What is the state of the UK Public Finances?

This afternoon the UK Chancellor of the Exchequer will stand up and give what is now called the Spring Statement about the UK public finances. It looks set to be an example of what a difference a few short months can make. But before we get to that let me take us back to yesterday when we were looking at the issue of falling house prices in London. That would have an impact on the revenue side should it be prolonged and the reason for that is the house price boom in the UK which was engineered back the Bank of England back in the summer of 2012 led to this. From HM Parliament last month.

In 2016/17 stamp duty land tax (SDLT) receipts were roughly £11.8 billion, £8.6 billion from residential property and £3.2 billion from nonresidential property. Such receipts are forecast to rise to close to £16 billion in 2022/23, or around £14.5 billion after adjusting for inflation.

That is a far cry from the £4.8 billion of 2008/09 when the credit crunch hit and the £6.9 billion of 2012/13 when the Bank of England lit the blue touch-paper for house prices. Although of course some care is needed at the rates of the tax have been in a state of almost constant change. A bit like pensions policy Chancellors cannot stop meddling with Stamp Duty.

Indeed much of this is associated with London.

Around 2% of properties potentially liable for stamp
duty were sold for over £1 million – these properties
accounted for 30% of the SDLT yield on residential

In fact most of the tax comes from higher priced properties.

In 2016/17 the stamp duty yields on residential property
were split nearly 45:55 between those paying the tax for
purchases between £125,000 and £500,000, and those
paying for properties purchased at over £500,000.

So there you have it the London property boom has brought some riches to the UK Treasury as has the policy of the Bank of England.

The Bank of England part two

Yesterday brought something of a reminder of an often forgotten role on this front.

Operations to make these gilt purchases will commence in the week beginning 12 March 2018……..The Bank intends to purchase evenly across the three gilt maturity sectors.  The size of auctions will initially be £1,220mn for each maturity sector.

This is an Operation Twist style reinvestment of a part of the QE holdings that has matured.

As set out in the Minutes of the MPC’s meeting ending 7 February 2018, the MPC has agreed to make £18.3bn of gilt purchases, financed by central bank reserves, to reinvest the cash flows associated with the maturity on 7 March 2018 of a gilt owned by the Asset Purchase Facility (APF)

So the Bank of England’s holdings which dropped to a bit over £416 billion will be returned to the target of £435 billion. So the new flow will help reduce the yields that the UK pays on its borrowings which has saved the government a lot of money. The combination of it and the existing holdings means that the UK can currently borrow for 50 years at an interest-rate of a mere 1.71%. Extraordinary when you think about it isn’t it?

The Office for Budget Responsibility ( OBR)

If we continue with the gain from the QE of the Bank of England then the OBR forecast that the average yield would be 5.1% and rising in 2015/16 back when it reviewed its first Budget. This gives us a measuring rod for the impact of QE on the public finances which is a steady drip,drip, drip gain which builds up over time.

If we bring in another major forecast from back then we get a reminder of my First Rule of OBR Club.

Wages and salaries growth rises gradually throughout the forecast, reaching 5½ percent in 2014.

For newer readers that rule is that the OBR is always wrong! I return regularly to the wages one as it has turned out of course to be the feature of modern economic life as the US labour market reminded us last Friday. If you take the conventional view as official forecasts find compulsory then at this stage of the cycle non-farm job creation of 313,000 cannot co-exist with annual hourly earnings growth fading from 2.9% to 2.6%. At this point HAL-9000 from the film 2001 A Space Odyssey would feel that he has been lied to again. Yet today and tomorrow will see a swathe of Phillips Curve style analysis from the OBR and others regardless of the continuing evidence of its failures.

The Bank of England has kindly pointed this out yesterday.

The accuracy of such forecasts has come under much scrutiny.

Here for a start! But ahem and the emphasis is mine…..

Gertjan Vlieghe explains how forecasting is an important tool that helps policymakers diagnose the state and outlook for the economy, and in turn assess – and communicate – the implications for current and future policy. So achieving accuracy is not always the sole aim of the forecast.

