time buyers as a direct result of the tax changes:

There is evidence, nonetheless, that new completions, after the tax measures on investors, have been purchased by owner-occupiers and not private investors. Distribution of lending moved towards first time buyers in the 18 months up to the end of 2001. In the second half of 2001 there was faltering investor demand as the result of the Bacon measures, reinforced by the economic slowdown. Therefore the forced decrease in investor demand and increase in supply during 2001 slowed price rises. The level of unsold stock was significant and was concentrated in the apartment sector. It reflected a deficit in investor interest shaped by the tax changes.

It's also worth noting that - unsurprisingly given the reputation Ireland has for having massively over built during the boom years - completions of new housing did not drop off over this period, though housing permits did, and the overall Irish housing stock continued to rise:

Sourced from Global Property Guide, Ireland

In the United Kingdom, of course, housebuilding activity seems likely to be supported against any possible impacts from Clause 24 by all of the various Help To Buy schemes.)

Given the other papers cited in the Property118 post all pre-date the second period of reduced tax breaks on Irish landlords' finance costs, and the information for rents during the first period of total removal of said tax breaks is broadly similar across all, I'm going to focus on Ronan C. Lyons, “The spread of rents in Ireland, over time and space”, in Lorcan Sirr (ed), Renting in Ireland. Dublin: Institute of Public Administration, 2014 (PDF version of the relevant chapter available here).

On Property118 emphasis is placed on nominal rent price movements, as illustrated in Figure 1:

However, when we consider the overall rate of rent price movements this first period of totally removed tax breaks for Irish landlords' finance costs (1998-2002) does not actually appear to be sufficient to cause a significant deviation from the long-term trend in the annualised 10-year change; just as the second period of reduced tax breaks for Irish landlords' finance costs (2009-onwards), which is arguably a better parallel for the reduced tax breaks that will come in for UK landlords' finance costs under Clause 24, appears unable to significantly lift the 10-year change much above zero:

(I've posted on this graph previously and I think I may have been mistaken, or at least overly strong, in my interpretation of the 1-year change for 2002 and 2009, due to irregular spacing on the x axis making the rate of changes in these specific years more obscure, but the overall trend in the 10-year change seems quite clear.)

Additionally, it seems quite misleading to consider nominal rent price increases in isolation as Ireland adopted the Euro in early 1999 (possibly explicating the fact that nominal Irish rents only appear to take off in 1999, a year after the tax changes are introduced, and meaning that average rents did not literally increase from €600 in 1998 to almost €900 in 2001 because Irish rents were not denominated in euros in 1998) and experienced a general uptick in inflation at this point, with a doubling in general inflation as measured by the Irish harmonised consumer price index (Inflation.eu, Worldwide Inflation Data, Ireland):

Hence, turning back to Lyons, it's hardly surprising to see that the rent price increases in question appear to be significantly less marked when rents are considered as a fraction of income; and on my reading neither seem to have succeeded (as yet) in defeating the long-term trend in this respect:

So, having established a bit of background on the subject, back to the CBI paper I mentioned at the start, ‘House price volatility: the role of different buyer types’, Central Bank of Ireland Economic Letter Series, Vol 2015, No.2 (h/t The Bank of England ):

Abstract

This Economic Letter examines the link between house price dynamics in Ireland during the recent housing boom and the composition of buyers in the market. The analysis provides information on the relative riskiness of dierent buyer types, a topic that has increased in importance with the recent Central Bank of Ireland proposals to cap loan-to-value and loan-to-income ratios for new mortgage borrowings. The analysis points to an association between periods of strong house price growth and the changing composition of Irish property purchasers, and in particular, the rise in the BTL segment.

Introduction

In the decade preceding the house price collapse in 2007, real Irish house prices grew by over 9 per cent per annum. Over this period, the structural make-up of buyers changed signicantly, with first-time buyers (FTBs) accounting for a reducing share of transactions over time and buy-to-lets (BTLs) accounting for an increasing share. This raises the question of whether or not different buyer groups contribute differentially to house price dynamics [. . .] In this context, Kelly et al (2014) find that FTBs have a lower default risk than second or subsequent buyers, implying that this could "rationalize differentiation of policy measures between dierent buyer groups" [. . .] We find that periods of strong house price growth appear to be related more to the share of BTL borrowers in the market than to the share of FTBs.

