Next property crash ‘could be triggered by great sell-off rush of landlord properties’, warning

Tax relief changes coupled with rent controls could trigger the next property crash.

The warning has come from Gary Heynes, a partner at tax and business advice firm RSM.

He says that as tax relief changes are increasingly phased in, landlords could find themselves paying more in tax than the net rental income they receive.

If they cannot put up rents to cover the shortfall, he says there will be a huge influx of properties on to the market.

The amount of tax relief landlords can claim on residential property is already being cut.

From April 6 this year, tax relief for finance costs is being restricted, with the full restriction phased in over a period of four years.

This tax year 25% of landlords’ interest costs will get tax relief at the basic rate of 20%. In the next tax year that will be 50% of their interest costs and by 2020/21 all interest costs will only get tax relief at the basic rate.

Heynes said that someone with a £600,000 property, paying an interest-only mortgage, could find that in future, what is now a 4% annual return on investment would be replaced by a cost of £1,700 to run the property.

Heynes said: “Margins are getting tighter for landlords. Add to this a possible increase in interest rates and the issue is exacerbated.”

Heynes said many landlords will simply put rents up in order to cover the shortfall.

“However, if a Labour government is elected, rent controls are almost certain to follow, so increasing rents might not be possible.

“Higher interest rates coupled with rent controls would not be a great environment for personal landlords and could instigate ‘the great sell-off’ as landlords look to reinvest elsewhere.

“This response could cause the next property crash as the property market becomes over-supplied with assets to sell, pulling house prices down, impacting equity levels and mortgage agreements.”

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11 Comments

  1. 40yearvetran08

    I do not think that will happen. He should stick to giving tax advice not trying to predict the property market.

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  2. Robert May

    But depending on where the property is a glacial advance in capital value will be ignored? I don’t think it will.

    22 year compound average 6.9% on £600,000, £41,400 versus £1700 extra income tax?  Quick let’s spend out 5 years additional tax on dumping an asset that’s generating an income and is house price index linked.

    It will be  an interest rate rise or restrictions on BTL lending that will cause an exodus from BTL not additional tax on the income.  There are spiv landlords with portfolios they can only  afford due to  low interest rates and pyramiding. The additional income tax might be enough to break those artificial property tycoons but not those  who understand how things work.

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    1. Deltic2130

      Spiv? Odd how so many of the crashists like to use that word. It’s almost as if it was pre-planned.

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      1. Robert May

        I am not a “crashist” I spent 2 years telling HPC’ers to buy while they could.

        However I encountered  through a Halifax repossession my first spiv, pyramid landlord. I have since  spent 25 years understanding the investment opportunities and pitfalls of property

        Right now I can tell  investors where the market  is vulnerable, where there are opportunities.

        Is it pre-planned or is it  an inevitable consequence of greed and cheap credit who knows? But it is rather obvious where some people have pushed LTV portfolios to the max assuming bad things will wait till after they’ve taken their profit.

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      2. JMK

        Yes it is most odd Deltic, and it seems to ignore what the word actually means….

        “a petty criminal, especially a black marketeer, racetrack tout, or pettythief”

        Ah well, let’s not let facts spoil things.

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  3. LandlordsandLetting

    I agree with Robert May’s assertion that the greatest threat to BTL is an interest rate rise. What’s more, simply because the interest rate hasn’t risen for so many years, even a relatively small 0.5% rise could well have a huge psychological impact on the market and could even cause a certain amount of panic, particularly amongst over-leveraged landlords.

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    1. Barry20

      One of the reasons George Osborne gave for Sec.24 way the BTL threat to financial stability. Whereas Sec.24 reduces the level at which interest rates  at which Landlords making a loss (and therefore possibly having to sell). Thereby,  precipitating the sell off his said he was trying to avoid.

      Many Landlords even those aware of Sec.24 aren’t aware of the combined impact of Sec.24 and an interest rate rise.

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    2. JMK

      I think you’r over estimating the effects of a small interest rate rise.  Firstly many landlords have already fixed rates but all a rate rise will do is push up rents again.

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  4. El Burro

    He has a valid point. I’ve been banging on to anyone that’ll listen for ages that the Government is driving landlords away.

    The way they are now being taxed (he doesn’t mention Stamp Duty), impending interest rate rises, slow capital growth, longer tenancy contracts and the threat of rent caps in the future especially if there is a Labour regime (and that’s something that was not on the horizon a year ago but is a real possibility now) has led to loads of landlords selling off already.

    The problem is that they aren’t being replaced, at the start of the year B2L investor enquiries were down 50% against 2016 and it isn’t much better now. And we’re in an area served by Crossrail where you’d think investors would be busting a gut to get into.

    Of course there are long term landlords out there who are mortgage free now and are happy to stick with what the have but the huge upsurge in new landlords we saw when the market returned a few years ago and interests rates had been pegged at silly % for ages are the ones whose backsides are twitching.

    A crash? Probably not because it is and will be a gradual process and it has already started. Each event will take more people out like those arcade games where coins tip over the edge.

    But stock down and few serious investors around. It doesn’t bode well for the PRS and in particular rents which are climbing all the time.

    Thank the Lord that Theresa May is going to build gazillions of affordable homes. Or was that David Cameron, no I think it was Gordon Bennett (sorry Brown). Sorry no it was Tony Blair wasn’t it  . . .(list of every Prime Minster over the last 40 years fades to the horizon)

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  5. Vanessa Warwick

    The first tremors will be felt when amateur landlords – the “mass market” of 97% of landlords with three or less properties – submit their tax returns for this tax year.

    The vast majority of them have not even heard of Section 24 – it’s not on their radar – so they are going to get a nasty shock and there will definitely be some knee jerk reactions.

    On Property Tribes we have a number of threads of landlords selling properties, including one portfolio landlord who has already disposed of 25 due to Section 24.

    The cumulative affect of all the threats I mention below are going to dis-incentivise existing landlords and deter new entrants imho.

    https://www.propertytribes.com/5-threats-that-should-be-on-landlords-radar-t-127630930.html

    Next year is going to be a very telling year all round as the impact of S24 truly starts to bite.  Combined with the other threats mentioned above, a perfect storm is brewing and there will be many casualties.

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  6. zep-123

    Vanessa couldn’t agree more next year is going to be telling as the less clued up landlords do their first return. Professional landlords like myself have already taken steps and will carry on and expand. It’s the poor tenants I feel sorry for as there will be a lot of sell offs esspecially larger family homes with the biggest mortgages. Already seeing it in London with record numbers in temp accommodation due to landlords selling as the south is going to be hit hardest. Just ask yourself in the middle of a housing crisis the government do this to make it worse it really is mind boggling. There should be incentives for investors to expand imagine how bad the crisis would be without the PRS. This will unravel over the next few years and it’s going to be horrendous Mark my words

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