For best really in the circumstances I think. Oh and as Forward Guidance turned out to be at best something of a dog’s dinner as promised interest-rate rises suddenly became a cut I think Gertjan’s intervention makes things worse not better.


Embarrassingly for the Forward Guidance so beloved by Gertjan Vlieghe this has been an area of woe for the credibility of the Bank of England but good news for the UK economy and public finances. This is of course how the 6.5% unemployment rate target which was supposed to be “far,far away” to coin a phrase turned up almost immediately followed by further declines leading us to this.

There were 32.15 million people in work, 88,000 more than for July to September 2017 and 321,000 more than for a year earlier…….The employment rate (the proportion of people aged from 16 to 64 who were in work) was 75.2%, higher than for a year earlier (74.6%).

As we look at that we can almost count the surge into the coffers directly via taxes on income and also indirectly via excise duties and VAT ( Value Added Tax). According to The Times more may be on its way.

Hiring confidence among British companies has reached its highest level in more than a year and recruitment is set to pick up as businesses shrug off downbeat economic projections, according to a closely watched study.

Manpower’s quarterly survey recorded that net optimism had climbed to +6 per cent in the latest quarter.


If we look for the situation I pointed out on the 2nd of this month that we are being led into a land of politics rather than economics. From the IEA ( Institute of Economic Affairs ).

New data shows that the Conservative government has finally hit its original target to eliminate the £100bn day-to-day budget deficit they inherited in 2010.

We get all sorts of definitions to make the numbers lower but whether they are cyclical or day-to day they are open to “interpretation” which of course is always one-way. But we have made progress.

the UK’s achievement of sustained deficit reduction over eight years should not be taken for granted.

This has been a fair bit slower than promised which leaves us with this.

The problem is the financial crisis and its aftermath saw public debt balloon from 35.4 per cent of GDP in 2008 to 86.5 per cent today – far higher than the 35 per cent average since 1975.

The consequences of that have been ameliorated by Bank of England QE and to some extent by QE elsewhere. Also it is time for the First Rule of OBR Club again.

The Office for Budget Responsibility projects that public debt will shoot up to 178 per cent of GDP in the next 40 years on unchanged policies, as demands on the state pension, social care, and healthcare rise.

The state of play is that public borrowing has finally benefited from economic growth and particularly employment growth. We are still borrowing but we can see a horizon where that might end as opposed to the mirages promised so often. There are two main catches. The first is that we need the view of The Times on employment to be more accurate that the official data. The second is that for debt costs not to be a problem then QE will need to be a permanent part of the economic landscape.

The certainty today is that the OBR forecasts will be wrong again. The question is why we have been pointed towards better numbers by the mainstream media? The choice is between more spending and looking fiscally hard-line ( which also usually means more spending only later….).





UK house prices get ramped one more time

Yesterday we got the conformation we expected that the UK establishment cannot stop itself from meddling in the housing market with the intention of pushing house prices up. The various readings that the house price was turning highlighted by actual falls in the London area was always going to focus their minds. Thus the headline proposal in the Budget was this. From City-AM.

The government has used the Autumn Budget to abolish stamp duty for first-time buyers on purchases of up to £300,000.

First-time buyers will also receive a stamp duty holiday for the first £300,000 on purchases up to £500,000.

Launching the policy, the chancellor said 80 per cent of first-time buyers will pay no stamp duty as a result of the change.

Firstly let me wish those who are about to buy for the first time good luck with their windfall although not everybody sees it like that as this from the chief economics  correspondent of the Guardian Aditya Chakraborrty indicates.

Jack up your asking price to show him how stamp duty really works.

However sadly it will not end there as we know that such moves tend to boost house prices and of course this is the reason the policy is announced. For the government can claim it is helping first time buyers and boost house prices for property owners in a win double for it. If we think more deeply then poorer areas will see little benefit at all as the £125,000 limit for zero rate Stamp Duty was enough but areas with higher prices will see benefits and I note the way that the gains were given to those paying up to £500,000. That will benefit first time buyers in London ( albeit not some of central London) which makes me wonder if it is an attempt to stop or slow this? From the Evening Standard on London house prices.

