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Imp

It's Different This Time

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During Christmas, the topic of house prices came up with my family. My parents have become house price bears, but still bask in the wealth brought to them by the house price inflation. Anyway, my father brought up the subject of tax relief on the interest you paid on a mortgage. I don't fully understand it, but it appears that this would have reduced the effective interest rate you would be paying on a mortgage by between 25% for a lower rate earner and 40% for a higher rate earner. This makes the historical average interest rate of 8% equivalent to 6% for a lower rate earner and 4.8% for a higher rate earner.

What's the history of this tax relief, and could the fact it no longer exist make a crash more likely at lower Bank of england base rates?

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During Christmas, the topic of house prices came up with my family. My parents have become house price bears, but still bask in the wealth brought to them by the house price inflation. Anyway, my father brought up the subject of tax relief on the interest you paid on a mortgage. I don't fully understand it, but it appears that this would have reduced the effective interest rate you would be paying on a mortgage by between 25% for a lower rate earner and 40% for a higher rate earner. This makes the historical average interest rate of 8% equivalent to 6% for a lower rate earner and 4.8% for a higher rate earner.

What's the history of this tax relief, and could the fact it no longer exist make a crash more likely at lower Bank of england base rates?

The only tax relief i was aware of was with SIPPs , if your on about SIPPS Gordon Brown stopped residential properties being included into a SIPP, if you do a search for SIPP on here you will get many result.

If your not on about that then i dont know, someone else care to englighten us on this..

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What's the history of this tax relief, and could the fact it no longer exist make a crash more likely at lower Bank of england base rates?

Until the 1960s, owner occupiers were deemed to be paying themselves rent on their property and were taxed on this rent. They could, of course, claim tax relief on their mortgage payments to offset against this tax.

When the tax on imputed rents was abolished, the mortgage tax relief for owner occupiers was retained, for some bizarre reason.

When I started paying attention to it in the late 80s, you could get relief on a mortgage of up to £30,000 -- so yes, it did indeed reduce your effective mortgage payments significantly -- although I think the relief was only available at the base rate, not higher rate. Unmarried couples could claim two sets of relief, so up to £60,000.

Nigel Lawson, the then Chancellor, abolished the dual relief for unmarried couples -- but fatally, he allowed it to be retained on existing mortgages and gave six months notice, so there was a frenzy of buying before the August 1988 cutoff, which was responsible for the extremes of the late 80s boom.

During the second half of the 90s, it was progressively abolished altogether, which caused little pain as interest rates were falling.

Google on MIRAS (Mortgage Interest Relief At Source) for more details.

Edited by zorn

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What's the history of this tax relief, and could the fact it no longer exist make a crash more likely at lower Bank of england base rates?

I don't think the fact that it no longer exists would make a crash anymore likely. It's a bit of a what you don't have you don't miss situation now as far as MIRAS is concerned.

It's just my personal opinion but it may have played a part in fueling the increase in property prices prior to the last crash. Mortgage Interest Relief at Source was available upto 60k if you took out a joint mortgage and weren't married. This may well have hiked things up when it became increasing 'acceptable' for couples to live in sin, joint incomed ftb's could afford to pay more for property and the property prices started to increase.

Edit:was posting same time as Zorn

Edited by Gillee

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The only tax relief i was aware of was with SIPPs ,

MIRAS is/was unrelated to SIPPs.

What's the history of this tax relief, and could the fact it no longer exist make a crash more likely at lower Bank of england base rates?

MIRAS was introduced in 1983 by the Thatcher government, as part of drive towards the creation of a "home-owning democracy" (and the destruction of public sector housing with the introduction of Right-To-Buy); it meant that any interest that you paid on your mortgage could be offset against your income tax bill. It was basically a handout to homeowners.

People alway say "Look how much lower interest rates are now compared to the 80's, houses must be affordable", but the REAL (effective) interest rate for homebuyers during the 80's was much lower than the nominal rates quoted by bulls, because of MIRAS (and double MIRAS for some couples).

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When I started paying attention to it in the late 80s, you could get relief on a mortgage of up to £30,000 -- so yes, it did indeed reduce your effective mortgage payments significantly

My father said something similar. This tax relief was significant, so mortgages were more affordable at higher interest rates.

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My father said something similar. This tax relief was significant, so mortgages were more affordable at higher interest rates.

Yes it had a significant impact on your incommings/outgoings. It was available for two people (don't think they had to be even a couple) on one house hence people clubbing together to buy. dual-Miras was withdrawn in summer '88 and the lead up to the this caused a frenzy.....over the next few years it was reduced, reduced and finnaly phased out. I'm sure I had it briefly on my first purchase back in '97 though it was peanuts by then.

