Over the last year the Cameron government used the tax code to heavily discourage buy-to-let investment, through such means as the 3% surcharge on second homes, the changes to mortgage interest relief and the exclusion of buy-to-let from the cut to capital gains tax, leave landlords paying almost 150% as much tax on their profits as other investors. Even before these developments the IFS showed that rental properties faced a worse tax environment than owner-occupied and social-rented housing. Now that Cameron has given way to May, the time is ripe for a rethink.
There are two motives for the policies Cameron was pursuing. First, it is a politically expedient way to raise revenues for the treasury: few will cry for landlords. Second, and far more important, it is intended to raise home-ownership – alleviating the housing crisis through tax tinkering. If buy-to-let investors are discouraged fewer will buy new houses and more will sell off their properties, which means more houses sold to owner-occupiers and a rise in home-ownership. It is, tentatively, working: the National Landlords Association predicts 500,000 properties will be sold from the rental sector in the next 12 months. That means 500,000 more people, couples and families in homes of their own.
But there’s another side to this story. Those are 500,000 homes drained from the British rental stock, and many more properties that would have become rentals in another climate. The sudden drop in supply will lead inevitably to higher rents, poorer service, or both, in what remains of the rental sector. The increased costs faced by landlords will also be passed on to their tenants. This will harm students, the young and the poor most: the very people increased home-ownership is supposed to help. They are also people who don’t usually have the £33,000 required for the average deposit on a mortgage, or even the £10,000 or so needed for deposits on some of the cheapest properties, so the added houses for sale won’t do them much good.
It also discourages mobile professionals who will find fewer accommodations when they look to move for work, lowering labour marketing mobility and so damaging the wider economy. What’s worse, it may well mean less house-building: between 1996 and 2013 83% of all new dwellings created in England were created by investments in the private rented sector. Don’t just take my word for it: the treasury select committee has said much the same thing.
All of this is to say that the attack on buy-to-let investment is misguided. It temporarily alleviates symptoms of the housing crisis by shifting a fraction of the existing housing stock from owner to owner, true, but its unintended consequences are likely more damaging than any benefits. Policies like the expansion of shared ownership housing are a far more pragmatic and less damaging way of increasing home-ownership, but also are not enough. The housing crisis comes from demand outstripping supply. Increasing supply by building more houses is a solution to the housing crisis. Decreasing demand by decreasing net immigration or increasing the rate of cohabitation is a solution to the housing crisis. Nudging people with the tax system to shift the pre-existing supply is not, and the May government should abandon its predecessor’s efforts to do so, and end the counterproductive attack on buy-to-let.