Property on the slide

Posted on: 14 April 2014 by 50connect editorial

How the buy-to-let property market boomed on the back of poor annuity values available to retirees

housing bubble

Is property about to become the Manchester United of the investment world? After years of supremacy, even during the recession when it remained the best of a toxic bunch, the opposition has finally got its act together thanks to the Budget - just as home-owning is about to get a lot tougher and less financially attractive.

United fans point to the departure of Sir Alex Ferguson as the main reason for the club’s slump. However, the money behind Manchester City and Chelsea, and the rejuvenation of Liverpool, was always going to make life more difficult, even had Fergie stayed.

Many predict a “property bubble” after George Osborne’s Budget last month when he loosened the purse strings on pensions and generally made saving a much more enticing option after years of neglect. But that pension freedom could have the reverse effect.

Much of the motivation for the rush to “buy-to-let” has been from those approaching retirement. They were worried that the prospect of buying an annuity with their pension pot was not only a bad deal financially, but alarmingly, it wasn’t going to be sufficient for an increasingly extended retirement, as independent financial advisers were forced to make apparent.

Buying a second property

Buying a second property is a big commitment, financially and generally. As well as the initial costs, such as stamp duty and mortgage fees, there is on-going expenditure on top of the monthly mortgage repayment and responsibility for the property until tenants are found. They can bring their own problems; avoiding that by using a full management letting service can cost more than 10% of the rental income.

A property only needs to be empty for a month or so for the proposed annual yield from the venture to be wiped out.

Yet, buy-to-let has remained popular because the options, especially annuities, brought such a poor return. Also, while the annuity dies with you, the property can be left to your heirs.

That has always been one of the main attractions of property. It can be seen, touched, lived in, used – and passed on as part of your estate. Your house – home – creates memories and emotions that have never been part of a pension pot’s existence!

The UK’s love affair with home owning has also been a mainstay of our national newspaper, TV and radio coverage. Every week, there will be some sort of house-price or mortgage story on the front pages. It was obvious that the first signs of recovery, the ‘green shoots’ so desperately searched for after the financial collapse of 2008, would come from the housing market.

To some, the return of “gazumping” was evidence that the recession was over. London has already returned to the frenzy of the “bad old days” with buyers queuing outside flats and estate agents demanding instant bids, which can still be trumped. The “bubble” of foreign buyers in central London has expanded as others decide it’s “now or never.”

Mortgage Market Review

Investing in property, if you can afford to, is rarely a bad deal. Even if it means a couple of years without holidays and luxuries, the security and comfort of your own home can more than compensate. Getting independent financial advice is crucial to making sure you are fully aware of what is being taken on, as well as looking at the best ways of protecting your investment if your circumstances change.

Buying a home will become more difficult later this month. On April 26th the Mortgage Market Review (MMR) comes into force. This review was set up to prevent irresponsible lending and the consequences that result from a future house price crash.

Why it has taken several years – and not several days (or several minutes) – to come up with a set of requirements to prevent irresponsible lending is anyone’s guess. Stop lending 110% mortgages to applicants without a secure job or any savings who are just jumping on the property ladder to cash in on house-price rises!

As ever, after years of consultation, by which time most lenders have got their act in reasonable order, the financial authorities are wielding a sledgehammer to smash a problem that has become a nut.

It makes sense that the rules get tougher the higher the LTV of the loan. Those borrowing up to 60% should not be subjected to the same stress test as those borrowing 75%, and the stress test for those wanting a loan of 85% should be the toughest.

Some mortgage lenders, such as the Post Office, HSBC and First Direct, do not use intermediaries. Strangely, the MMR does not insist on applicants being given independent mortgage advice. Instead, the lender will have to offer advice – although that adviser will only be able to discuss the lender’s products.

Keeping advice in-house makes little sense. All the MMR insists on is that all applicants must receive advice. Currently, roughly half go through a mortgage broker and half go direct to a mortgage lender (who until April 25 can sell without giving advice).

Those lenders have clearly managed to protect their market share. Why the MMR does not recommend that every borrower receive independent advice is curious, especially after all the recent various miss-selling scandals. What has the lender to fear? This part of the MMR could come back to haunt the Financial Conduct Authority (FCA).

Mansion tax looming

Another looming “worry” on the property horizon is “mansion tax”. So far the Chancellor has blocked attempts by the Lib Dem part of the Coalition to impose a 1% annual tax on properties worth £2m or more. Labour leader Ed Miliband has vowed to introduce it if his party wins next year’s General Election.

As ever, there is confusion in the numbers. Those against it claimed that an annual fee of £25,000 just to stay in your £2.5m home is outrageous. The Business secretary and Lib Dem Vince Cable claims that the 1% will only be charged on the amount over the £2m mark, i.e. £5,000.

That’s still a lot of money for a pensioner to find each year. Perhaps, they should downsize, but should that sort of financial pressure be imposed. Why not make the option to downsize financially attractive, i.e. no stamp duty and a percentage of the purchaser’s stamp duty to help with the move.

Many make a last property move with the intention of spending the rest of their lives there. It would be very un-British to make them abandon that dream. The Treasury is almost certain to benefit with an Inheritance Tax 40% cut of most of the value of that property, anyway.


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