In Defence of Buy to Let?

by Ken Gibb

A few months ago I was speaking at a Scottish housing policy conference and I struggled to articulate a point about UK government policy on private renting. The essence of the idea was to question how the initial unfavourable tax changes to the private renting sector proposed by HM Treasury in the 2015 summer budget and then reinforced in the Autumn Statement actually helped deliver more housing supply and expansion in home ownership.

Mark Stephens recently pointed me to the February 2016 report by the House of Commons Treasury Committee on the Spending Review and Autumn Statement 2015 [1]. The report contains a chapter on housing, which has much to recommend it. Here, I want to focus just on what they say about Buy to Let.

The broader argument is contextualised by a belief stated by OBR that the private rented sector is expected to continue to grow, in part because of continuing affordability problems shutting young would-be purchasers out of home ownership. A critical question therefore is whether sufficient rental housing opportunities that are affordable exist for these and other households unable or unwilling to own. 

The Committee also stresses support for the idea promoted by the Bank of England’s Financial Policy Committee that they should have the power over direction of the BTL sector. The FPC note that in the year to September 2015, BTL lending grow by 10% compared to just 0.4% for owner-occupier lending. The worry is that BTL lending could threaten or risk wider financial stability. However, for reasons that the Treasury Committee terms ‘inexplicable’, the Government’s continues to delay granting this power of direction. Moreover, the Treasury Committee, rightly, also wants more detail on what the power of direction over BTL leading would mean, what tools would be used to achieve impact and how would the effects of such intervention be analysed.

The point of course is that there is a world of difference between promoting the case for greater financial scrutiny by the independent Bank of England and its Financial Policy Committee, as compared to using Bank concerns about BTL to warrant two examples of crude tax measures aimed at curtailing BTL investment. So, my concern is first that these are the wrong measures and have been introduced prior to realising the more sensitive and flexible regulatory role potentially to be played by the Bank. Second, there are grounds to argue that these are poorly specified policies in terms of what they are set out to do.

The decision to reduce mortgage tax relief to the basic rate for BTL landlords, to be introduced over 4 years from 2017 is justified by the HM Treasury analysis on the basis that the taxation of private renting is lighter than home ownership. As Paul Johnson of the IFS said in evidence: ‘this line of argument is plain wrong’ (section 101). Private landlords pay more in tax and in addition allowances for wear and tear depreciation (worth 10% of rents before tax) have also been removed.

Second, the decision to add a surcharge to all rates of stamp duty (repeated in Scotland’s land and building transactions tax) in the Autumn Statement was criticised by those giving evidence to the committee in terms of further increasing the tax disadvantage confronting private landlords and doing so via a ‘bad tax’ i.e. one on transactions which reduces mobility and will inevitably be passed on to tenants in the form of higher rents – reducing affordability. Peter Spencer from York University also made the point that the delayed implementation of this announcement, like in 1988 when double MIRAS was abolished several months after the announcement, would lead to a rush by investors to complete sales before the surcharge came into effect, followed by a dearth of sales thereafter (Section 111).

The point is that you do not need to be an opponent of bad private renting to see that these kinds of poorly constructed policies damage the housing system as a whole, reduce affordability and do little if anything to expand housing supply. We need a larger scale quality private renting sector if we accept the fundamental difficulties of developing a more balanced housing system. If in our hearts, we do not think that home ownership is going to be rendered much more affordable any time soon, there needs to be a sensible rental market alternative. It should be monitored and regulated as suggested by the Treasury Committee through the FPC (subject to the caveats raised by them), and we need of course need proper quality control and standards enforcements, But, it seems to me, the Chancellor’s policies as presently constituted, simply do not help.

1. House of Commons Treasury Committee, 6th report 2015-16, February 2016 Spending Review and Autumn Statement 2015. HC 638.