CAN GOVERNMENT POLICY ON THE UK PROPERTY MARKET DAMAGE THE ECONOMY?
CAN GOVERNMENT POLICY ON THE UK PROPERTY MARKET DAMAGE THE ECONOMY? By Godwin OkriIt has long been a settled argument amongst free-market economists that a liberated market is a flourishing market. This is why some economists wince each time they read about Government policies affecting the UK property market. Most people enter the housing market hoping to build financial security for themselves and their family. However, recent policy initiatives by the Government are set to undermine the platform for individuals to enter the property market and may have other, more far reaching negative impacts on the UK economy as a whole. The Buy-To-Let (BTL) market (also referred to as the Private Rental Sector) has grown in size since the inception of the BTL mortgage in 1996. There are now about 2 million BTL landlords controlling assets worth about £2 trillion. The growth of the private rental sector has helped to mitigate the effect of the growing number of people on council waiting lists, which now stands at about 1.9 million. Commercial real estate investment in the UK has also grown significantly. Rather than applaud the strides made by this sector, the current Government has instead blamed the Private Rental Sector (PRS) for the escalating property prices in the UK. As a result, the Government introduced a plethora of policies as panacea to cure the alleged problem, which are summarised below.
- The Prudential Regulation Authority (PRA), which is part of the Bank of England, has instructed that lenders must not lend to BTL investors if the property in question produces rent below an Interest Coverage Ratio (ICR) of 145%. The borrower must also be able to afford the mortgage with a hypothetical interest rate of 5.5%. Portfolio landlords (i.e landlord with more than 4 properties) must also show a robust yield.
- The Government announced that anyone buying a second home must pay a 3% surcharge to HMRC.
- BTL landlords must check the ID of potential tenants before execution of the agreement.
- The Government introduced Section 4 of the Finance Act (No.2) 2014 which prevents landlords from offsetting the full value of their mortgage interest payments against their rental income when calculating their profit. From April 2020, the tax relief they can claim will be limited to the basic rate of 20%.
- Since April 2016 the 10% of the rental income which landlords (who let furnished properties) were able to claim as notional wear and tear when preparing their tax returns has now been discontinued. Now, landlords can only claim the actual cost of ‘replacement’ of furniture, but not the initial cost of purchase.
- As a final straw, the amendment made to the provisions of Section 21 of the Housing Act 1988. The Deregulation Act 2015 (which introduced the amendment) is seen as the final dagger piercing the BTL heart. The 2015 Act now makes it a lot harder for BTL landlords to evict their recalcitrant tenants, even during a period of persistent none payment of rents. The Act introduces a new Form 6A, which cannot be served earlier than 4 months into the tenancy; if the tenant raises a complaint, he cannot be evicted until certain conditions are met, etc.