You’ve probably heard about this pesky housing crisis we have in the UK. We have the most expensive rents in Europe, house prices are once again going berserk and we’re still building less than half the 300,000 homes per year we ought to be constructing. It’s all too depressing if you’re one of the millions of young working people totally priced out of a secure home at an affordable price.
It’s not that the government is doing nothing. One of its best initiatives is the Affordable Homes Programme, which directly funds new housebuilding for below market rate tenures. The problem is that it is only seeing a £1.7bn investment spread over the next three years. This won’t make anywhere near enough of a dent in the huge housing shortage.
However, the UK just elected a Conservative government on a platform to get the public finances into surplus: asking for more money when they are looking to make spending reductions is pretty pointless. We need to look at raising more tax revenue from the existing housing market to fund more affordable homes.
Handily there’s one big source of potential tax revenue that would do just the trick. Landlords who use buy-to-let mortgages to buy up houses currently get tax relief on their mortgage interest. A similar tax relief for homeowners was abolished back in 2000, but buy-to-let landlords kept this perk.
Since then buy-to-let lending has boomed. The tax allowance has now risen to an astonishing £6.3bn per year. That’s the sort of number that needs repeating in bold: £6.3 billion!
So why should this tax relief in particular be shown the door? There are three reasons:
1. Landlords are basically investors. They buy an asset (a house), get a yield from it (rental income) and hope to make a capital gain. You can’t ordinarily get tax breaks for debt used to fund other speculative investments; landlords should not be treated any differently.
2. The Bank of England is starting to fret. Its latest financial stability report bluntly stated that “buy-to-let lending could pose a risk to financial stability” and highlighted the tendency for buy-to-let landlords to use interest-only mortgages. A tax perk on mortgage interest obviously encourages interest-only repayments. I don’t know why any Chancellor with a “long term economic plan” would want to keep a tax incentive for behaviour that threatens financial stability.
3. The Conservatives won the election on a promise to “double the number of first-time buyers”, and having secured victory David Cameron has asserted that “as a majority government we will be able to deliver all of [our manifesto]”.
However the current borrowing trends aren’t encouraging. The latest numbers show a 10 per cent drop in the number of first-time buyer mortgages, but a rise of 8 per cent for buy-to-let mortgages. With the assistance of an exclusive tax break, landlords are able to outbid more and more first-time buyers. Abolishing the relief will help tip the scales back towards first-time buyers, help the Conservatives keep their promise and start to rebuild a property-owning democracy.
With the revenue raised by getting rid of this relief, the government could easily afford to treble the size of the next Affordable Homes Programme, giving a much-needed boost to the British construction industry, creating thousands of new jobs and getting the homes we urgently need built.
The Conservatives like to call themselves “the party of homeownership”; but this doesn’t mean anything unless they back aspiring first-time buyers over and above their landlord competition. Buy-to-let mortgages don’t deserve encouragement. It’s time for this tax break to go.
UPDATE FROM THE EDITOR: In his Budget today, chancellor George Osborne announced that he was capping the level of mortgage relief available to landlords at the basic rate of tax (20 per cent). That essentially means a cut to the subsidies available to anyone who currently pays higher rate taxes. The change will be introduced over a four-year period from April 2017.
Duncan Stott, the author of this piece, commented on the change in a statement:
For the Conservatives to be pro-homeownership, it means they must take aaction against buy-to-let. We hope this excellent move to bring fairness to mortgage taxation will be just the beginning of the reforms needed to get the housing market into a fit shape for first-time buyers.
Duncan Stott is director of the affordable housing campaign Priced Out.