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Why the government’s tax hike on landlords is making life even harder for renters

2-minute read

Sam Bromley

17 September 2019

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The tax increases on landlords have showed ‘few signs’ of benefiting potential homeowners, according to a former interest rate setter at the Bank of England.

David Miles, who's now a professor of financial economics at Imperial College in London, said the tax changes have not achieved the government’s aim of helping first-time buyers.

Instead, an outcome of the government’s tax hikes on landlords is that potential first-time buyers are faced with a rental sector where there’s ‘reduced choice’ and where ‘rents are likely to be higher as supply gradually shrinks’.

Why did the government introduce tax changes?

The tax changes were introduced to help reduce the number of cases where buy-to-let investors and first-time buyers were competing to purchase the same properties.

By making buy-to-let less financially attractive through the use of higher taxes, the government aimed to encourage landlords to step aside, allowing first-time buyers to get onto the property ladder.

The tax changes included a reduction in the tax relief that landlords can claim on their mortgage interest and a three per cent stamp duty surcharge on buy-to-let properties.

The changes may have made it harder for tenants

Professor Miles suggested that first-time buyers “are hardly helped by squeezing the supply of rental property and driving rents up”.

Rents have increased due to a shortage of supply of rental properties available as landlords quit the sector – the tax changes having made their investments less profitable.

Policies to support rental investments are needed

Professor Miles claimed there's nothing intrinsically wrong with people being in the rented sector for an extended phase of their life.

But he added: “We should want to avoid a situation where people feel pressurised into taking big mortgages relative to their income early in life because the rental option is so poor.”

He concluded: “In a world where house prices might be consistently higher relative to incomes than in the past, we might naturally expect the period in which people are in the rented sector is longer.

“And there are good economic reasons for believing that in a country with a rising population and where real incomes tend to increase over time, house prices might well rise at least as fast as incomes.

“To have then introduced measures that reduce the supply of rented property is perverse.”

David Smith from the Residential Landlords Association said: “Professor Miles hits the nail on the head. Choking off the supply of rental properties does nothing to help aspiring first-time homebuyers who need somewhere to live now.

“It is time to change tack and recognise that we need more homes to rent as well as to buy in order to meet growing demand and have policies that support investment.”

Should the government reverse the tax changes? Let us know your thoughts in the comments below.

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