[. . .]

Conclusion

This Economic Letter examines the link between house prices and the composition of buyers in the Irish housing market, with a particular focus on the recent housing boom [. . .] We do, however, observe a number of stylised facts in the data which are consistent with the operation of the collateral channel. Specically, we find that during periods of strong house price appreciation, the share of FTBs in the market fell, while other buyers, and in particular BTLs, became increasingly important. We also find that the share of BTLs in the market is positively correlated with a measure of overvaluation in the market, a result which does not hold for other buyer groups.

There are two graphs in particular in this paper that stand out for me a great deal:

Thoughts?

[Venger]

There's a new post on Property118 that once again points to Ireland as a possible case study for the potential impacts of Clause 24

Excellent technical post Neverwhere. Good reading. Impressive. Still processing it through in my mind, but very good reading. Deserves to be read a few times, and I will check in again on it later today.

My own little push back against the Ireland example, would be to highlight some of BTLers previous views away from this Ireland example article.

Where a lot more doubt comes through (overlooking some of the more fanciful BTL-headed stuff - '100Ks of tenants mass homelessness' ) about BTLers ability to push up rents. (I still hold to the view UK mainland rents will fall over next 5-10 years).

Ros . says:

27/09/2015 at 14:13

Reply to the comment left by “Mark Brown” at “27/09/2015 – 13:25“:

I don’t agree. The reality is that with a few interest rate rises, many landlords will go out of business and they will not be able to just keep increasing rents. When you raise rents you annoy and de-stabilise tenants. The only way I generally get any rises in – and I have definitely started doing this more – is when someone leaves. I can then advertise at an increased rent. But if you increase it too much, you just end up with a void for longer. Yes, Clause 24 will lead to an increase in rents; but no, nothing like the level needed to keep landlords in business. So I’m not comfortable with the term ‘tenant tax.’ I see it more as an attack on landlords than on tenants – although both will suffer.

http://www.property118.com/budget-2015-landlords-reactions/76164/comment-page-451/#comment-65272

__________

Mark Alexander - Property118 says:

27/09/2015 at 14:40

50% of landlords have no mortgages, large landlords will incorporate, smaller landlords will sell to FTB’s and BTL will become a less attractive form of investment.

As demand increases rents will rise but that will come after the mayhem, not before.

Only when landlords have their pick of the best tenants on high incomes will rents increase significantly. Before we ever get to that position there will be carnage with hundreds of thousands of tenants being left homeless.

This is an attack on both landlords and tenants but to think the solution is simply to pass on the tax to tenants and that the status quo will remain is naive in my opinion. I also agree with Ros, it’s not just tax that will hurt the PRS, interest rates will rise too. mass homelessness will become a problem well before rental inflation kicks in, especially if demand for homes continues to grow.

It is for these reasons I’m not happy to badge this as a tenant tax. I will sell a large chunk of my portfolio to owner occupiers or cash rich landlords if they want them. I will retain the rest mortgage free. When the market facilitates higher rents from better quality tenants then that’s what I will provide. Meanwhile, like other larger landlords, I will be restructuring my tax affairs to ensure that I am under minimal pressure to divest and and gear down, thus able to do things in my own time.

Those landlords proposing to put rents up by 5% per annum will have a big shock and find they have significant void periods before realising that rents are set by market forces and then have to settle for what the market rate is after having already lost a lot of money due to rental voids.

That’s just my opinion, some will disagree but life would be boring if we all had the same opinion.

Having said all of that, I still haven’t given up on the notion that common sense will prevail at Wedtminster proving we continue with our lobbying efforts.

http://www.property118.com/budget-2015-landlords-reactions/76164/comment-page-451/#comment-65274

__________

S.E. Landlord says:

28/09/2015 at 14:13

Reply to the comment left by “Mark Brown” at “27/09/2015 – 23:54“:

I am not comfortable with calling it a tenant tax. It is a tax on a landlord or an operating cost for a landlord with a mortgage. I would not describe mortgage interest, insurance premium or any other costs as a tenant cost and therefore I do not feel I can call this a tenant tax.

