While the Chancellor of the Exchequer George Osborne received much praise across the press for his budget speech earlier this week, there is anger within the property industry. In a move which many believe will decimate the buy to let market going forward, the Chancellor announced a cut in mortgage interest payment tax relief from 40% or 45% down to 20% by April 2020. There are serious concerns that this tax relief reduction will reduce the attractions of the buy to let market at a time when the UK property sector is running short of accommodation.
Is the property sector a political pawn?
Time and time again the property sector is seen as “easy prey” by the regulators and politicians. Just prior to the election we saw talk of an increase in the mansion tax not to mention an array of other tax changes which would have increased the risk/reward ratio. Even though the mansion tax issue has been put to bed in the short term the reduction in tax relief on buy to let mortgage interest payments seems to be a case of “playing to the gallery”.
This is most certainly a dangerous game being played by the UK government because upsetting buy to let investors when there is a shortage of accommodation across the UK seems crazy. There has been talk that this change in tax relief will rebalance the relationship between first-time buyers and investors but how can this be?
Will this play into the hands of first-time buyers?
When you bear in mind that the vast majority of first-time buyers at the moment are unable to afford the average price of property in the UK, do politicians really expect a reduction in property prices and an increase in household incomes? The gap between affordable housing and affordable funding for first-time buyers has never been greater and it would take a monumental rebalancing of the situation to enable significantly more first-time buyers to buy their dream home.
We must also ask the question, if returns are reduced and demand for buy to let property weakens then why would any investor make further funds available to redecorate and revamp an existing buy to let property? This would have a knock-on effect to the building industry in general and as some experts have said over the last 24 hours, it does look as though the UK government has not thought this through.
Will these changes stick in the long term?
There will come a time when a future UK government will be forced to backtrack and reinstate at least some of the tax breaks afforded to high income investors in the buy to let market. A reduction in demand for buy to let property will impact the number of new builds made available in the short to medium term with the potential to make a difficult housing situation even worse.
Many experts are suggesting that the Conservative government budget this week has an air of desperation as it seems to be playing to the centre left of politics. Will property investors really sit back and take these changes without fighting their corner?