Savills anticipates prices will fall 1.5 per cent in 2017 and a further two per cent in 2018, before stagnating in 2019

Things are usually really bad when an estate agent predicts price falls!

How much will house prices rise?

I put in a maximum public service effort yesterday on social media to point out that the first rule of OBR ( Office for Budget Responsibility) club is that the OBR is always wrong. Some seemed to learn but others parroted its claim that house prices will rise by 0.3%. So let us move on knowing that it will not be that as we mull that the gain can be up to £5000 so some prices will probably rise by that and of course some desperate to buy might leverage via a mortgage and be able to pay even more than that. There will be a small downwards effect above £500,000 as there is an extraordinary marginal tax rate where £1 costs £5000 on the other side.

Some however appear to be unaware of the record of the OBR and in this instance seemed as the TV series puts it Lost In Space.

You may note the large number of people who sent this one and wonder how many of them realise that Torsten now thinks it is between £160,000 and £190,000 although of course that may have changed by the time you read this. Does it qualify as fake news?

The BBC seems oblivious to the continual failures of the OBR too.

It also estimates that it will result in only an additional 3,500 first-time buyer purchases…….The policy will cost the Treasury £3.2bn over the next five years.

There is a further irony about this which is that Stamp Duty was one of the few areas where we seem able to raise tax rates and revenues. Partly of course due to the fact that housing benefits from capital gains tax exemptions for the main home.

Term Funding Scheme

Just a reminder that house prices will be pumped up by the extra £25 billion of this that the Bank of England requested on Monday and will therefore presumably supply before it ends in February. This works in several ways as you see banks get funds at or close to Bank Rate as opposed to going to savers which is both easier and cheaper than the 1.1% ( plus costs) they have to pay for new deposits from individuals according to the Bank of England. This means that the banks can mix between wider margins and lower mortgage rates than otherwise. The lower mortgage rates boost business volume compared to otherwise and of course via their impact on house prices improve the mortgage book of the banks.


There was a by now familiar refrain that we must build more houses which has been proclaimed by every Chancellor this century. From the BBC.

£44bn in overall government support for housing to meet target of building 300,000 new homes a year by the middle of the next decade.

I am sure you have already spotted that for housing demand it is jam today whereas for housing supply it is jam tomorrow! Indeed it is hard to avoid the thought that by the middle of the next decade the odds are that the current Chancellor will be long gone. Indeed according to Yes Prime Minster if you want to kick things into the long grass you announce an enquiry.

So I am establishing an urgent Review to look at the gap between planning permissions and housing starts.

It will be chaired by my Right Honourable Friend for West Dorset.

And will deliver an interim report in time for the Spring Statement next year.

Some care is needed as it takes time to plan and build houses and flats but we find yet again that demand and consequently house prices come first. On past track records the houses may not ever be built.

Universal Credit

It is clear that some of our poorest people have been affected by the clunky way that Universal Credit has been introduced. So I welcome the effort and money put forwards in the Budget to help with this and fixes if not all at least some of the problems.

Growth downgrade

The obvious cherry to pick for the headline writers has been the economic growth downgrade given to the UK. However this is based on the productivity forecasts of the OBR which have been well take a look for yourselves.

Oh and remember they were saying that UK borrowing will be higher this year than last? From the Budget Speech.

Today, the OBR confirm that we are on track to meet our fiscal rules:

Borrowing is forecast to be £49.9 billion this year; £8.4 billion lower than forecast at the Spring Budget.


So we received a giveaway Budget of which a lot of the giveaway was focused on the housing market. Again. Whilst some will initially gain the problem is that next time around the house prices that are being boosted will be even more unaffordable and thus more “Help” will be needed in a cycle which is so far endless. Existing home owners can continue to listen to some Hot Chocolate.

You win again

The problem is that for all the talk of rebalancing the UK economy we continue to lean towards the housing market. So whilst I welcome the efforts to boost productivity and technology they may find they are swimming against the tide. Still at least the extra maths teachers may help us in measuring productivity which may yet turn out to be the problem that never was. Also the technology issue needs to be in the right areas. I understand that one needs to provide stations to encourage use but my area has seen a considerable number of charging points for electric vehicles built in the last year or two but they are so rarely actually used.

