SMUG MONEY: Is buy to let moral?

Written by Rebecca O'Connor on 19th November 2015

In the first of our new series of comment blogs, Smug Money, Becky considers whether buy to let landlords are the scourge of the housing market, or just minding their own business.

Buy to let is seen as a safe haven, while markets look increasingly volatile.

It’s also benefiting from recent changes to pension rules – many retired people are wondering what to do with that large pot of cash they can now access directly and are naturally turning towards the attractive yields and familiarity of bricks and mortar to fund their retirements. All completely legitimate and understandable.

Except the more of us that succumb to the cosiness of a buy to let, the fewer homes there will be available for all the poor saps trying valiantly but in vain to save for a deposit on their first property, dashing the dreams of a generation. Should we care? Well, I think we all do. But it’s that classic self-interest v common good dilemma, and in buy to let, they really are pitched against each other.

And I speak as part of the problem.

As an accidental landlord, the question of whether my property investment is moral is one I occasionally wrestle with (although honestly, it was completely accidental and may soon revert back to its former residential status when my dear sis moves back in).

The ridiculous increase in rent in the last 10 years, the shortage of housing in the UK and the vertiginous price of the average home now have all made it harder than squashing a cow in a phone box to get on the ladder.

It is more expensive to rent than buy. Let me say that again. It is more expensive for people priced off the ladder to put a roof over their heads than it is for the smuggos in home ownership to pay their mortgages.

How did this counter-intuitive topsy turvy situation come about? Whereby we expect those with the lowest incomes (at the start of their careers) and the highest housing costs, in the form of eye-watering rents, to shoulder all of their bills and outgoings AND save for a deposit?

Meanwhile, the well equity-endowed older homeowners, with little to no housing outgoings on their mortgage (because they’ve paid them off, or use them as low interest borrowing devices instead of personal loans), in-between deciding between a holiday Majorca or Tuscany, and the Laura Ashley or John Lewis new sofa, hoover up all the small properties for which, not surprisingly, there is high tenant demand.

You can’t blame them. Or can you?

Mark Carney, Governor of the Bank of England, has voiced his disapproval of the buy to let sector as a destabilising force in the housing market.

George Osborne is rather giving to landlords with one hand (pension freedoms) and taking with the other (the incoming loss of mortgage interest tax relief), but none of his changes are expected to kill off the sector. You’d need to ban private individuals not operating as buy to let companies from owning houses other than their own home altogether to do that. Hardly a vote-winner among the property-owning, older, Tory-voting demographic.

Mortgage lenders are doing a pretty good job of helping first time buyers through parental deposits and high loan-to-value mortgages (with relatively high interest rates, it has to be said). But they are also helping the buy-to-let brigade with higher LTVs and low-rate loans.  They are not acting with a moral mind, but a commercial one.

So is it down to us, as individuals, to take a stand against this unfortunate market failure? And if so, how?

Well, avoid the buy to let crowdfunding websites, for one thing. They are currently advertising themselves to disenfranchised young people wanting to benefit from property market gains. If you want a 6% yield, there are other ways to get one. Property is not the be-all-and-end-all investment, and has in fact underperformed a typical pension investment over the last 10 years.

So the first thing to say is, invest in a pension instead, if you aren’t already.

For now, tax relief on pensions are way more attractive than any other long-term investment you can make.

Stocks and shares ISAs are also completely tax-free and you can invest up to £15,240 a year in them.

When picking the funds for your stocks and shares ISA, we would always urge people to go beyond the marketing and look at the top ten fund holdings for an idea of how GOOD (as in ethical) that fund is. Because there is no other way to tell – even, in fact, if it is called ethical.

Alternative energy income funds, typically return an annual 6 per cent, with payments half-yearly, which is what you would expect from a buy to let, depending on where you are buying.

So, I won’t be a buy to let landlord from some point next year. Tempting though it may be to continue to benefit not only from the double-whammy of rent rises and capital gains, it’s just bad, hm’k? (And do remind me I said that, won’t you?!)