The Unintended Consequences of BTL Regulation

We are now 6 months past the introduction of the new buy to let (BTL) regulatory changes. The new regulations were bought in following a steady rise in investment property purchases since the 1990’s with 1 in 5 mortgages agreed now being for investment property.

The Government introduced tighter BTL regulation as they want to encourage first time buyers and maintain some stability within the housing market.

As with any new regulation it comes with a degree of unintended consequence.

The Property Environment

If we look at some of the numbers behind residential property we start to get an idea of what has been driving the investment property sector:

• In the decade leading up to 2014 the percentage of households living in privately rented accommodation rose from 11% to 19% and is expected to increase further
• London accounts for 24% of all buy to let mortgages, whereas it only accounts for 13% of home owner mortgage approvals

In the UK as a whole the prices of property, student numbers and transient workforce are all driving a demand for rental property. The Government are seeking to constrain the BTL market and as such we are heading for a point where something has to change or it simply won’t work.

Enter the unintended consequences.

Unintended Consequences of BTL

Stamp duty increases introduced last year have reduced the number of buy to let transactions. The ability to write off mortgage interest against profits has started to taper and the overall profitability of investment property has started to reduce.

This is against a backdrop of increasing demand for rental properties, so what gives?

As with any regulatory change to any market, it takes time for it to have an effect and for those impacted to work out how to react.

The changes we are seeing are that more property and buy to let transactions are being done within limited company names, this brings them outside of the interest relief changes and makes approval of lending slightly simpler. As for the stamp duty, this is forcing demand for purchases down but it is unlikely to continue that way forever.

The immediate picture is one of property being less profitable, however with demand for rental property remaining high then it is only a matter of time before the extra landlord costs are passed on the the tenant.

We may now be at a point in time where the demand is starting to attract investors back into property, however this time with a more corporate structure and potentially higher yields being sought.

With property prices in London remaining some way above the national average it may be that rental costs could increase outside the capital as landlords seek higher yields to cover stamp duty rises.

If rental yields go up then the price of the property goes up. The unintended consequence could well be that the new regulation has not solved the property issue, rather it has spread it nationwide instead.

By Dave Farmer

Please add your comments or reply to this post. Credit to Shawbrook for figures relating to BTL usage.