The threat to buy-to-let comes from a new direction  

22 June 2010 | By John Murray

It started with the creation of the Office for Budget Responsibility and the introduction of a levy on banks and building societies to generate £2bn a year has been on the agenda of both Liberal Democrats and the Tories ahead of the election, so there was no surprises there.

The good news for these institutions is George Osborne’s confirmation that the said levy won’t apply to the smaller members of that fraternity and in terms of international competition similar levies are to be applied to both French and German banks as well.

But for lenders worried about what impact the budget might have on the buy-to-let market there is mixed news.

The principle threat to the market was supposed to come from a swingeing increase in capital gains tax from 18% to possibly 40-50% but the reality, no change for basic rate taxpayers and an increase to 28% from higher rate taxpayers is unlikely to have an impact on the market. At 28% it is still well below the 40% that the Brown regime imposed before it introduced the 18% rate three years ago.

More difficult to interpret is the impact that cuts in housing benefit will have on the buy-to-let sector. For example, Paul Hunt, managing director of Phoebus Software says: “We heard about housing benefit being reformed – with a maximum limit of £400 a week, in a package saving £1.8bn a year by the end of the Parliament – but there’ll be more to come.  

That will support house prices and boost the rental market, raising rents in the long run.”

That runs contrary to a long cherished view of my own that Housing Benefit has inflated rental returns and has driven the growth of the private rental sector – a prejudice that was reinforced by the chancellor in his budget speech when he cited a family receiving Housing Benefit of £104,000 a year.

The expenditure on Housing Benefit is truly staggering and at the current level of £21bn per annum it is a state subsidy that is distorting the market. Just 10 years ago the equivalent figure was £14bn which at that time I argued was outrageous given that state help for homeowners in financial difficulty under ISMI amounted to just £500m.

How this issue will pan out is not the only uncertainty facing the industry. We have yet to see detail on the new regulatory regime being introduced and still to come is the report of the independent commission on the future structure of banking. This is headed by Sir John Vickers, who is a former Chief Economist at the Bank of England, member of the MPC and Chair of the Office of Fair Trading

*For the record its pre-budget measures also included giving the Bank of England responsibility for macro prudential regulation (the Financial Policy Committee), the abolition of the tripartite regime with the Financial Services Authority ceasing to exist in its current form, and finally there is to be the establishment of a new Consumer Protection and Markets Authority which will regulate the conduct of every authorised financial firm providing services to consumers.