I said at the start of this year that 2015 was going to be a bad year to get into buy-to-let.
It wasn’t about rising interest rates, though that wouldn’t help. It wasn’t (directly) about the ridiculous levels of unaffordability in the market.
It was about politics. The government needs to raise money. It would like to do that while losing as few votes as possible in the process. That puts landlords high on the target list.
George Osborne has already cut back on the tax benefits of buy-to-let. And it’s unlikely to be his last move on property. Here’s why.
Most people believe that falling house prices would be a good thing
According to the FT, a recent international survey by ING found that nearly three-quarters of European consumers believe that “a fall in house prices would benefit society”.
What’s particularly interesting is that it wasn’t just renters who thought so. More than two-thirds of European homeowners – whose net wealth would presumably be threatened by falling prices – agreed too.
Looking at the figures in more detail, nearly 60% of British homeowners and nearly 80% of renters thought a drop in prices would be a good thing.
This is yet another sign that the political mood music is changing.
The social pact under New Labour was fairly simple: the government enjoyed a super-charged tax take as Britain’s oversized financial sector leveraged up the economy.
Those at the lower end of the income scale got tax credits. Those at the top end enjoyed a forgiving tax regime. And those in the middle either gained or could look forward to super-sized gains based on property price inflation. The way to win an election was to make sure that house prices had risen since the last one. That was a surefire sign to most people that the economy was going in the right way.
The credit crunch put a stop to that conveyor belt. It revealed that a lot of the ‘wealth’ was based on fantasy valuations, ones that could evaporate as quickly as they’d appeared in the first place.
Worse than that, it called into question the entire system. With the banking system on the verge of freezing up entirely, the government and central banks felt the need to step in and halt the crash.
A lot of discontented voters
Trouble is, the solution didn’t leave anyone feeling happy. Quantitative easing (QE) and bailing out the banks – the first time around, in 2009 – might have been necessary. But the events of the six years following that have left a lot of people feeling dissatisfied.
If you sat out the madness of the property bubble, secure in the knowledge that it couldn’t go on, then you were proved right. But the crash was cut short by the Bank of England’s actions, and now prices in London and the southeast (though – and it’s worth noting this – not in most other parts of the UK, if Nationwide is correct) are higher than ever before. So you’re probably not a happy bunny.
Those who were dependent on tax credits see austerity as an attack on them by wealthy, unsympathetic toffs, rather than a result of an unsustainable Ponzi economic model collapsing. So they’re not happy either.
The super-wealthy are very, very gradually having their privileges revoked, from non-dom status, to crackdowns on tax dodges masquerading as investment schemes. They realise that they are prime targets for cash-strapped governments. They’re probably not feeling too cheerful either (happiness is relative, remember).
Even those who profited from the magic property money multiplier scheme must be having doubts. The crash showed that property prices can go down as well as up. And how are you ever meant to ‘trade up’ when the cost of an extra room means another six figures on the mortgage? And then there’s the need for the children to get on ‘the ladder’ too – even if you can afford to fund your offspring’s deposits, you’re not necessarily going to be happy about it.
So it’s little wonder that so many people think that improved affordability would be a good thing. The sense of being ‘locked out’ of the property market has to have contributed to the rise of Jeremy Corbyn, for example.
Economists go on about inequality a lot these days, but very few people cared about inequality in the early 2000s, because they aspired to be wealthy themselves. It was within reach. That’s no longer the case.
It’s one thing to not be able to afford a yacht or a private jet. The lifestyles of the Roman Abramoviches of this world are too abstract and distant (and kind of alienating, from my point of view) to be envied. It’s not the stuff of revolution.
But when you’re looking at something that you think should be a basic component of adult life – like a property with breathing space for more than one person – and you’re despairing of ever attaining it, well that’s different.
A canny politician will latch onto that. And Osborne is nothing if not canny. He’s already made inroads into the tax treatment of buy-to-let. It’ll be interesting to see if he takes this further in a future budget.
Meanwhile, in the current issue of MoneyWeek magazine, out now, James Ferguson of the Macrostrategy Partnership gives his expert view on what Osborne’s new rules on buy-to-let mean for the housing market. You can read it online here.
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