Three (tax) strikes and you are out
by Ken Gibb
A relatively little-mentioned aspect of this week’s budget was the continuation of the fiscal assault on buy to let landlords. As we know, the rate of capital gains tax has been cut but the private landlord has been exempted from this effective tax subsidy. The rate of CGT remains at the old higher rate for them. While this is only a relative disadvantage compared to other forms of assets, it is a continuation of a process whereby the Treasury has accumulated fiscal penalties on the sector over the last year or so (reducing tax relief to the basic rate for interest on borrowing and also the 3% hike on all rates of stamp duty quickly replicated in Scotland).
The rationale from the UK Government is two-fold: they want to pursue a tenure-based housing policy that promotes the growth in home ownership and are of course pursuing a range of more or less credible policy proposals to do just that. Second, however, they are justifying this approach insofar as it means reducing the incentives to invest in private renting (or stay in the sector), because the Bank of England published its view that BTL investment may be pricing out home owners and creating bubble like inflation in the housing market (that needs to be moderated).
The logic of this argument is I think pretty ropey. It is one thing to say that rental investors are bidding up the properties they purchase (they obviously are very active and taking a large chunk of new lending and yes may be pushing prices up a bit); but it does not follow that by choking off the return to such investment via blunt fiscal interventions will (a) deflate any such bubble (whether or not it is a real issue consistently or largely outside of the Metropole) or (b) that this will in the short to medium run actually make things better in terms of the supply of housing. Let’s unpack the argument a bit.
A THOUGHT EXPERIMENT
Clearly, private renting and owner-occupied segments of the housing market are interdependent – they are a more or less functioning system where change in one affects the other. In recent years, largely though not wholly as a result of the non-affordability of home ownership and linked long term supply shortages, demand has grown and supply has responded on the rental market to accommodate unfulfilled home ownership demand and, to an extent, meet new demands independent of this frustrated non-owning segment. Intervening through fiscal levers to make the rental sector less attractive may well reduce new investment and stimulate disinvestment – slowing the growth and even reducing the sector’s actual size. But there are least three problems that arise in this system where I think the Treasury is not thinking it all through.
First, it will take a long time for any downward pressures on prices caused by a landlord or investor exit to impact on house prices to the extent that they make a material difference to potential first time buyers (and it is questionable if this would ever be the case in some parts of the U.K.)..
Second, the PRS is not the only force acting on house prices – there remains the chronic weakness of new supply to deliver and the myriad host of new announcements and policies supposed to unlock housing supply, as well as of course other demand side policies like Help to Buy. Where is the evidence that this strategy adds up or that BTL is the critical driver of prices?
Third, in the (potentially lengthy) intervening period while we wait optimistically for this supply renaissance to deliver large numbers annually of a range of owner-occupied supply to locations where there is demand and a good proportion of it is accessible to potential purchasers – just where are the growing number of households going to be accommodated? Will a shrinking rental market simply not reduce the options for people to rent and bid up market rents? Surely, this continuing long term problem in the home ownership sector is precisely why we need a well-functioning, better regulated (e.g. longer length of tenancy) and well policed rental market? Actively trying to make it less competitive and less attractive to investors is simply wrong-headed.