Those that are anti private landlords and anti btl will be very quick to correct the terminology and probably criticize landlords for calling it a tenant tax. I prefer to explain it for what it is and how it will affect those landlords with mortgages. As with most things we all have different views and act with what we are comfortable with.

http://www.property118.com/budget-2015-landlords-reactions/76164/comment-page-455/#comment-65327

Also you're totally missing the point. The thread title is falling rents. fru-gal's anecdotal is consistent with falling rents, because the rental achieved recently is lower than the rental achieved earlier.

However, we can add to the anecdotal because one way to square the circle is to propose that the BTLer took all that time because they couldn't at first accept that they were going to have to accept a lower rent in order for the market to clear. Basically, the market stayed irrational* longer than they could stay solvent, so eventually they folded and let at a lower price. Now that suggests that some BTLers are simply unable to believe that rents fall, and you are giving the appearance of being additional anecdotal evidence to that end.

It also suggests two tricky questions for BTLers. How long do you keep a property void in order to wait for a pinch point in the mismatch between supply and demand to allow you to lock in the rent you want, and how many times does 'bad luck' on this score result in BTLers wiping out all their profits? On thin margins even a single month void is bad news. The take home message is a wise BTLer with any sense wouldn't hold the property void for too long. If that meant pulling the rent down sharply then plenty of BTLers will do just that, with the earlier entrants able to pull further down without turning cash flows negative. In the teeth of the next recession with all these piss weak late entrant BTLers desperate to avoid voids, rents could fall quite sharply. Sweet. Again, combine that with the end of FLS, BCBS RWA revisions and housing element of UC being trimmed and some late entrant BTLers are going to find that a 5% gross yield was just a ticket to an enormous capital loss on an investment with a negative carry. Double sweet.

* Irrational according to the BTLer, natch.

[long time lurking]

The difference between ROI at that point in time (early 2000`s) and the UK now is simple ,wage`s and benefits, there was far more wriggle room for increasing rents in the ROI then, as wages were rising rapidly compared to the cost of living (excluding HP`s), basicly the market could support the increase can the UK support any sort of increase now i very much doubt it , this was the era of the the Celtic Tiger

Edited January 1, 2016 by long time lurking

[billybong]

From Fig 4 Average annual rent as a fraction of average income, 1988 -2013 the ratio was flat during the period immediately after the policy change. That suggests that the rents followed income. ^ Celtic Tiger effects and economic boom (i.e. more debt) etc.

There were a lot of changes to the Irish currency around that time as well because Ireland was in transition from the Irish Pound to the Euro - generally starting from 31 December 1998.

From Wikipedia

Replacement with the euro

31 December 1998, the exchange rates between the European Currency Unit and the Irish pound and 10 other EMS currencies (all but the pound sterling, the Swedish krona and the Danish krone) were fixed. The fixed conversion factor for the Irish pound was € 1 = IR£ 0.787564. On the next day, a virtual euro was introduced and the exchange rate was GB£ 1 = € 1.42210,[7] making GB£ 1 ≈ IR£ 1.12. By 1 January 2002, the day when the physical euro was introduced, GB£1 was worth about IR£ 1.287.[7] Following the appreciation of the euro since its launch and the fall of Sterling in 2007–2009, as of May 2012, GB£ 1 was worth about the equivalent of IR£ 0.98.

Although the euro became the currency of the eurozone countries including Ireland on 1 January 1999, it was not until 1 January 2002 that the state began to withdraw Irish pound coins and notes, replacing them with euro specie. All other eurozone countries withdrew their currencies in a similar fashion, from that date. Irish pound coins and notes ceased to be legal tender on 9 February 2002,[8] although they are intended to be exchangeable indefinitely for euro at the Central Bank.

As if they wouldn't have increased rents by 24% before the policy change if they'd been able to just like that

Edited January 1, 2016 by billybong

[janch]

Your last 2 graphs say it all....BTL fell sharply and FTB went up from 2008 ie desired result Well played ROI.

[billybong]

^

In the UK after 2008 it just got worse and worse for FTBers - especially in London.

Edited January 1, 2016 by billybong

[Guest]

Fantastic find and good analysis Neverwhere.

You've found more interesting facts than the hundreds of landlords across Property Tribes and Property 118 put together.

But that's not really a compliment.

[Neverwhere]

Fantastic find and good analysis Neverwhere.

You've found more interesting facts than the hundreds of landlords across Property Tribes and Property 118 put together.