As a last point welcome to the Ashes series of 2017 which seems to have had a fairly even start.

Core Finance TV

You can check my predictions against what happened.


UK housing policy continues to promote ever more unaffordable prices

This week has opened with a barrage of news on the UK housing market. Whilst this is of course the equivalent of a hardy perennial there are two factors bringing it into focus. The first is that it is the UK Budget next week and the second is a weekend where a strong end to the last week for the UK Pound £ has been replaced by this.

Barclays trade of the week (short EURGBP) stopped out at Monday 0857am… ( @RANSquawk )

Is that some sort of record? As Prince would say it is a Sign O’ The Times.

One issue at play is building evidence of changes in the housing market. From Estate Agency Today.

Sellers have launched “their own sale” in response to the stagnating market by slashing asking prices according to Rightmove – but some sellers have not cut enough.

So what has happened?

The portal says sellers of homes that are new to the market have trimmed asking prices over the past month by a modest 0.8 per cent; more dramatically, 37 per cent of properties already on the market have reduced their asking prices since first being listed.

The 37 per cent figure represents the highest proportion at this time of year for five years, the portal says in its latest monthly market snapshot.

It is not the fact that there are price offers at this time of year that is unusual it is the amount of them. Also the five-year timing will be noted by the Bank of England as that takes us back to developments which influenced its decision to boost house prices with its Funding for Lending Scheme.

At the moment the situation as regarding price drops is recorded thus.

Analysis of those properties that actually sold last month after having reduced their prices shows that their average reduction between initial and last advertised asking price was also 6.3 per cent.

However the state of play in London seems rather different especially as we note this in the Guardian is from an estate agent.

Lucy Pendleton, of the London estate agent James Pendleton, said sellers in the capital are facing some particularly tough decisions. She argues that one large price cut can work better than several small ones.

As to the gap between asking prices and actual selling ones Henry Pryor helps us out.

Average asking prices measured by across the country have fallen slightly. They’re now just 27% (£84k) higher than average sale prices recorded by

LSL Acadata

This body covers all transactions including those for cash and tells us this.

The slowdown in prices continued into October, with values flat over the month and up 0.8% on an annual basis. This is the slowest growth since March 2012, and at £298,438 prices are now roughly level with November 2016.

The driver of the slow down is very familiar.

London continues to weigh on the market, with the decline in prices there (now 2.4% annually) dampening growth substantially though. Prices fell more slowly in September than the previous month, down 0.3%. The average house in the capital remains at £583,598, despite a fall of £14,250 over the year.

Government Policy

We have had various suggestions and hints from ministers over the past couple of months but this morning has brought this in the Financial Times.

UK chancellor Philip Hammond is drawing up plans to help first-time buyers in his Budget later this month, in an attempt to show the government is getting to grips with the housing crisis.

Having opened this piece with a mention of hardy perennials we have one which blooms very regularly in the UK which is what the UK government will badge as help for first time buyers. I would imagine that many of you will be able to guess what form this will take before reading the details below.

The chancellor is preparing a stamp duty cut for first-time buyers as a signal that the Conservative party understands the widespread resentment felt by those locked out of the housing market because of high prices, according to government aides………The Treasury regards a stamp duty cut for first-time buyers, which might be introduced for a temporary period, as one way to address a growing feeling of inter-generational unfairness in Britain.

There are more than a few begged questions in that but let us for the moment move on whilst noting the changes at play.

This problem is exemplified by how younger people are struggling to follow in the footsteps of their parents by buying their own homes. The number of homeowners under the age of 45 in England has dropped by 904,000 since the Conservatives entered government in 2010: down from 4.46m in that year to 3.56m in 2015-2016, according to data from the Department for Communities and Local Government.

Also this is an intriguing way of looking at the likely impact which also points out the wide variation in average house prices around the UK.

Lucian Cook, head of residential research at Savills, an estate agency, said any cut in stamp duty for first-time buyers would primarily benefit those purchasing homes in London and south-east England. Stamp duty is not payable on properties worth less than £125,000, and Mr Cook highlighted how the average price for a first-time buyer in Yorkshire was just over £125,000.