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Dear Imp

Thank you for an excellent post. (Not thought of this before.)

If MIRAS reduced the effective interest paid by borrowers during the last crash then this is another nail in the coffin for the argument that "it was different last time, interest rates were much higher etc".

(Note that this argument already had flaws in it as 1) it ignores the fact that house prices now reflect recent history of low rates so a "small" IR increase could have a proportionately large effect, 2) it ignores

the increase in overall debt levels, and 3) reasons that bubbles run out of steam/pop are complex, IRs not the whole story.)

Will check this out in more detail when I have got more time, but hope others pick up on this.

The Judge

:)

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good thread.

hadn't considered this aspect of MIRAS. So, in addition to being a much more significant trigger for the last HPC (unlike the commonly blamed 15% rates for a day 3yrs later), it adds strength to the view that it would only take a tiny number of IR rises to tip us over the edge now.

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Guest Charlie The Tramp

When the tax on imputed rents was abolished, the mortgage tax relief for owner occupiers was retained, for some bizarre reason.

I remember in the 60s and 70s that LA rents were heavily subsidised.

Some believed that the tax relief for mortgage payers was a form of subsidy to them as they would have been paying for the LA rent subsidies in their General Rates. Others believed it was an incentive to buy your own home relieving any responsibility on the LA to house you.

In fact I was informed by a LA Housing Officer when first married that was the way to go for every £1 of interest paid I would get 33% back. I believe at the time the standard rate of tax was a high 33%.

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Mortgage Interest Relief at Source was available upto 60k if you took out a joint mortgage and weren't married. This may well have hiked things up when it became increasing 'acceptable' for couples to live in sin, joint incomed ftb's could afford to pay more for property and the property prices started to increase.

Indeed, this was one of the two drivers for the previous crash.

Back then the age of the average FTB was (IIRC) about 23-24. The advanced notice of the abolition of MIRAS had the effect of dragging the next 2 years' worth of FTBs into the market earlier than would otherwise have been the case. This meant that not only had prices been artificially raised, but also for the next 2 years there were very few FTBs underpinning the market. No wonder there was a crash.

Contrast that with today. The average FTB these days is what? 31, 32, 33? So compared with 'the last time', there's about a decade's worth of FTBs waiting in the wings for the market to soften. That's a lot of pent up demand.

'Nonsense', I hear the Bears saying. Look at the charts, look at the fundamentals, price/earnings ratios, etc. etc. etc.

Please forgive my (probably non PC) observation. You can 'chart' and 'trend' all you like. It all counts for nothing when Oestrogen enters the equation.

Oestrogen, I said.

You can be as logical as you like. When your lady is in her 30s that biological clock is ticking louder than Big Ben chimes. She wants to 'nest'. Not somewhere rented under the control of some MGB landlord but 'our own place'.

We have already seen on these boards a possible future divorce because a spouse wants 'our own place'. Actually, as I understand it, it.s worse than that, the poster & wife already had their own place but he chose to STR.

I notice from another thread that the average age of the forum user here is mid - late 20s. I'm 45. I lived through the last crash, I saw friends with negative equity hand their keys back and walk away.

FWIW we (self & wife) currently own 9 properties (including our own). We won't be selling any of them soon.

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This thread raises some very important points conveniently overlooked by the bulls who talk about the 'historically high' IRs that caused the last crash. Real rates were not that high in the last crash; the affect of MIRAS and higher inflation meant that, when factored in, real IRs were probably no higher than now.

The tragedy is that financially unsophisticated buyers have been duped by the VIs to embrace huge mortgages based on the fantasy that current IRs make mortgages more affordable than in the previous crash.

It is a wicked lie.

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JohnG,

FWIW we (self & wife) currently own 9 properties (including our own). We won't be selling any of them soon.

Just for clarification I take it all those properties are mortgage free then?

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...could the fact it no longer exist make a crash more likely at lower Bank of england base rates?

It's possible that it may help to exacerbate this correction as it means the effective interest rate for a mortgage on a principal private residence is higher than it would have been when MIRAS was available.

Until the 1960s, owner occupiers were deemed to be paying themselves rent on their property and were taxed on this rent. They could, of course, claim tax relief on their mortgage payments to offset against this tax. [zorn]

1963 to be precise. Until then imputed rent was taxed under Schedule A.

When the tax on imputed rents was abolished, the mortgage tax relief for owner occupiers was retained, for some bizarre reason. [zorn]

Wanting to retain the votes of mortgage payers and aspiring mortgage payers is not a "bizarre reason".