But that's not really a compliment.

Thanks!

[Neverwhere]

Your last 2 graphs say it all....BTL fell sharply and FTB went up from 2008 ie desired result Well played ROI.

As it's not concerned with volumes I think the level of mirroring in market share (it is strikingly near perfect) may be more a reflection of BTLers acting as the marginal purchaser of housing. From the CBI paper:

Following a drop in the mid- to late-1990s, the FTB transaction rate remained steady at around 5 per cent of the population in the 25-34 age group. As a further check we also examine the home-ownership rate for those in the 25-34 year age group using Household Budget Survey data from the CSO; while the rate declined from 65 per cent in 1994 to 58 per cent in 1999, it remained relatively stable thereafter until the housing bust in 2007.

[. . .]

Figure 3 shows that the FTB share declined from 40 per cent to 33 per cent during the early 2000s as house prices rose rapidly. However, this was largely due to the marked increase in BTL transactions during this period. Indeed, if BTL loans are excluded, there is little change in the FTB share throughout the boom.

[. . .]

One corollary of this is that we would expect to see a positive correlation between excessive house price developments (i.e. over- or under-shooting) and the share of BTLs in the market. Figure 5 shows that this is indeed the case: using a standard house price model to measure house price `mis-alignment', we and a strong correlation between this mis-alignment and the increasing presence of BTL buyers in the Irish housing market.

This would seem to support the idea that buy-to-let investors are not a reliable group on which to base a market, because compared to other market participants (most notably first time buyers) they tend to be overly enthusiastic during booms and decidedly unreliable during busts.

It's very interesting to me that I came to this paper by way of HM Treasury and The Bank of England's Financial Policy Committee, as it's clearly part of the matrix of fact against which Government policy towards buy-to-let is being formed.

[Neverwhere]

From Fig 4 Average annual rent as a fraction of average income, 1988 -2013 the ratio was flat during the period immediately after the policy change. That suggests that the rents followed income. ^ Celtic Tiger effects and economic boom (i.e. more debt) etc.

There were a lot of changes to the Irish currency around that time as well because Ireland was in transition from the Irish Pound to the Euro - generally starting from 31 December 1998.

From Wikipedia

Replacement with the euro

31 December 1998, the exchange rates between the European Currency Unit and the Irish pound and 10 other EMS currencies (all but the pound sterling, the Swedish krona and the Danish krone) were fixed. The fixed conversion factor for the Irish pound was € 1 = IR£ 0.787564. On the next day, a virtual euro was introduced and the exchange rate was GB£ 1 = € 1.42210,[7] making GB£ 1 ≈ IR£ 1.12. By 1 January 2002, the day when the physical euro was introduced, GB£1 was worth about IR£ 1.287.[7] Following the appreciation of the euro since its launch and the fall of Sterling in 2007–2009, as of May 2012, GB£ 1 was worth about the equivalent of IR£ 0.98.

Although the euro became the currency of the eurozone countries including Ireland on 1 January 1999, it was not until 1 January 2002 that the state began to withdraw Irish pound coins and notes, replacing them with euro specie. All other eurozone countries withdrew their currencies in a similar fashion, from that date. Irish pound coins and notes ceased to be legal tender on 9 February 2002,[8] although they are intended to be exchangeable indefinitely for euro at the Central Bank.

As if they wouldn't have increased rents by 24% before the policy change if they'd been able to just like that

Thank you for flagging this in a bit more detail. It did strike me as highly misleading to look at nominal rent increases over this period without considering the fact that it entirely coincided with a currency switchover and Ireland moving from the Irish pound to the euro!

The importance of this detail is further emphasised by the fact that the tax changes to Irish landlords' finance costs (which as detailed above were far more onerous than Clause 24) came into force in early 1998 but nominal rent price movements (such as they can be extrapolated, given the currency switchover) don't appear, to me, from the graph above, to significantly deviate from the long-term trend until Ireland officially adopts the euro in 1999.

[Neverwhere]

Excellent technical post Neverwhere. Good reading. Impressive. Still processing it through in my mind, but very good reading. Deserves to be read a few times, and I will check in again on it later today.

My own little push back against the Ireland example, would be to highlight some of BTLers previous views away from this Ireland example article.

