The bubble seems to have finally burst for buy to let as banks and building societies blame tax changes for a huge slump in landlord lending.
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Trade body the Council of Mortgage Lenders says lending was down a fifth to £21.4 billion in March compared to a year earlier ahead of property business tax changes that came into effect from April 6.
Since Budget 2016, when then Chancellor George Osborne flagged the tax hike, buy to let borrowing has plunged.
Higher rates of stamp duty and capital gains tax coupled with the phasing in of lower mortgage interest relief this tax year have strangled buy to let.
And they are not the only changes. More landlords are expecting to pay a higher rate of tax on rental profits, while new rules to determine tax relief on replacing furniture and fittings is less generous.
Magic of gearing
But all is not lost for property investors due to the magic of gearing.
Although the cost of entering and staying in the buy to let market is higher, the rewards are still as great with the right property.
Property is unlike most other investments, such as stocks and shares, which are considered speculative and where the full price is paid upfront.
An investor buying £150,000 in shares pays the full cost and gains a return on the £100,000. Say the yield is 10% – after a year that’s £10,000.
A landlord can invest £150,000 as a £50,000 deposit on three properties worth a total of £450,000 and generates the same 10% yield – but after a year that’s £45,000 in the bank.
Some properties can generate even more return if a willing seller wants to dispose of a home that they may have inherited or needs some serious refurbishment.
That’s not to say stocks and shares should be spurned in favour of property.
Diversification is still an important investment principle regardless of the advantages of gearing.
Investing in buy to let and then staking stock market cash on companies who rely on the property market for their profits is not a good idea.
If the property market plunges, not only do house prices but the stock values of companies with business tied into property drops too.
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