Investment stampede?
There has been much media attention on the surge in investor buying activity prior to the introduction of the 3% additional stamp duty surcharge that came into effect on 1st April. Indeed, across the UK as a whole, figures from the Council for Mortgage Lenders suggest that the number of mortgages completed for the purchase of buy to let properties in the first two months of this year were 26% and 28% higher than in the same two months of 2015 and 2014, respectively.
In the prime London market, investors and those buying property to redevelop accounted for 19% of the market in the first quarter of 2016 up from 13% in Q1 2015. However, this should be set against the context of a relatively subdued market, given the underlying caution regarding Brexit and the already high levels of stamp duty on the most expensive property.
Such buying activity was most heavily concentrated in the market between £500k and £1m, where investors and developers accounted for one in three purchasers of prime property. This reflects not just the better rental performance of these properties but also the higher income yield returns available and the lower tax costs on acquisition.
Policy implications
The imposition of the additional 3% stamp duty is just one of a series of measures introduced by the current government to temper investment in the residential sector. In our last Prime Rental Spotlight (Q4 2015) we looked at the potential impact of the progressive reduction in the tax relief available on mortgage payments, noting that while this would limit the ability of those with recourse to debt to expand their portfolios, it would not affect the high proportion of cash investors in the prime London market.
In the March 2016 budget, residential investments were specifically excluded from the cut in the rate of capital gains tax from 28% to 20%. A measure that, like the stamp duty surcharge, was intended to have an impact across a wider range of investors.
Such tax measures have been introduced in the absence of mortgage regulation akin to that introduced for home buyers in April 2014. However, with the Bank of England keeping a close eye on the buy to let sector, it was always envisaged that such regulation would come in due course.
The first concrete proposal for that regulation was announced in a consultation paper published in March. It makes provision for all mortgage lenders to adopt an affordability test when assessing prospective buy to let lending – accounting for all income and outgoings relating to the property and the other net income of the prospective borrower – that is stress tested having regard to interest expectations over a minimum five-year period.
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