Where a lot more doubt comes through (overlooking some of the more fanciful BTL-headed stuff - '100Ks of tenants mass homelessness' ) about BTLers ability to push up rents. (I still hold to the view UK mainland rents will fall over next 5-10 years).

The difference between ROI at that point in time (early 2000`s) and the UK now is simple ,wage`s and benefits, there was far more wriggle room for increasing rents in the ROI then, as wages were rising rapidly compared to the cost of living (excluding HP`s), basicly the market could support the increase can the UK support any sort of increase now i very much doubt it , this was the era of the the Celtic Tiger

I think you're both right to pull it back to the UK market and highlight the differences, which are signficant.

There certainly appears to be a lot less room for rent hikes in the UK, when comparing the total amount of income that is already taken up by rent, than there previously was in Ireland. In fact, Ireland has had restrictions on the tax breaks afforded to landlords' finance costs in place since 2009 (only 75% of interest costs can be deducted from rental income prior to calculating income tax) and yet they still have a lower percentage of household income going towards rent payments, on average, than we do here in the UK with all of our tax breaks for landlords' finance costs currently remaining in place:

Housing Crisis Sees Britons Pay Highest Private Rents In Europe, National Housing Federation Study Reveals, June 2015, The Huffington Post

[janch]

"This would seem to support the idea that buy-to-let investors are not a reliable group on which to base a market, because compared to other market participants (most notably first time buyers) they tend to be overly enthusiastic during booms and decidedly unreliable during busts.

It's very interesting to me that I came to this paper by way of HM Treasury and The Bank of England's Financial Policy Committee, as it's clearly part of the matrix of fact against which Government policy towards buy-to-let is being formed."

Indeed! It's good to see policy is being set with regard to previous experiments in a similar country. Of course there are a lot of differences between the Irish economy and the UK but at least any obvious mistakes can be averted by looking at previous experience.

I'm impressed with your diligence in rooting out this research

[Neverwhere]

"This would seem to support the idea that buy-to-let investors are not a reliable group on which to base a market, because compared to other market participants (most notably first time buyers) they tend to be overly enthusiastic during booms and decidedly unreliable during busts.

It's very interesting to me that I came to this paper by way of HM Treasury and The Bank of England's Financial Policy Committee, as it's clearly part of the matrix of fact against which Government policy towards buy-to-let is being formed."

Indeed! It's good to see policy is being set with regard to previous experiments in a similar country. Of course there are a lot of differences between the Irish economy and the UK but at least any obvious mistakes can be averted by looking at previous experience.

I'm impressed with your diligence in rooting out this research

I think the diligence was probably in reading (well, skimming, I'm not that diligent ) through the The FPC's tools over the BTL mortgage market - Impact Assessment! The CBI paper stands out, I think, as offering an interesting insight into the relationship between BTL and the market as a whole. Especially as Ireland had a much stronger housing market correction than we did. Emphasis added:

LTV or ICR limits could also reduce the scale of the amplification channel. In an environment of rising house prices, buy-to-let borrowers can take advantage of capital gains and extract equity to expand their portfolio, boosting house prices further. Research from the US and Ireland provides evidence for this dynamic. Haughwout et al³⁰ found that, in the 2000’s boom, US states that saw bigger booms and busts in house prices tended to have bigger, and faster growing, shares of borrowers in the housing market. And research by the CBI³¹ finds that the share of buy-to-let borrowers in the market is positively correlated with a measure of overvaluation. Overvaluation may lead to an unsustainable increase in household indebtedness by all mortgagors. This can compromise their ability to pay their mortgage and maintain their spending in the face of a shock, which is a clear risk to financial stability. An LTV limit would reduce the scale of this channel by reducing both the amount of equity borrowers can withdraw when remortgaging, and the scale of investment they can make with this equity. An ICR limit could also help by linking loan sizes to rental income, which in general tends to be less cyclical than house prices.

The proposed tools could also reduce the scale of the downward amplification channel. In an environment where the returns on buy-to-let investments no longer appear attractive, perhaps due to rising interest rates, lower rents, or expected falls in house prices, there could be a ‘fire-sale’ of buy-to-let properties – where a large number of mortgaged buy to let landlords choose to sell their property at the same time. That could have negative impacts on the wider economy if it exacerbates the scale of a house-price fall during a downturn. It would increase credit losses in the event of a mortgage default, and reduce value of housing collateral against which to borrow reducing the consumption spending of home-owners.

