Ignore the landlord martyrs: time for the BOE to intervene

HAMISH_MCTAVISH

Generali wrote: »

Remind me, what did Marshall say happens to prices when the supply curve shifts? I don't think that the whole of the tax rise gets passed on.

Had the tax rise been immediate, I'd agree, but given it isn't fully implemented for 5 years that gives time for rent price inflation to compensate.

Over the next 5 years population will increase by something like 2.5 million while we continue to build nowhere near enough houses.

Landlords have 5 years to get the rent up and most will only need 25% or so to maintain current levels of profit.

Within the context of a large and rapidly worsening housing shortage I think that's firmly achievable.

Generali

HAMISH_MCTAVISH wrote: »

Had the tax rise been immediate, I'd agree, but given it isn't fully implemented for 5 years that gives time for rent price inflation to compensate.

I agree, it allows for the eventual outcome to be reached rather less painfully.

The fact remains that the increased cost will be reflected in the supply curve. Some landlords will decide to sell up, increasing rental costs a bit and reducing house prices a bit. Some landlords will decide to stay in the market and some of those will go bust and some, the ones that had the better financial plan in place, won't.

All of the costs of the tax will be passed on after the weaker players are shaken out of the market.

CLAPTON

HAMISH_MCTAVISH wrote: »

Price/rents are driven by the imbalance between demand and supply.

By changing the allocation of housing stock in the future you can vary the degree of that imbalance.

There are a couple of key things worth noting...

1) A high proportion of renters are not in a position to become buyers

2) The number of homes in O/O is vastly higher than the number of homes in rented

So moving say, 100,000 houses from rented to owned has a huge impact on rental stock levels but only a tiny impact on O/O stock levels.

In practical terms this means that any change to allocation has a bigger effect on rents than prices.

Simple Example:

Imagine a small island, we'll call it Osbornia, with 1000 houses. 800 of them are owner occupied, and 200 of them are rented.

There are currently 20 houses available for rent, and 80 houses available for sale.

120 additional people move to the island of Osbornia..... But only 90 of them can get mortgages and the other 30 have to rent.

90 new Osbornian citizens are competing for the 80 available houses.

So Osbornian house prices then rise until the 10 lowest earners of the 90 that can get a mortgage are forced not to buy.

Prices don't rise all that much though, because the ratio between demand and supply is only 9/8.

This leaves 40 people competing for the 20 rented houses.

Rents rise a lot more than house prices in percentage terms because now 20 of the 40 need to be priced out.

The ratio between demand and supply is 4/2.

So rents soar until the 40 people are forced to share the 20 houses.

You now also have 40 incomes servicing 20 rents so it remains affordable...

The King of Osbornia, lets call him King George, decides he wants to change all this and restricts the number of houses available for rent. He also marginally increases mortgage availability.

Next year there will be 10 houses available for rent, and 90 houses available for sale.

Now imagine another 120 people move to Osbornia.

But this time 95 of them can get a mortgage and 25 cannot.

So 95 people compete for 90 houses and 5 are priced out.

We now have prices rising by less than they did the previous year as the ratio between demand and supply has changed.... From 9/8 last year it is 9.5/9 this year.

The gap has narrowed.

But in rented the gap has widened...

As we now have the 5 priced out buyers, plus the 25 renters, chasing just 10 houses.

The ratio is 3/1, whereas last year it was only 4/2, so rental growth becomes explosive until enough people are priced out and forced to share that supply and demand return to equilibrium.

And as you now have three incomes servicing every one rent, it remains affordable.

This is, in a nutshell, what Osborne is doing.

He's faffing about with allocation and hoping to gain some tax revenue from it. It would be politically impossible to tax tenants directly so he taxes landlords instead.

He knows full well that if he limits the stock coming on to the market for rented accommodation, the imbalance will worsen in rented by more than the imbalance is eased in O/O, and this will enable landlords to increase rents enough to recoup the tax loss.

At the same time it won't stop house prices rising, but it may enable a few more people to buy as the pace of increases slows.

It's actually quite an elegant way of passing tax burdens through to the very segment of society least likely to vote at all, and least likely to vote Tory if they do, whilst superficially being seen not to target them but to target his natural allies in the middle class landlord community.

in spirit maybe
but the balance of supply and demand determines price

by 'imbalance' you actually mean you think that there are too few houses for peoples wants

chucknorris

wotsthat wrote: »

It's amazing how excited people get about a lettings business.

I feel exactly the same way about people who have a pet tortoise.

HAMISH_MCTAVISH

Generali wrote: »

All of the costs of the tax will be passed on after the weaker players are shaken out of the market.

Yes.

100% of this extra cost will be passed through to tenants eventually.

The big question is how many existing 'weak players' are there to shake out.

I think the answer is 'a fair few' if he'd done it immediately, but by delaying the implementation for 5 years and allowing time for rent rises to take the sting out, 'a fair few' will become 'virtually none'...

What he will achieve is discouraging new investment into rented supply so those who stay in place will have less competition moving forwards.

This will inevitably force rents up faster than they otherwise would have risen.

cells

I think there is a lot of overreaction to potential regulation and changes to BTL. It is almost as if some people think renting out of homes is going to be made illegal soon

The treasury will want to pluck the maximum feathers with the least hissing.

The BOE/Regulators would want to reduce the risk BTL might have if they sell all at once. Its clear they cant put regulation up drastically as that will cause the panic/forced sales that their regulations are supposed to avoid with the regulation.


My view is that the stamp duty changes were smart, the interest as a cost changes were stupid. The BOE might place some regulations onto BTL but its more likely to be to standardise BTL at no lower than 125% cover at 5.0%-5.5% and 25% down rather than the fantasies of some crashists of no BTL mortgages the day after tomorrow.

cells

HAMISH_MCTAVISH wrote: »

Yes.

100% of this extra cost will be passed through to tenants eventually.

The big question is how many existing 'weak players' are there to shake out.

I think the answer is 'a fair few' if he'd done it immediately, but by delaying the implementation for 5 years and allowing time for rent rises to take the sting out, 'a fair few' will become 'virtually none'...

What he will achieve is discouraging new investment into rented supply so those who stay in place will have less competition moving forwards.

This will inevitably force rents up faster than they otherwise would have risen.

plus the fact is that the rental stock was growing by some +300,000 a year (most of that not via BTL mortgages). Each additional tax or regulation change will chip away at that but its such a huge number that to get it to +0 will be almost impossible.

I think maybe at most (with the current rule changes) the +300,000 a year figure is going to fall towards +200,000 a year.

I also feel property investment has become a class of its own. A lot of savings will flow into property from average jo families (cash or via mortgage) who simply do not trust asset managers or think their charges and fees good value for money.

Jason74

wotsthat wrote: »

I've only looked once. I truly hope that site is representative of landlords in the same way as HPC is to house hunters.

Sadly I suspect that property 118 is fairly representative of landlords as a whole. I think that it's the more enlightened views espoused by some (albeit not all) of the BTL owners on here that is the exception

getmore4less

Don't forget that a lot the shared ownership is in reality rental stock as it takes a renterthan can't afford to be a proper OO off the rental market.

Pennywise

Surely, the new tax relief restriction only affects higher rate taxpayers, so those "amateur" landlords with just one BTL probably won't be hit at all.

And those "pensioners" who've bought a BTL to increase their income won't be hit either, as if they're getting an income, then that suggests they have a very low or zero mortgage anyway.

I see it as only affecting those with multiple BTL's, all heavily mortgaged, or those already paying higher rate tax by virtue of their jobs.

So, basically, despite all the whingeing, relatively few "normal" small landlords are going to be hit.