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Opinion: the Government needs to scrap the clampdown on landlords

Opinion: the Government needs to scrap the clampdown on landlords

The concerted effort to hammer landlords is making life worse for tenants as well and needs to stop, argues Joanne Christie.

Joanne Christie

Mortgages and Home

Joanne Christie
Updated on 14 May 2019

It’s generally accepted that there are three basic human needs: food, shelter and clothing.

Everyone seems to accept that those businesses involved are in it to make a profit. But for some reason, many people think that shelter should be provided at no profit, or even a loss, by the private sector.

A recent publication by the Institute of Economic Affairs (IEA), a freemarket thinktank, claimed that some landlords face tax rates that could exceed 100% of their underlying profit as a result of tax measures passed by the Government in recent years.

It says some will even have to pay tax on their loss in the future.

This is largely because in 2015 the Government announced Section 24, a measure that meant landlords would no longer be able to deduct their mortgage costs from their rental income before calculating their profit.

The strange thing about this is that anti-landlord types seem to think that landlords not being able to make a profit is a great idea. Why?

Do people think that landlords will be happy to provide housing if they are making a loss?

I’m a landlord and I know I won’t. I simply can’t afford to.

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International comparisons

The anti-landlord sentiment in the UK is something I’ve been perplexed by since moving here from Australia back in 2001.

Of course, there are – and always have been – the same rumblings Down Under about people being priced out of the market by those buying properties to let, but there’s also an understanding that rented homes are needed.

At the moment this very issue is centre stage in Australia as the two main political parties gear up for an election this month.

But they aren’t arguing about whether or not finance costs should no longer be tax-deductible, as is now the case in the UK.

No, the very idea would be unthinkable, because as the IEA paper says, the idea that a business is taxed on its profit, but not allowed to offset costs involved in making that profit is not sustainable.

Contract (Image: Shutterstock)

In Australia, the debate is about whether ‘negative gearing’ should be abolished. Down Under, those who own rental properties can offset any losses from those properties against their other income.

So you could make AU$100,000 from your job, lose $20,000 on property and only pay tax on $80,000 of income.

This isn’t unique to the Australian market either – landlords can also do this in Germany, a market often held up as infinitely more tenant-friendly than the UK.

In fact, in comparison with other countries, the UK had a relatively unattractive tax regime for landlords even before it brought in Section 24.

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Looking forward, not back

Australia’s Labor Party (broadly similar in ideology to the Labour party here) wants to do away with negative gearing, while the Liberal Party (similar to UK Conservatives) is vehemently opposed to its removal.

But Labor also acknowledges the tax change shouldn’t apply to those who already own rented property as the UK Government’s removal of the ability to deduct mortgage costs does. The party only wants to apply it to new purchases.

Why not? Presumably, because it doesn’t want a load of properties being sold, thereby resulting in a lack of properties available to rent and higher prices for those that remain.

While people may be opposed to the idea that landlords are speculating on property by buying something they might make a loss on, the end result is that rents are cheaper, which benefits those who will continue to rent.

Last time I considered moving back to my native Brisbane, I couldn’t believe how low rents were compared with London despite the fact house prices had skyrocketed in a similar fashion as they have in London.

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A flawed argument

The argument for doing away with negative gearing and the ability to offset finance costs is that it will free up houses for first-time buyers, who will no longer have to compete with landlord buyers.

While this may well be true, the problem is that this is not a large group. How many people are really in a position to buy (i.e., with the required deposit and income) and at the right point in their life?

I didn’t want to buy a house when I moved here at the age of 23 and I didn’t even think about buying one until I was almost 30. I needed it to be viable for landlords to rent out property for all those years I was renting.

It isn’t just young people who want to rent either. Last year, the Centre for Ageing Better said there had been a more than 60% rise in the number of over-65s renting privately since 2007, and it predicted this would rise further.

In the UK, just as in Australia, many people want or need to rent.

According to the Office for National Statistics, there were 4.5 million households in England’s private rented sector in 2017, a 63% rise since 2007.

Landlord with keys. Image: Shutterstock.

Political blinkers

But while the Australian political parties recognise there are a huge number of people who will continue to rent long term and therefore landlords need be encouraged to remain in the market, none of the UK parties seem to.

When former chancellor George Osborne announced the removal of the ability to deduct mortgage interest, he said he was trying to level the playing field between owner-occupied and let housing.

What I think he has really done is create an uneven playing field among renters. Those who rent due to choice and can switch to owner-occupation may benefit very slightly from his policy, but those who rent due to need will suffer.

People argue the number of houses will stay the same and those switching to owner occupation are removed from the renting pool so there’s no extra demand, but it’s not that simplistic.

Many people don’t buy a property of the same size as the one they rented.

This argument also overlooks the fact the many landlords are switching properties from long-term lets to holiday or short-term lets, as these are unaffected by the tax changes.

People also argue that the market will only bear a certain level of rents and that they can’t rise any further. There’s little evidence that’s actually true with some data already suggesting the opposite.

In April, Rightmove reported an 8.2% year-on-year rise in rents in London, the highest since it started tracking the market in 2012. 

And even if were true, it’s unreasonable to think that landlords will continue to rent out properties at a rate at which they are making a loss. It’s more likely they will sell up.

Indeed, a recent survey of members by the Residential Landlords Association found that 25% of landlords are looking to sell at least one property in the next year.

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Ireland’s ‘housing crisis’

Admittedly, the above statistics are only very early signs, but they do support landlords’ arguments that as a direct result of Government policy, those who rent will have to pay more in future.

In Australia, a previous Government removed negative gearing back in the 1980s, reinstating it within two years at the very first (and somewhat inconclusive) sign that rents were rising as a result.

In Ireland, on the other hand, the Government waited until 2016 to acknowledge a ‘housing crisis’ and reverse a 2009 policy that reduced landlords’ ability to offset mortgage interest costs.

The problem is that most people think this came too late to reverse the dramatic increase in rent that occurred while it was in place. Late last year, Ireland escalated the reintroduction of full mortgage interest relief by two years to “incentivise landlords to remain as landlords”.

The question is how long and how much evidence will it take for the UK Government to realise it needs to do the same?

For balance, here is an earlier article we published on why the landlord clampdown was long overdue. Have a read of both and let us know your thoughts in the comments section. Should the Government backtrack on some of its recent measures aimed at landlords? Do you think it needs to go further still?  

*This article contains affiliate links, which means we may receive a commission on any sales of products or services we write about. This article was written completely independently.

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