There will be several drivers in the residential market during 2016.
The most important considerations for those in the buy-to-let market will be the impending tax changes in April from George Osborne’s 2015 budget. These demonstrate a clear intent to take the heat out of the housing market and make it easier for owner occupiers, particularly first time buyers, to buy.
The highest profile change will be the 3% addition to marginal stamp duty rates for second homes and buy-to-let investments. This would add £15,000 to the tax bill for purchasing a £500,000 residential property.
Perhaps a more significant change, and one which is likely to have a greater impact over the longer term, is the limitation of tax allowances available for deduction of mortgage interest from tax paid on rent payments to the basic tax rate of 20%. This will be fully phased in by 2017. Higher rate taxpayers with investments where mortgage interest exceeds 75% of their rent charged will become lossmaking under these changes. As a result, 2016 may see some landlords reconsider their investments and potentially disinvest.
Our view is that, while these aggressive measures will never be viewed as welcome, it would be wise for the smaller investor to consider the bigger picture. With demand increasing and significant shortage in supply likely to endure, we see no indication that capital value appreciation in residential property is likely to stop in the medium term. We do not believe that stamp duty changes should deter investors. Payment of additional SDLT is inconvenient but, at the present rate of house price inflation, is likely to be negated over months not years.
Were there to be a rise in interest rates, it is unlikely to be large, particularly in a climate of low inflation and falling oil prices. Any rise there is will be modest and will result in limited hardship amongst borrowers. Lenders will continue to operate a policy of forbearance so we do not foresee a rise in distressed selling this year.
Any market uncertainty surrounding the London mayoral election this May is likely to go unnoticed in the capital as prices are buoyed by the shortage of supply. Although overseas investment is contracting, London will continue to be seen as a safe haven for investment. The changes to income tax allowances and stamp duty levies are aggressive attacks on the smaller investor, but exceptions will be made for those with larger portfolios. Investor demand is unlikely to be materially affected this year unless underlying confidence in the longer term future of residential property is weakened. Given the well documented shortage of housing, both to buy and rent, we do not consider this a likely scenario.
Outside of London, the promotion of the Government’s ‘Northern Powerhouse’ strategy may see a continuation of the increased demand seen in the North West, Yorkshire and Humberside last year as investors seek value in the regions ahead of substantial infrastructural investment and regeneration alongside HS2.
All in all, it looks set to be an interesting year. Allsop will continue to offer a wide variety of properties for investors, landlords and owner-occupiers seeking opportunities over the coming months. We look forward to helping you in 2016.