Snakes & Property Ladders

For most of us in the UK, our home is our biggest asset. Unlike ‘Le French’ or ‘Ze Germans’, who have Europe’s highest level of renters, the UK has been built upon the foundations of a ‘property-owning democracy’. The dream of owning property can be traced back to the end of the Second World War. In the aftermath, nearly a million homes had been destroyed or badly damaged. Politicians quickly sought to increase homeownership to maintain social cohesion and stave off the threat of political unrest. After all, how can the people revolt if they are too busy soaking up the sun from the comfort of their gardens?

Property is an asset class that can serve as a means for accumulating wealth. Homeowners can benefit from capital appreciation through rising house prices and possibly, earn rental income. Buy-to-let (BTL) properties have been a popular investment choice for decades. In the early 2000s when multiple pension scandals surfaced and the dot-com bubble burst, many investors felt greater security by having real ‘bricks and mortar’ compared to other assets. For some investors, BTLs have served as an alternative to a pension for providing income during retirement. The appeal of property investing is clear and the past two decades have been a rosy time for BTLs. Low interest rates, static supply and high demand for housing have caused a BTL boom which many have profited from.

However, good times don’t always last forever. The financial crisis of 2008 served us a sharp reminder that property is not immune to market corrections - as prices tanked by 16% compared to 2007. During this period all asset classes suffered. However, where it took the FTSE100 around five years to recover to its pre-crisis level, it took house prices almost double the time to recover.  

Today, the housing market is slowing, and property prices have fallen from their peak levels of 2021. According to the ONS, UK house prices have now fallen for a fifth consecutive month, marking the longest decline since the dreaded 2008/09 financial crisis. According to the Savills (an estate agency), in the three months leading up to December 2022, a total of 47,000 BTLs were sold - an increase of 21% when compared to 2021. The primary driver for the selloffs? You guessed it. Rising interest rates. Due to the large value and long timescale of mortgages, even the smallest changes to interest rates can significantly affect to rental yields. With the Bank of England raising interest rates to 4% (as of today) in a fight against inflation, the cost of borrowing has no choice but to surge. Ultimately, this makes mortgages more expensive and means house prices must fall in order to compensate.

Speaking of mortgages, BTL investments are often leveraged at high loan-to-value rates or mortgaged on an interest only basis – This is where the borrower pays the interest of the loan monthly and capital value at the end of the term. As most BTLs are mortgaged this way, rising interest rates will increase the monthly interest cost without reducing the capital sum at the end. What’s more painful is before April 2017, landlords were able to deduct the mortgage’s interest payment against their income tax, but has since been removed.

The popularity of BTLs has led to adverse effects on wider society. The BTL boom has led the supply of new homes being outstripped by a rising level of demand. This has made it increasingly difficult for first-time buyers and families to purchase homes. Stricter regulations around accessing finance has further raised the barrier to owning a property - especially for millennials and future generations. At present, there are fewer homebuyers under the age of 30 than ever.

Consequently, to prioritise first-time buyers and disincentivise BTLs, the government has introduced a raft of supposedly ‘affordable home ownership schemes’ such as: help-to-buy ISAs, lifetime ISAs, shared ownership, stamp duty tax cuts and deposit schemes. However, these have all been met with mixed responses. For landlords, in addition to removing mortgage interest tax relief, stamp duty on additional properties has risen by 3% and the capital gains tax allowance has been cut in half. Tougher energy efficiency standards have also increased the cost of maintaining properties and pushed down rental yields.  

Climbing the rungs of the property ladder is a fundamentally entrenched value of the ‘British Dream’. However, the elusive quest to buy a home seems further out of reach for families and future generations due to a distorted housing market and extortionate costs. Britain is becoming an ‘inheritocracy’ with an increasing number of millennials relying on the ‘bank of mum and dad’ or waiting for an inheritance to fund their deposits. For the players who are further ahead in the figurative game, the venomous snake of rising interest rates and tightening legislation is forcing them to move back many places. Nonetheless, the game is still in play and the hand of future governments can make the game fairer.

Lee Nguyen

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