If we consider Figure 5 in the CBI's paper itself then it seems to me that there is potential for the direction of causation that produces this correlation to run in both directions. For instance, in 2008 house price mis-alignment starts to fall slightly before BTL market share, indicating that BTLers were following the trend rather than leading it; whereas over 1998-2001 BTL market share drops off and the trend in house price mis-alignment lags behind before then adjusting to zero:

House price mis-alignment is calculated as the dierence between actual and fundamental house prices. The fundamental house price is estimated with a standard reduced form model of house prices, where prices are a function of income levels, real interest rates, population levels and the total housing stock. For a more thorough overview of the model, see Kennedy and McQuinn (2012)

Obviously there will have been other factors in play (as with the rent price increases this period coincides with Ireland adopting the euro, amongst other things) but it does seem to offer the possibility that targeting BTL in isolation could help lead to a managed correction to a sustainable housing market, as well as sounding a warning that allowing BTL to flourish is likely to exacerbate an uncontrolled bust in an unsustainable one.

[pig]

There is that Freudian slip about Shelter championing first time buyers.

As far as I can work out they are tenure agnostic: if the PRS was competitive, good value, good quality and stable they would be happy.

[Neverwhere]

There is that Freudian slip about Shelter championing first time buyers.

As far as I can work out they are tenure agnostic: if the PRS was competitive, good value, good quality and stable they would be happy.

That's my impression also.

Perhaps if the PRS was competitive, good value, good quality and stable private renters would be happy too, instead of longing to leave it and buy homes of their own?

Those renting privately (77 per cent) are more likely to show a preference for buying compared with those who are renting from a housing assocation (61 per cent) or a local authority (58 per cent). Nevertheless, for all three ‘renter’ groups the majority would prefer to buy rather than rent.

Department for Communities and Local Government, Public attitudes to housing in England: Report based on the results from the British Social Attitudes survey, July 2011

This seems like something that BTLers should have previously been joining forces with Shelter to actively lobby the Government for - rather than continually campaigning against, as seems to have generally been the case - if they really wanted the UK PRS to be seen as positive and they actually cared at all about their tenants' quality of life.

Now they feel that their personal wealth is under threat they're suddenly all heart.

[Venger]

[. . .] A strange consensus seems to have arisen across all political parties and even in housing charities like Shelter, that potential first-time-buyers are the only group now to be valued or protected and again, they think that by attacking landlords they support first-time-buyers. Do they not realise that rent hikes (an inevitable effect of Clause 24) will make it more difficult for first-time-buyers to save for a deposit, just as happened in Ireland?

If you need a reminder.

Letter from Shelter Chief Exec to the 118ers.

http://www.property118.com/campbell-robb-ceo-shelter-open-letter/81625/

Shelter's positioning down the years has done my head in. I recall HPCers stopping donations with some of the stuff they came out with.

2008 (although heavy with the anti-hpcers 'breakdown squad' on the threads)

http://www.housepricecrash.co.uk/forum/index.php?/topic/80031-shame-on-shelter/

http://www.housepricecrash.co.uk/forum/index.php?/topic/84295-struggling-homeowners-have-less-protection-than-in-the-90s-but-most-people-dont-even-realise-it-shelter/

5/5 although I didn't sign the petition. I've had nothing to do with Shelter since they started lobbying the government for more BTL.

That's what I recall too, but can't find the thread. Also recall one about plight of tenants losing their homes from BTLers, with suggestion BTLers kept in position, in the crunch.

At other times they've come out with some good stuff though.

[Neverwhere]

If you need a reminder.

Letter from Shelter Chief Exec to the 118ers.

http://www.property118.com/campbell-robb-ceo-shelter-open-letter/81625/

Shelter's positioning down the years has done my head in. I recall HPCers stopping donations with some of the stuff they came out with.

2008 (although heavy with the anti-hpcers 'breakdown squad' on the threads)

http://www.housepricecrash.co.uk/forum/index.php?/topic/80031-shame-on-shelter/

http://www.housepricecrash.co.uk/forum/index.php?/topic/84295-struggling-homeowners-have-less-protection-than-in-the-90s-but-most-people-dont-even-realise-it-shelter/

That's what I recall too, but can't find the thread. Also recall one about plight of tenants losing their homes from BTLers, with suggestion BTLers kept in position, in the crunch.

