Can ‘generation rent’ get back to home ownership?

The Palace Gate property experts believe that the recent shake up in the property market aims to make property ownership a reality again for local residents.

The ‘Help to Buy’ scheme that was first introduced in 2013 and amended in 2015, is designed to help first-time buyers get on the property ladder. Those buyers who have a 5% deposit can get a 40% interest-free loan from the government and a further 55% as a mortgage.

Critics say this scheme may encourage first-time buyers to impulse buy and then find themselves struggling to keep up the payments in five years. But the optimistic view is that the property values go up and the homeowners climb up their career ladders – that is the point of the scheme.

The buy-to-let landlords and overseas investors have both contributed to the massive increases in property prices and left many locals, not just the first-time buyers, unable to buy a home. This is further fuelled by the shortage of housing stock. It is no coincidence that 2013 also saw the start of tax changes targeted at property ownership.

Numerous tax changes since 2013 all address property ownership:

  • Owning a property in a non-natural person’s name demands higher stamp duty – houses in private names are more likely to be principle homes (HMRC defines a non-natural person as companies, partnerships including companies and collective investment vehicles)
  • Many overseas investors used corporate vehicles and let the houses they bought stand empty so an annual tax on properties owned in corporate structures and left empty was introduced – ATED (annual tax on enveloped dwellings)
  • CGT and IHT never applied to overseas investors, now it does, creating a more level playing field
  • A further 3% stamp duty on second homes has been applied
  • Pending changes to buy-to-let mortgages will bring them more in line with regulated mortgages
  • Phasing out the ability to deduct mortgage interest from income

How will this shape the future of the property market?

Individual landlords with one to four properties currently supply 70% of the rental stock, with nine million people renting in the private sector. This was fuelled by the introduction of unregulated mortgages and the buy-to-let products.

Until recently the rental stock was only 1% owned by institutions in the UK, compared to closer to 20% in the US and Germany. Institutions have struggled to compete with the tax benefits that private landlords have enjoyed for well over 30 years in the UK. That’s all about to change as institutional investors will not be subject to CGT, IHT and even the higher stamp duty if they start at the build-to-rent stage.

As competition from private landlords diminishes, both domestically and from abroad, the cost of housing will start to increase at a slower pace, which will give locals the chance to catch up and start to afford to buy homes again. The larger scale landlords, who will be medium- to long-term investors, will start to provide a larger portion of the rental stock, giving tenants security of tenancy and ‘generation rent’ professionally managed, better quality homes for the long term.

Investors from overseas will start reinvesting using institutional type investment vehicles made up of at least five unrelated parties, a market that has currently gone dead. Private individuals from overseas who are looking for a secure place to put their money will come back and so will others who have instability in their own countries or want to invest for their children or their future education.

It’s a difficult time but, as always, London and the UK is the place that everyone wants to be – the market will find ways.

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