In the popular imagination, the buy-to-let business is speculative. Landlords purchase shiny new-build flats in the hope of selling them for a profit within a few years.
This model was indeed favoured by some private investors in the last property boom. Larger-than-life characters such as Kevin Linfoot, who planned to build Western Europe's tallest residential tower in Leeds before his company went bankrupt in 2009, made money by selling flats off-plan to gullible investors. Because these tycoons benefited disproportionately from media coverage in the good years, they also attracted it disproportionately in the bad ones.
But in reality buying off-plan was always a minority sport. Only one in 10 buy-to-let loans taken out between 2004 and 2007 were for new-build properties, according to one survey. Many of those investments will have gone badly wrong, so the proportion now is probably much lower.
Instead, most buy-to-let landlords favour homes that have been around for at least a generation. 77 per cent of properties in the private rented sector were built before 1980, show data from the Department for Communities and Local Government. Older homes offer the chance to make a margin on refurbishment or reconfiguration - such as converting terraced houses into flats or bedsits. And, like new cars, new homes attract a premium that disappears with the first tenant. Nigel Terrington, chief executive of buy-to-let lender Paragon, estimates this premium at 5 per cent or more.
This distinction matters because of the infamous English housing crisis. The House of Commons last week published an excellent report called the 'Financing of New Housing Supply'. Its acknowledgment of the role private investors play in the private rented sector is welcome. "The sector is, and will continue to be, dominated by small companies and individual landlords," writes the Communities and Local Government Committee. Equally welcome, albeit vague, is the recommendation that the government "bring forward a set of proposals to simplify the tax and regulatory structures that apply to private landlords".
But I am sceptical that any but the most radical proposals will lead to a resurgence of buy-to-let development finance, as the committee hopes. Developers used to talk up the prospect of capital gains by way of compensation for mediocre yields and the delay between an off-plan purchase and its construction. But that sales pitch is no longer convincing. Developers will have to offer flats at a substantial discount if the yields are to compete with those immediately available on second-hand terraced properties. This seems unlikely.
True, there can be knock-on effects on the new-build market when landlords buy a second-hand home. They may free up capital for owner-occupiers to buy brand-new homes. But buy-to-let investment is just as likely to feed into higher house prices as into new building, and housing supply is surprisingly unresponsive to high prices. Even at the peak of the previous cycle, in 2005-06, there were only 183,360 housing starts in England, and that number has since fallen to 103,750. According to government demographers, England will need an extra 232,000 new homes each year over the next two decades. This is the core problem the House of Commons report is trying to address.
Mark Butterworth, director of the Residential Landlords Association (RLA), worries that yields are not just too low on new-build properties; he thinks they are unacceptably low across the whole buy-to-let industry, now that the prospect of strong capital returns has faded. This argument is based on research by Michael Ball, an economics professor at Reading University, including a survey of the finances of 200 RLA members. Mr Ball fears the whole sector will see substantial disinvestment - landlords will either sell stock or fail to maintain it properly - unless yields rise back to their much higher levels of 10-15 years ago.
Of course, there's an element of lobbying in Mr Butterworth's comments to the House of Commons committee: the RLA wants a more favourable tax regime. But they raise an interesting point: what is an acceptable yield for buying houses? Mr Butterworth suggests 8-10 per cent. We'd be interested in hearing readers' views.
In France, investors receive tax credits for investment in new-build stock. Most are able to offset a full 25 per cent of their investment cost against their tax liabilities over a period of nine years. This in a country where popular opinion is set against the bourgeoisie. In England, the government instead tries to stimulate demand for new homes by giving subsidies to first-time buyers, through schemes such as First Buy and New Buy. This is politically easier, but less effective. Investors have far more cash, by definition, and the private rented sector, unlike the owner-occupied sector, is growing.
The most realistic suggestion for tax reform to come out of the report was that investors should be able to use their Sipps to buy houses. This seems a fairly painless expansion of a structure that we already know is popular. The change could be limited to new stock. It wouldn't solve the crisis by any stretch of the imagination - but it would help a little.
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