So a response to house price falls in London? We have been wondering on here how long that might take….

Bring me a higher love

The hardy perennial theme continues as I note this from City-AM.

Writing to the chancellor, an influential group of housing associations urged Hammond to allow developers to extend the height of properties without having to secure planning permission.

Under the “build up not out” plan, championed by Tory MP John Penrose, developers would be able to increase a building’s height so it matched the tallest building in its neighbourhood, or the height of surrounding trees.

The supply of homes is of course an issue in the UK although of course developers have quite a vested interest in being able to build higher as I recall the Yes Prime Minister episode that referred to this. Those who live next door may not be quite so keen so care is needed.


There is a clear problem with two possible government policies which is the proposed expansion of Help To Buy we looked at back on the 2nd of October and today’s Stamp Duty cut. This is that moves which are badged as help are tactically true but strategic disasters. What I mean by this is that the person helped gains at that moment but that fades away as we note that these moves are not only associated with but cause ever higher house prices. Sometimes they are priced  straight in and people may be being helped to buy at the top of the market signified by the ever higher multiple of income required. This of course then requires even more help to stop house prices falling as the cycle repeats so far endlessly.

An irony is that a Stamp Duty cut would also damage one of the better revenue areas for the government in recent times. From the FT.

The Treasury’s receipts from stamp duty surged to a record high of £11.77bn in 2016-17, up 10 per cent per cent compared with the previous year.

There are regular debates about taxation and the apparent impossibility in more than a few areas of increasing it. Well Stamp Duty has not been one of them and has seen increasing flows to the UK Exchequer.

The issue of raising housing supply seems much better founded than raising demand. But it is problematic for the current Chancellor of the Exchequer as whilst it is welcome I think to see someone who is not just a career politician owning businesses which are in property development and construction raises a moral hazard question. Approving changes which benefit you personally is not a good look especially when the developers have benefited from the whole Help To Buy era.

Also if we look back to October 23rd there was this.

The government should borrow money to fund the building of hundreds of thousands of new homes, a cabinet minister says.

Communities Secretary Sajid Javid said taking advantage of record-low interest rates “can be the right thing if done sensibly”.

If Mr.Javid was a Chelsea footballer it would appear that he has been sent to Vitesse Arnhem on loan maybe permanently.

Meanwhile there is news from the Bank of England that house buyers have had the advantage even before it existed.




What does UK tax revenue tell us about economic growth and GDP?

One of the ways of measuring the economic output of an economy is to look at the tax revenue it raises. We do this because of the fact that there are a litany of weaknesses with the economic growth or GDP (Gross Domestic Product) numbers we receive. Only on Wednesday they received a critique from the labour market update where the employment situation was markedly different to the economic growth numbers. In the quarter just gone the extra hours worked (1.7%) far exceeded the economic growth of 0.5% which after the construction and industrial production updates is in danger of becoming 0.4%. So tax revenue received gives us a check on the state of play. If we look wider afield we see that one of the signs of the “lost decade” in Japan has been its inability to raise its tax revenue as the problems created by the latest Consumption Tax increase have shown.

Why this month?

January is the month in the UK when the self assessment forms have to be sent in by and income related  taxes paid. There will be some overflow to February for it all to be accounted for but we get a look at a sector which the official average wages figure ignore. They have a threshold of 20 employees and so miss smaller businesses and the growing number of self-employed which means that they are exactly what a data series should not be which is skewed and biased.

The pattern for Income Tax

If we look back we see that the employed or Pay As You Earn (PAYE) version of this generated receipts of £130.9 billion in 2008 tax year. If we compare like for like we see that it fell and  then bounced in 2011 but was then stable until 2014 when it rose to £138.3 billion and £145.1 billion in 2015. So we see some backing for the economic improvement from 2013 onwards although of course we have the issue that inflation has eroded this but pulling the other way has been the rise in the personal (tax-free) allowance albeit one offset somewhat but the failure to raise higher-rate thresholds. So the picture here is murky and hard to determine.

