The Buy-to-Let scheme has received mixed press in recent years. Some call it a valuable economic incentive needed to avoid widespread housing shortages, particularly as the London housing crisis intensifies. Others claim it is a disastrous scheme designed to benefit the rich, while forcing a massive over-inflation of rents throughout the country. Of course, neither polemic is entirely accurate. But in any case, there can be no doubt that Buy-to-Let is impacting the lives of millions of Brits, while impacting the economy on many levels. So is this scheme truly in the interest of the British people? Or is it increasing inequity and unjustly raising the cost of living?
The Value of Buying to Let
Proponents of Buy-to-Let can point to several benefits offered by the scheme. The loans that make the trend possible have their roots in the 1980s housing shortage and the market collapse of the early 1990s, both of which flooded the market with tenants eager to rent but without the means to buy a home. The Buy-to-Let scheme filled the gap by incentivising those with resources to buy homes and let them out to those in need.
Today, the scheme is often seen as a great way for retirees to supplement income with a relatively safe, high return investment; and it is even supported by several tax breaks.
The Many Incentives
Property prices are rising fast throughout the UK, so investing in property at the moment is an enticing proposition for those with the means to do so. Meanwhile, banks are providing Buy-to-Let mortgages at rates as low as 3.6%, making it easy for investors to cover the mortgage with rent payments in order to make immediate gains. Plus, as property prices continue to climb, it becomes harder for young Brits to buy their first home, so the demand for rentals is rapidly increasing as the prospect of buying slips further away for so many—which means it is easier to find renters, and thus an increasingly safe investment to buy a home to let.
But while the incentives are high, many fail to realize the substantial risks involved. As the recent US housing collapse ought to teach us, the housing market is far from a safe bet – especially now. In order to make this kind of investment – which so many Brits are now risking their retirements on – one has to go to the huge expense of buying a home, only to sink more money into it for years to come in the form of maintenance, repairs, insurance (where there is now a dedicated ‘buy to let’ insurance market), taxes, and advertising fees. Plus, renters are by no means guaranteed, and despite the strong market, many homes remain unoccupied for years while new owners look for someone to occupy the space. Finally, investing in a Buy-to-Let property means tying up money that can’t be quickly liquidated. So while the investment consumes more and more money, it has no protection against a market collapse, and if things take a turn for the worse, it could become impossible to sell even for a significant loss.
But apart from the risks and benefits to investors, Buy-to-Let is having a major impact on housing prices. Those who already own homes are the ones who invest in Buy-to-Let mortgages. They rent the houses out at a significantly higher price than they buy them for (ie at a significantly higher price than market value). So Buy-to-Let drives up rents, making it harder for tenants to save up to buy a home. Because fewer Brits today can afford a home, there are more renters; and thus more incentive for those with money to invest in Buy-to-Let, which in turn creates more overvalued properties and further drives up rents.
It doesn’t take an expert economist to see where all this ends up. The housing bubble is expanding, and the Buy-to-Let scheme is putting more and more air in it every day. Sooner or later it is going to burst. So while the scheme might be a viable way to make money right now, it is bad for Britain. Buy-to-Let is increasing the wealth disparity and making home-ownership harder to achieve than ever before. Today, the young are the ones being most obviously impacted. Tomorrow, it will be all of us.