Chartered Institute of Housing wants to penalise tenants

Posted on 21 June 2007 by Ray Boulger

1 Comment

At their Annual Conference this week The Chartered Institute of Housing (CIH) claimed that the tax relief available on Buy-to-Let (BTL) mortgages is contributing to the problems faced by first-time buyers (FTB) and called on the government to close what they called the loophole that allows buy-to-let landlords to offset the costs of running a rental property, such as service charge, repairs and letting agent fees, as well as mortgage interest. This is also a common theme in letters to the press from frustrated would be FTBs.

CIH President Paul Diggory argued that the phenomenal growth in buy-to-let is contributing to the affordable housing crisis by pricing FTBs out of the market. Whilst there is an element of truth in these clams the CIH’s proposed solution overlooks the economic realities of life and ignores the main cause of the problem. CML figures show that in 2006 11% of gross new mortgage lending was for buy-to-let. However, properties owned by BTL investors represent about 12% of the UK housing stock and so 11% of new lending being for BTL is in line.

In his opening speech at the conference Paul Diggory said: "The government has acknowledged that there is an acute lack of affordable housing across the country so it does not make sense to still offer tax relief to those who buy, simply to rent. Buy-to-let owners have a financial advantage over those trying to buy their first home, as well as pushing house prices even higher.”  

By saying “simply to rent”, I assume Mr Diggory looks down on those who rent, but they have just as much right to good quality housing as FTBs and someone has to provide that housing. Many landlords would simply sell up if they, unlike every other business, were not allowed to offset their expenses against their income. Perhaps the CIH believes that homes to rent to replace those properties owned by ex landlords should be provided on a subsidised basis by the public sector. I can’t see where else these homes would come from after a mass exodus by BTL investors.

Tax proposals such as these demonstrate a surprising lack of understanding from the CIH of life in the real world, as well as ignoring the needs of people who choose to, or have to, rent. The principle reason for the shortage of so called “affordable” housing stems from the most basic law of economics – there is more demand than supply. Since the Barker Review over three years ago the Government has been good at talking the talk about the need to build more residential units. However, some action would be good and with new household formation running at about 230,000 per year, compared with new housing starts last year of only 165,000, you don’t need an economics degree to work out why there is pressure on prices.

Incidentally, I presume politicians and bureaucrats who use of the term “affordable” must logically either class all other properties as “unaffordable” or they themselves must be illogical. If a property is unaffordable no one would be able to buy it and therefore presumably it would either be empty or occupied by squatters. I don’t see many empty properties around and so there don’t appear to be many unaffordable properties, unless squatters make up a huge proportion of our population. Thus, as virtually all properties are “affordable” this adjective appears to be rather superfluous when used in this context!

Whilst recognising the shortfall in house building is a serious problem, the Government appears to only want to half solve it. Gordon Brown said last month that his medium term goal (by 2015) was to increase the number of new homes built to 200,000 per year. There is no indication that the rate of new household formation is likely to fall and so, despite housing apparently being one of the Government’s priorities, the shortfall of supply over demand looks likely not only to continue for at least the next 9 years, but to progressively get worse.

One Government policy which significantly benefits investors at the expense of FTBs is the requirement introduced a few years ago for developers to build at a far higher density than used to be the norm. The only way to implement such a policy is to build a much higher proportion of flats and so whereas a few years ago flats represented about 14% of new residential property that percentage has now more than doubled. Many investors prefer flats, whereas FTBs generally prefer a house if they can afford it.

The reason BTL investors get tax relief on their mortgage interest is that for tax purposes they are carrying on a trade and a basic tax rule is that expenses incurred wholly, exclusively and necessarily in carrying on a trade are tax deductible. Although BTL does result in property prices being higher than would otherwise be the case I suspect the increase is fairly modest. This is because whether someone rents or buys the amount of property required to meet demand for accommodation is the same. What is different is who owns it but because additional finance is available to fund BTL mortgages the overall amount of funding available for residential property is increased and this is what causes prices to be higher than they would otherwise be.

Changing the tax rules to prevent landlords from claiming the costs of owning their property as a deductible expense against the rental income would be rather like saying to Tesco you can’t deduct the cost of the goods you sell or the costs of running your stores from the revenue you receive from selling goods before calculating your tax bill. I wonder how long Tesco would survive if they had to pay tax on their turnover rather than their profit!

As a result of the BTL revolution the quality and choice of property available to those who want to rent has increased enormously over the last 10 years. If the CIH proposal was adopted the net result of hitting landlords with penal taxation would be either to hugely reduce the supply of rental property or to push rents up a long way to compensate landlords for their extra tax bill. The end loser would be those who rent. They would either have much less choice where to live or they would in effect be paying tax on their rent as increased rent would be needed by the BTL investor to make being a landlord economically viable after paying a much higher tax bill.

This proposal from the Chartered Institute of Housing has been thought through about as well as the Government thought through HIPs! In both cases either they have not heard of the law of unintended consequences or they have blinkers on!

Categories: Buy to let, House and home, Property market

• Save to del.icio.us
• Digg this story