At other times they've come out with some good stuff though.

Shelter are by no means perfect but at least, as an organisation, they do genuinely seem to care about the problems that people face in the UK housing market (as opposed to suddenly pretending to care for reasons of self interest).

I don't personally agree with all of the detail (I don't think physical housing supply is as large an issue as made out, but then here in London the sheer volume of new builds really leaps out at you) but overall that's a pretty good letter you've linked to from their Chief Exec! For anyone who hasn't seen it previously:

Dear David,

Thank you for your email. While the restriction of mortgage interest tax relief has never been a priority for Shelter we do support the change that the Chancellor announced in the Summer Budget. This is for a number of reasons.

In the first place, this change will help to level the playing field between landlords who pay the higher rate of tax and first time buyers when they’re trying to buy a property. The tax relief currently makes borrowing cheaper for landlords than for owner occupiers, giving landlords a competitive advantage over prospective first time buyers. This is part of the reason that the share of new mortgages going to buy-to-let is at an all-time high.

Given the preference of the overwhelming majority to own a home rather than to rent, we think that this advantage is unfair.

While the underlying cause of high house prices is the current shortage of homes, tax relief on buy-to-let has exacerbated this by giving an incentive to investors to take on unsustainable amounts of debt. Phasing out the tax relief should help to remove this inflationary pressure from the housing market and calm the destabilising effect it is having on prices over the long term.

Finally, we support this change because we believe that there are higher priorities for government spending. At a time when the government is committed to eliminating the deficit, our campaigns have focussed on protecting housing benefit for low income renters and the affordable homes budget. Cuts to and restrictions on housing benefit are the single biggest threat to increasing homelessness in the immediate term. And cuts to the budget for genuinely affordable homes pose the biggest threat to finding a long term solution to homelessness in England.

In the era of austerity, these are bigger priorities for spending than on tax relief for higher rate landlords.

Irrespective of our in-principle support for the policy, we fully support work to mitigate any possible unintended consequences that the government’s decision may have. Given the five and a half years before these changes come fully into effect and the 18 months before they even start to be phased in, there is time for this to happen. We would encourage any landlord who believes that they might be affected by the tax changes to take advantage of the time they have to consider their options, which include sale with sitting tenants, and discuss them with their tenants.

Best wishes,

Campbell Robb

Chief Executive

[Venger]

Shelter are by no means perfect but at least, as an organisation, they do genuinely seem to care about the problems that people face in the UK housing market (as opposed to suddenly pretending to care for reasons of self interest).

I don't personally agree with all of the detail (I don't think physical housing supply is as large an issue as made out, but then here in London the sheer volume of new builds really leaps out at you) but overall that's a pretty good letter you've linked to from their Chief Exec! For anyone who hasn't seen it previously:

Agreed! Good letter.

One of the only letters from an authority which actually tells them it's the difference between BTLers and FTBs

...where for the most part, the BTLers want to compare their positions to equity rich home-owners.

And then outlines some of the major advantages the BTLers have over the FTBs.

Still, I think most of the BTLers didn't process it - they only see what they want to see (Sixth Sense) - and still comparing themselves to equity rich homeowners, and incorporated (which they also had the choice to do from the outset, but didn't, at the time, offer same leveraging up advantages as plain BTL).

[Neverwhere]

Agreed! Good letter.

One of the only letters from an authority which actually tells them it's the difference between BTLers and FTBs

...where for the most part, the BTLers want to compare their positions to equity rich home-owners.

And then outlines some of the major advantages the BTLers have over the FTBs.

Still, I think most of the BTLers didn't process it - they only see what they want to see (Sixth Sense) - and still comparing themselves to equity rich homeowners, and incorporated (which they also had the choice to do from the outset, but didn't, at the time, offer same leveraging up advantages as plain BTL).

Which could just as easily read "...where for the most part, the BTLers [are] equity rich home-owners."

They're basically arguing but I like this tax break more than my other tax break, can't you take away that one instead? Which totally misses the point that those they have helped to price out get no tax breaks on their housing costs at all!

