How Britain betrayed the buy-to-let generation
In total, 16pc of all homes sold this year were previously let, according to Hamptons estate agents, which analysed data from Countrywide, Britain’s largest property group. In 2013, the share was just 10pc.
Many have been squeezed out by the reduction in tax relief on buy-to-let mortgages that began in 2017. Others have been deterred by a wave of bureaucracy. All feel burned by a government that had previously encouraged them to invest.
A liberalisation of the housing market
The seeds of buy-to-let Britain began under Margaret Thatcher. Chris Norris, of the Residential Landlords Association, a trade body, said: “The growth of the private rental sector came from the theology in Thatcher’s government that assets were very important. Rental policy was part of a package of policies about liberalising markets. Nigel Lawson was liberalising financial markets, there was a mirror image of this in housing.”
Thatcher brought in the 1988 Housing Act. This introduced Section 21 “no-fault” evictions, which meant that landlords could repossess properties without needing to prove tenant wrongdoing. Later, the 1996 Housing Act states that Section 21 could apply to assured shorthold tenancies.
In turn, this kickstarted the buy-to-let mortgage market in 1996. Previously, investors could purchase buy-to-lets either using a commercial loan, or a residential mortgage with permission from their lender to let the property.
What changed with the introduction of buy-to-let mortgages was that banks started lending based on the property’s expected rental income, rather than purely on a landlord’s personal income. Buy-to-let investment became democratised.
Not only did prospective investors have new access to borrowing, but house prices were cheap. The years-long housing downturn of the early 90s saw waves of forced sales and mega discounts. And buy-to-let offered opportunities for the newly-unemployed, many of whom had also seen their pension pots destroyed by the recession.
“The older demographic in our membership were made redundant in the early 1990s and used their pay-offs to buy previously repossessed properties at auction,” said Mr Norris.
Not all of the boom in lending was responsible. There was a surge in “get rich quick” property buying clubs and so-called “back-to-backing”, whereby landlords bought and remortgaged rapidly.
“Landlords were growing their portfolios quickly, too quickly. They could buy a property on a Monday and then remortgage for 30pc more the following week. And these were often 100pc mortgages,” said Mr Norris.
Many landlords were therefore hit hard by the global financial crisis in 2007 and 2008. But the ensuing recession ironically spurred further investment. Interest rates fell, credit became cheaper, and investors again needed alternatives to their pension pots. There was also a major tax incentive.
The following years under Tony Blair were a lucrative period for landlords. Aspiration was a big part of the philosophy of New Labour and government intervention in buy-to-let was minimal, said Mr Norris. “The demographic of buy-to-let investors was a fit with New Labour just as they were under the Tories.”
“You had a lot of people investing, partly because they had been let down by their pension funds. They felt encouraged to do so by the government.” said Mr Norris.
At the time, landlords were able to offset the interest payments on their mortgages against their tax bills. At the time, mortgage interest payments were deductible from their tax bills. Then chancellor Gordon Brown even announced plans to allow for property to be included in private pensions, though this never materialised.
Between 2005 and 2015, the private rental sector doubled in size, from 10pc of homes to nearly a fifth of all dwellings. But the growth of the sector also began its downfall. Landlords had become a large, wealthy group, who caught the eye of the taxman.
The rhetoric began to shift when Mr Brown became prime minister. Then chancellor Alastair Darling made the capital gains tax regime more punitive for buy-to-let investors, by removing taper relief and indexation. Mr Brown also had plans to create a landlord register and scrap Section 21 – an approach that sounds very familiar today.
Osborne’s death of a thousand cuts
But the real sea change came during the coalition years. The logic was two-pronged. “During austerity, the Treasury spotted landlords as a wealthy group that they could attack,” said Mr Norris. Post-financial crisis, then chancellor George Osborne needed cash and landlords were sitting ducks.
Second, the number of renters had swelled so significantly, they suddenly became an important group of voters that needed to be courted – an approach that this government has continued. Since buy-to-let mortgages were introduced in 1996, the number of private renters in England soared from less than two million to 4.4 million.
“The Tories increasingly realised that renters do vote and that they want those votes,” said Mr Smith.
From 2010, the coalition years began the shift in policy to what Mr Norris terms “a thousand cuts”.