If we move to today’s numbers then again we get some backing for the UK economic improvement as the £12.33 billion of this January was a 5.4% rise on the £11.7 billion of the same month in 2015.

What about self-assessment?

Care is needed here as some of the money is recorded in February but today’s numbers did come with some disappointment.

Self-assessed income tax receipts increased by £0.2 billion to £12.4 billion in January 2016 compared with January 2015.

That is only a 1.6% rise and it is hard not to think of the increasing numbers of self-employed as I type this. After all on Wednesday we were told this.

self-employed people increased by 154,000 to 4.66 million

Care is needed as we are not comparing like for like as we do not have the January numbers here and it is not only the self-employed who are self-assessed. But a 1.6% rise seems a bit thin as we note an increase of 3% in their numbers. Have their wages fallen and if so what does that tell us?

So we have an odd picture here where the employed income tax numbers look excellent whilst – with caveat s- the self-employed ones are worrying and may show a decline.

Value Added Tax

This was suggested as an indicator in the comments section and the rationale behind this is simply that it gives us an idea of how much is being sold in the economy and thereby taxed.If we look back the picture is muddied by the changes in its rate but 2007 saw receipts of £92.02 billion to give you a sighter but for the reasons explained 2011’s £111.5 billion is more of a benchmark. We have seen a genuine pick-up here as 2013’s £118.2 billion was replaced by 2014’s £124.2 billion and 2015’s £128.4 billion. Perhaps the numbers are better than they look if we allow for a higher rates of avoidance and evasion in response to the rise to a 20% rate of VAT.

If we bring this up to date we see that VAT revenue is performing.

VAT receipts increased by £3.8 billion, or 3.7%, to £108.2 billion ( in the tax year to January).

This should not be a surprise as at the same time we received another excellent set of retail sales figures in the UK.

Year-on-year estimates of the quantity bought in the retail industry showed growth for the 33rd consecutive month in January 2016, increasing by 5.2% compared with January 2015.

The driver behind this has been the fall in retail prices which as I pointed out on the 29th of January last year has been an economic benefit.

Today I wish to challenge a piece of economic orthodoxy which is that lower prices are bad for us.

The 2.6% fall in prices over the year to January has been accompanied by the strong volume increase shown above. Also the 2.4% increase in spending (rounding means this doesn’t quite add-up) has fed into better VAT numbers helping the Exchequer. So far this tax year we have collected some £108.2 billion of VAT.

Stamp Duty on houses

Regular readers will be aware that it is my opinion that the Bank of England lit a fire under the UK housing market with its Funding for Lending Scheme in the summer of 2012. Thus we should see quite a pick-up in Stamp Duty receipts if the theory hold water. Well how does £6.7 billion in 2012 followed by £8.7 billion in 2013 and £11.1 billion in 2014 grab you? There was a slight fading in 2015 to £10.77 billion but it was still some 61% up on 2012.

I am not sure it could be much clearer and if other taxes had done the same we would be home and dry!


We find that the UK revenue numbers do provide a guide to what has been going on in the UK economy. We can see that whilst the medium-term picture is murky due to all the changes we see to be getting a solid increase now in both income tax (4.7%) and national insurance (3.5%) in the year so far. However whilst we only have a partial picture it looks as though the employed have been doing much better than the self-employed.

The VAT figures are more bullish in that they have a clearer rising pattern with the economic improvement and as they reflect the surge in retail sales seen in 2015 and so far 2016. It will not be too long before we find that reflected in the balance of payments numbers I suspect but enough of that for now. The clearest surge has come from Stamp Duty on houses! As Turkish pointed out in the film Snatch “Who da thunk it”

My musical summary comes from the delightful Sheryl Crow.

Everyday is a winding road
I get a little bit closer
Everyday is a faded sign
I get a little bit closer to feeling fine

Oh and as to the January Public Finances they appear to be a little better but it is hard to be clear as you see the expenditure figures have confused the concepts of up and down.