One of the things that amused me about the Property118 post in the OP is that it cited a paper - The Housing Crisis in Dublin, BA Dissertation, National College of Ireland, April 2001, Karl Thomas Connell - that appears to decry the lack of tax reliefs for tenants: "Tax relief was available on the interest portion of mortgage payments, whereas no such relief was available on rental payments for private tenants."

Tax breaks all round?

[Neverwhere]

Ros 02/01/2016 at 19:55

Reply to the comment left by “NW Landlord” at “02/01/2016 – 19:42“:

I bet you neither GO nor the Treasury officials responsible for it even knew about the Irish experience. It would be good if a few people can write to the Treasury and give the link to my article and also this newspaper article. You might put in the email something along the lines of – ‘The Chancellor has announced this policy and I wouldn’t be surprised if neither he nor the other architects of this Alice in Wonderland tax didn’t even know a similar move in Ireland has proved disastrous.’ Any volunteers?

This is the link to my one:

http://www.property118.com/uk-rents-set-sky-rocket-osbornes-tax-grab/83275/comment-page-2/#comment-70804

[long time lurking]

[Neverwhere]

[Neverwhere]

dislexic_landlord 31-12-2015,01:13 PM

RE: Landlords unite! Support the Judicial Review of Clause 24

This is worth reading ? its all happened before in Ireland and what a result it as for them ad they had to back track

http://www.property118.com/uk-rents-set-...rab/83275/

mark_whitburn 31-12-2015,01:33 PM

RE: Landlords unite! Support the Judicial Review of Clause 24

Thats good that there is some history in Ireland with the same bad decision. The only difference is that some landlords are effective and others aren't. This basically means that the landlords who are trying to put up rents will be completing with landlords that don't have too.

dislexic_landlord 31-12-2015,01:48 PM

RE: Landlords unite! Support the Judicial Review of Clause 24

I don't think there will be a price war on Rents I think most Landlords will always try to get what you can

But I do think there will be less Landlords in future years

David Price 31-12-2015,01:49 PM

RE: Landlords unite! Support the Judicial Review of Clause 24

Do you seriously think that all landlords are not going to get on the bandwagon? All rents will increase until the market can take no more just as credit card interest has increased until the system is near broken. Like it or not that's capitalism.

mark_whitburn 31-12-2015,01:54 PM

RE: Landlords unite! Support the Judicial Review of Clause 24

But we exist in this model now don't we, we are all landlords and are trying to maximise our returns whilst supplying good rental properties. I guess the question is who will go first for other people to follow, the landlord who goes first will look expensive and runs the risk of his property being empty until other landlords also increase rents.

[Lavalas]

As it's not concerned with volumes I think the level of mirroring in market share (it is strikingly near perfect) may be more a reflection of BTLers acting as the marginal purchaser of housing. From the CBI paper:

This would seem to support the idea that buy-to-let investors are not a reliable group on which to base a market, because compared to other market participants (most notably first time buyers) they tend to be overly enthusiastic during booms and decidedly unreliable during busts.

It's very interesting to me that I came to this paper by way of HM Treasury and The Bank of England's Financial Policy Committee, as it's clearly part of the matrix of fact against which Government policy towards buy-to-let is being formed.

Wait, I've been riddled with cold since Boxing Day so there's a fair chance I'm misunderstanding...

So the 118 Trump Card, the facts of which Osborne has apparently been so ignorant of when formulating Clause 24 and the one fact that will blow the whole thing open if only people could understand it... has in fact helped inform the very policy they're fighting?

You couldn't make it up (unless I have).

[Neverwhere]

Wait, I've been riddled with cold since Boxing Day so there's a fair chance I'm misunderstanding...

So the 118 Trump Card, the facts of which Osborne has apparently been so ignorant of when formulating Clause 24 and the one fact that will blow the whole thing open if only people could understand it... has in fact helped inform the very policy they're fighting?

You couldn't make it up (unless I have).

Nope, that looks pretty much spot on to me.

Given we know for certain (because they took the trouble to provide citations) that HM Treasury have been paying close attention to Irish BTL and its impact on the Irish housing market in relation to the FPC's powers of direction over the UK BTL market it seems highly, highly unlikely that they wouldn't have also taken developments in Irish BTL and the Irish housing market into consideration when formulating Clause 24.

Apparently you with a cold beats the combined intellect of the landlord fora.

Edited January 3, 2016 by Neverwhere