I was reading some property stats this morning and it made me think of cobras. Specifically, the Cobra Effect, also known as the Law of Unintended Consequences.
The cobra story harks back to the British rule of colonial India, when the British government tackled a cobra infestation by paying a bounty for every dead cobra. Enterprising people started breeding the cobras for the income. When the government found out they scrapped the program and the worthless cobras were released … making the infestation even worse than before.
The Cobra Effect is something about I’ve blogged about before in other situations, and I wonder whether we’re going to see it’s effect in the UK property market …
The Government wants to make the property market fairer for first time buyers. Their view (and the view of many others) is that the free market is favouring the rich investors, so in 2016 the Government fiscally intervened by increasing stamp duty and reducing tax benefits for property investors.
It was an attempt to encourage property investors to seek profits in new hunting grounds. The hope was that competition for smaller houses and flats would be reduced, making them affordable for first time buyers. Indeed, there was even hope for a double-whammy benefit if investors switched their investments to peer-to-peer platforms focused on the SME sector.
So, as we started 2017, we wondered what the stats for 2016 would show and on 31st January Isabelle Fraser provided some useful analysis in The Telegraph
Fraser confirmed that the Treasury collected 18% more stamp duty from the sale of residential properties in 2016 compared with 2015. The Treasury collected an impressive £8.28 billion.
However, this wasn’t the result of first-time-buyers finally clambering onto the property ladder after years of being priced out. It was those pesky buy-to-let landlords taking the 3% tax-hike in their stride. Fraser confirmed that “One in five of all homes bought in the last six months of the year were additional properties, and this raised £962m for the Treasury’s coffers, representing 21pc of the tax take during this period. This amount was higher than forecast by the Office for Budget Responsibility, which had pencilled in £660m for the 2016-17 financial year.”
Indeed, without the extra stamp duty collected on additional properties, 2016 would have seen reduced revenues compared with 2015.
And what’s worse is that the cash-rich investors were particularly prevalent. Fraser quoted Lucian Cook, head of residential research at Savills, who estimated that there was “significant cash investment in buy-to-let”, with fewer than 40,000 of the 119,000 additional homes during the period bought using a mortgage.
So, why is this a potential Cobra Effect?
Well, let’s remember that the aim of the Government intervention was to help first time buyers get onto the property ladder. However, the effect may have been to drive up costs for professional landlords without actually deterring them. Fraser quotes Nick Leeming, chairman of Jackson-Stops & Staff, who said “my fear is that additional costs will be passed on to tenants.” So, higher rents means aspiring first time buyers can save less each month … which pushes that dream of their first home even further beyond their reach.
And the Government now looks set to intervene again, with the Communities Secretary announcing yesterday that greater protection would now be given to those trapped in the rented sector, by encouraging councils and developers to build more affordable rental properties.
Like them or loathe them, it feels like the Government had good intentions here. However, it seems their actions have had little impact on cash-rich investors, yet they may have a material impact on the monthly cash-flows of renters.
It looks like a fair bit of further intervention may be needed to kill this particular cobra.