...although I think the relief was only available at the base rate, not higher rate. [zorn]

At one time it was.

MIRAS was introduced in 1983 by the Thatcher government... [iPOD]

This was an adminstrative change. Previously the relief was given as a tax allowance. More volatile interest rates made it easier to have the relief deducted by the lender -- Mortgage Interest Relief At Source.

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Indeed, this was one of the two drivers for the previous crash.

Good post JohnG and a belated welcome to HPC.

I must admit for the last 3 years I've been very bearish on property, enough to step off the ladder 2 years ago. From what i'm seeing the HPC that I expected hasn't happened, sure there's been some wobbling with a few dips, but apart from newbuilds (esp CityLifstyle appartments) nothing looks particuarly fragile. Your explanation of the FTB pent-up situation and the Oestrogen effect does ring bells.

Okay so you are a BTL'er and intending to retain your portfolio, aside from the abuse you are going to get on here what do you see happening:

1) General property prices over the next 1-5 years.

2) New builds esp city lifestyle.

3) The BTL market especially those late joiners to the party.

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There was also Lapras, for a short while, not so large as Miras, but still significant at the time.

http://www.bopcris.ac.uk/bopall/ref22211.html

The main object of these schemes was to save staff but they were recognised to involve an offsetting cost through giving tax relief to some people who previously had not obtained it. LAPRAS was introduced in April 1979, but relief on life assurance premiums was terminated for policies entered into, extended or enhanced after 13 March 1984. MIRAS commenced in April 1983. In 1984-85 life assurance relief cost the Exchequer £725 million, and mortgage interest relief cost an estimated £3,500 million.

Edited by OnlyMe

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JohnG,

FWIW we (self & wife) currently own 9 properties (including our own). We won't be selling any of them soon.

Just for clarification I take it all those properties are mortgage free then?

Nope. 9 mortgages. Bought my first prop (own residence) in 1982. First BTL in 1998. Do The Math, as they say over the pond. :)

Edited by JohnG

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There was also Lapras, for a short while, not so large as Miras, but still significant at the time. [OnlyMe]

Indeed, this was a key selling point of endowment mortgages: tax relief on the endowment premiums and tax relief on the interest only mortgage which didn't reduce.

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Guest Charlie The Tramp

Nope. 9 mortgages. Bought my first prop (own residence) in 1982. First BTL in 1998. Do The Math, as they say over the pond. :)

Which year did you buy your last BTL property? Except for your principle residence how many on IO mortgages?

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JohnG,

Nope. 9 mortgages. Bought my first prop (own residence) in 1982. First BTL in 1998. Do The Math, as they say over the pond. :)

Property is an illiquid market, the stock market is extremely liquid.

Monday morning I phone up a spreadbetter, provide my debit card details and put £2K into the account, I then go a place a £10k spreadbet on Vodafone shares. There is no way in hell that I would consider myself an owner of £10k's worth of VOD!

Do the math? I can't, there are no numbers to do the math on! For all I know you could have 1 really cheap property in your portfolio almost owned outright, a couple with hefty gains and you have pyramidded up at exactly the wrong point and have just diluted all your gains and are at serious risk of losing all your equity with a very small change in market valuation.

Edited by OnlyMe

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There was also Lapras, for a short while, not so large as Miras, but still significant at the time. [OnlyMe]

Indeed, this was a key selling point of endowment mortgages: tax relief on the endowment premiums and tax relief on the interest only mortgage which didn't reduce.

Yes, and the net result of all this is what the net real rate of interest is compared to wage inflation (-goods/cost inflation). I reckon it was quite good at the time (for those that kept their jobs that is during the 80's).

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Good post JohnG and a belated welcome to HPC.

.......

Okay so you are a BTL'er and intending to retain your portfolio, aside from the abuse you are going to get on here what do you see happening:

1) General property prices over the next 1-5 years.

2) New builds esp city lifestyle.

3) The BTL market especially those late joiners to the party.

Thanks for the welcome :D

Abuse I can handle. My trade is software testing. Grief is my stock in trade :P

To your questions -

1) General movement plus or minus 10% (nominal) over 5 years. Therefore maybe as much as 25% in real terms.

2) City Centre New builds (CCNB) > £200per square foot - ouch! Don't Go There.

3) Anybody who has been in the market > 3 years shouldn't have a problem. < 3 years and predominantly CCNBs had better have another source of income to subsidise the deficits.

Property should be a minimum 20 year, preferably inter generational proposition. With those timescales what happens in any given 5 year period is neither here nor there.

Fo me it's neither bullish nor bearish. It's Just The Way It Is.

HTH. :)

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    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
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