Buy-to-let pain is just one drag on house prices

The housing market faces a precarious future as interest rate rises combine with tighter lending, writes Olivia Rudgard

The housing market is facing a tough few months as increasing interest rates, new buy-to-let taxes and tough conditions for first-time buyers combine to create a precarious set of circumstances. Mortgage rates are now expected to rise (see Page 1) and buy-to-let investors are due to be hit by a punishing tax from April next year, which will remove their ability to offset their mortgage interest costs against their rental income.

The cost of borrowing for firsttime buyers is already rising more quickly than costs for other buyers with larger deposits. Owneroccupiers with tracker mortgages or high standard variable rates could start to see their monthly costs rise as official interest rates increase from their current rock-bottom levels.

Buy-to-let investors could also struggle as their margins begin to be eroded by the new tax, which is predicted to send many into lossmaking territory. Many could sell up or raise rents as a result.

Figures suggest that fears about the market in the aftermath of the Brexit vote have caused many owners to hold on to properties they would otherwise have sold, with some letting them out to tenants. This has increased the number of properties on the rental market, pushing rents down.

But this is a pattern that may not continue, as buy-to-let investors prepare to raise rents in order to preserve their returns ahead of the tax change in April.

There are fears that a mass sell-off by landlords, combined with a move away from riskier lending and a rise in mortgage rates, could see prices plummet and thousands of aspiring buyers locked out of the market.

Tougher regulation of the buy-to-let market may also reduce competition between lenders, causing rates to rise. And the cost to banks of implementing the new requirements is likely to have a knock-on effect on mortgage rates.

Nigel Spalding, 52, owns properties in south London with his partner, Anthony Wilson, 54. “We’re waiting until after the Autumn Statement,” he said. “If there’s no leeway there we’ll consider selling or increasing rents.

“But we can only increase rent if the market can take it. My anticipation is that when all this is worked out by the market rents will go up, because there’s less available to rent and it’s too costly to buy property to let.”

He has calculated that to cover the tax increase he will have to raise rents by 26pc. His tax bill will increase by more than two-and-a-half times.

Some buy-to-let lenders have said that they will accept remortgage business from their own customers under older terms and conditions – but not from customers of other lenders.

Simon Collins of John Charcol said this could leave thousands of borrowers stranded on high rates, as lenders don’t offer their best deals to existing customers.

If prices fall, owners will also have less equity, reducing their ability to remortgage. High rates could also mean higher rents – leaving potential first-time buyers with less scope to save. Pressure has come off the housing market, with buyers taking more time, experts say. “People do want to see a bit of value now – they want to think they’re getting a half-decent deal,” said Mr Collins.

But Eddie Goldsmith, chairman of the Conveyancing Association, said first-time buyers were not benefiting. “The anticipated boost that George Osborne’s measures were supposed to give to first-time buyers appears not to have materialised,” he said.

“When you add in the uncertainty wrought by the Brexit vote, the impact across the entire housing market is sizeable. Transaction levels have dropped over the past few months and the market is subdued to say the least,” he said.

Falling prices would, in theory, be beneficial for first-time buyers. But risk aversion among lenders could cancel out any benefit as borrowing gets tougher and more expensive.

Figures from AmTrust, a mortgage insurer, show that, since the Bank Rate cut in August, interest rates on mortgages for those with 25pc deposits have fallen by 0.15 percentage points, while for those with 5pc deposits the reduction has been just 0.05 percentage points.

On Thursday Virgin Money increased the rates on some of its mortgages for customers with 5pc deposits by up to half a percentage point. The two-year fixed rate increased from 3.75pc to 3.89pc, the three-year fixed rate went from 3.99pc to 4.39pc and the five-year

‘People want to see a bit of value, they want to think they will get a half-decent deal’ ‘Transaction levels have dropped and the market is subdued to say the least’