London Housing Market Revisited
by George Hatjoullis
Many of the changes that I wrote about last year have come to pass and yet the London Housing Market remains solid. However, it is worth updating a few developments. First, my surrogate index of London Housing health, the Foxtons share price, has moved lower. Having retraced 50% of the move from high to low it is now drifting lower. Worth watching.
More important perhaps are the announced changes in the buy-to-let market. From 2017 higher rate personal tax relief on mortgage interest for BTL properties will be reduced. It will take place over three years but ultimately tax relief will be restricted to 20%. Moreover, from next April it will no longer be possible to deduct 10% of annual rental income as a wear and tear allowance before calculating personal income tax due. Only actual maintenance expenditure can be deducted and this must be properly receipted. This changes the economics of BTL and complicates the mortgage lending process as the lender must judge what tax bracket the borrower is in when assessing the affordability of the loan. It is conceivable that, at the margin, some BTL ventures become unaffordable and a few more starter properties enter the market.
Two possible responses (other than selling up) might be to raise rents and/or move a portfolio into a corporate structure. Raising rents may work as the demand is quite inelastic. However, rental income is capped by average income and we may be close to the limit for the average tenant. Moving into a corporate structure may trigger stamp duty and capital gains tax liabilities so it is not a panacea. In short, expect BTL growth to start to level out. Foxtons, and other agencies, now generate quite a bit of income from managing rental properties.