In the past ten years, the ‘private rented sector’ in the UK has ballooned, both in absolute terms and as a proportion of the housing market. As the popular narrative runs, rising house prices are driving more people to rent where they might have previously bought their homes. In fact, the causality runs the other way too: landlords investing in property have disproportionate buying power, pushing up prices and squeezing supply for other buyers in an already tight market. In recent years, many landlords have expanded their property portfolios, meaning that the very homes that might have been owner-occupied today are now rented instead. So this is a separate issue from the lack of supply in the market, though partly prompted by it.
Consider these two options: letting a property to tenants, and living in it yourself. On the face of it, there are pros and cons to both. Landlords have the benefit that they can offset the interest payments on special ‘buy-to-let’ mortgages against income tax, as they are classified as a business expense. On the other hand, they have to pay tax on any gain in the capital value of the property when they come to sell it. Owner-occupiers, on the other hand, don’t pay capital gains tax on a primary residence but must pay income tax and mortgage interest payments as normal. So far, so balanced.
Except that it’s not really balanced at the moment. The power that each these factors exerts over the others is distorted by current conditions, as chronic under-supply has sent prices spiralling. The maximum amount that a bank will lend for a residential mortgage is around four times annual income, but in the current market, this falls well short of what you’d need to buy a house. (The government’s Help to Buy scheme helps those who can afford the mortgage but don’t have cash for a deposit.) Faced with this impossibility, most would-be first-time-buyers are forced to join the ranks of the renters.
The buy-to-let mortgage market is very different. If you’ve got some cash (for most people that’s a big ‘if’) it can be easy to secure a much bigger mortgage than if you were going to live there yourself, simply because a bank isn’t looking at your personal income when calculating how much it will lend. It’s looking at the possible rental income from that property. This means landlords are more powerful buyers than prospective owner-occupiers. It also creates upward pressure on rents – which restricts’ renters’ ability to save for a deposit, assuming they haven’t totally given up on one day owning their own house.
The ‘buy-to-let’ boom, accessible only to those with cash for a deposit, has priced many out of home ownership. It has also resulted in a concentration of wealth in the hands of landlords. This is not because all landlords are profiteers – but simply by owning the asset and expecting a certain return, a landlord gains a part of their income from a tenant, after mortgage payments, management and maintenance costs are deducted, that must by definition be pure profit. This is an amount that an owner-occupier in the same property would be keeping for themselves.
To put it bluntly: a shift away from owner-occupation equates to a transfer of wealth from the poor to the rich.
The runaway cycle could be damped by greater taxation of landlord income, or restrictions on buy-to-let loans, but it’s difficult to do this without attracting accusations of double taxation or undue market manipulation. A rise in Bank of England interest rates will certainly begin to cool the buy-to-let frenzy but there’s no indication that this will happen any time soon.
For now, though, the options for first-time buyers are fairly bleak: either move out to distant suburbs, far from friends, buzzing city centres and work opportunities, or move out of town altogether. The latter is increasingly attractive to many: twenty- and thirtysomethings are moving to Manchester, Birmingham, Cardiff and elsewhere, lured by low costs and superior quality of life. But they had better act soon: the landlords are coming too.