London Blog

Budget 2015: what it means for renting in London

On the whole the budget was relatively light on property market related stuff. Still, we think there are three things worth focussing on for anyone interested in renting in London. These are (in increasing importance) buy-to-let ISAs and extended pension freedoms which could reduce demand and increase supply respectively and the extra £900m in taxes to be levied on the City which could hit demand for prime rental stock.

I’ll start with the taxes on the City to start with. Now I’m not going to take a view on the greediness or saintliness of bankers but the cold hard fact is that the success of London’s financial sectors does maintain upward pressure on London’s super-prime, prime and fringe prime rental markets. If this translates into even a modest contraction of demand for rental property from those working in finance this could have a profound impact on the market because of how large that particular demand segment is.

The two other key things that might affect the private rented sector are the changes to pensions and introduction of a Help to Buy ISA (Help to B-ISA?).

The measure means that the government will give a 25% bonus to people saving up for a deposit (up to a £12,000 maximum). So if you can put £12,000 into a special ISA then the government will turn it into £15,000 when you come to buy the first home. In London the limit on the capital value of the property is £450,000.

So on the assumption that anything that increases owner occupation will reduce the size of the private rental market, what are the implications? Well we expect the impact to be minimal – certainly in the short term. The government expects that it will take most first time buyers until around five years to save up so there won’t be any real impact until 2020. Even if their long term plan plays out as they only hope the increase the number of first time buyers by a few percent per year. There were around 300,000 mortgages lent to first time buyers in 2014. The governments long term objective is to increase this by 10,000 per year, just over 3%.

The other thing that could potentially have an impact is the announcement to have a consultation to extend the pension freedoms we’ve covered in last years article which asked if the budget will cause a buy-to-let boom to existing pensioners, which would allow those who have already bought an annuity the option to cash it in. Some have suggested that pensioners might use this cash to invest in a buy-to-let as an alternative which might provide them with some income and give them an asset to hand down to their loved ones. The new pension freedoms have certainly proved very popular and extending these to those already in retirement would seem to make sense. However we expect that a guaranteed income which an annuity provides will have a greater lifetime value than a one-off cash payment.

The budget headlines

  • An increase in the personal allowance to £11,000 by 2016/17
  • An increase in the higher rate income tax threshold to £43,300 by 2017/18
  • The first £1,000 of savings interest will be tax free for basic rate taxpayers, £500 for higher rate taxpayers
  • Replacing tax returns with real-time online accounts
  • Extending pensions freedoms to allow those with annuities to cash them in
  • Further improvements to ISAs with the introduction of a ‘Help to Buy ISA’ and allowing savers to withdraw money from a cash ISA without sacrificing any accumulated allowance

This budget was much more about tax than the property market as one might expect for an election budget. The few elements which could directly affect the rented sector we expect to do so in a very faint manner.

March 19, 2015 rentonomy Topical