Number Crunching

We are regularly told that there is no inflation. Today I got news that my gym and track membership at (the public) Battersea Park Millenium Arena is rising from £28 to £30 per month or 7%. Whilst the Guardian reports quite a surge in Probate Fees.

The flat £215 fee will be replaced with a new system of tiered charges that would result in some paying as much as £20,000 for estates worth more than £2m.

For estates worth between £500,000 and £1m the new fee will be £4,000, rising to £8,000 for those worth between £1m and £1.6m, and £12,000 for those valued at between £1.6m and £2m.


What are the prospects now for buy to let property investment in the UK?

One of the features of the UK property price boom which was triggered by the Bank of England in July 2012 has been a shift from people buying to own to buying to rent. The changes were highlighted on the 10th of this month in a speech given by Jon Cunliffe of the Bank of England.

And it is growing quickly now, by around 9% a year.  Buy to let now represents 16% of the overall mortgage stock and accounted for 80% of net lending over the past year.

The attraction was two-fold but came from this development driven by the start of the Funding for (Mortgage) Lending Scheme (FLS) which drove this.

But over the past three years, as banks’ funding costs have reduced and as competition in the mortgage market has intensified, on average mortgage interest rates have fallen by 2 percentage points.

So the opening attraction was lower mortgage rates which began to turn the mortgage market around and this led to the second factor which was the expectation of higher house prices. So costs were cheaper and expected returns were higher especially if you figured that the Bank of England was really determined to fire the market up again. After all FLS followed some £375 billion of Quantitative Easing and the slashing of Bank Rate to 0.5%. This all looks bit like the “whatever it takes” expressed back that same summer of 2012 by Mario Draghi of the European Central Bank.

Buy To Let had been on the march anyway

The longer-term situation had been as shown below.

The private rental sector in the UK has been growing rapidly over the past 15 years partly due to structural reasons.  The stock of mortgage lending for buy to let has increased from £65bn to £200bn over the last decade.  And it is growing quickly now, by around 9% a year.

Thus we see that an existing trend was given a shove by the Bank of England and it was not alone. Back in July another policy change was highlighted by the Financial Stability Report.

The buy-to-let market could receive an additional stimulus from recent pension reforms, which give retirees more flexibility over how they use their defined contribution (DC) pension pots.

We simply do not know the longer-term impact of the change to pension rules. Perhaps the strongest impact may well be the perception that a type of “Greenspan/Bernanke/Yellen Put” is being applied, as measure after measure boosts house prices. For those unfamiliar which the concept then listen to “The only way is up,baby” from Yazz for a musical theme. In this arena “down” is definitely a four-letter word.

Why did buy to let boom relative to house purchases?

There are several factors at play here and the most obvious was tucked away in the Bank of England FSR.

higher house prices relative to incomes.

Whilst the reductions in mortgage-rates have improved affordability of course real incomes have fallen whilst house prices have risen. There are different measures of this but house prices are up by around 18% and real wages are down by around 6% in the credit crunch era. It would be an irony if it is the continual hints and promises of interest-rate increases  from Bank of England Governor Mark Carney that have deterred people but whatever the reason prospective mortgagees who face ever longer terms may wonder how long low interest-rates will last for?

Also there is something else which seems to have encouraged a change and it is also something which the Bank of England may want to lock away in a dark cupboard.

But there are signs of growing risk appetite spreading to underwriting standards. …….the number of advertised buy-to-let mortgage products at LTV ratios of 75% and above has increased since mid-2013………Looser lending standards in the buy-to-let sector.

Criteria for buy-to-let mortgage lending are different to ordinary mortgage lending but we are left with the view that its rise has been partly due to the fact that it has been easier to borrow.

How much of a problem is this?

Let me use the words of the Bank of England to describe it.

Buy-to-let borrowers are potentially more vulnerable to rising interest rates because loans are more likely to be interest only and extended on floating-rate terms, and affordability tends to be tested at lower stressed interest rates than owner-occupied lending.

You may be surprised by the “interest-only” bit as one only has to recall around 2009 when our political class were telling us that these were not far off evil and would not be a feature of the UK system going forwards in the words of Taylor Swift

Like, ever…

In reality we find that they have simply metamophosed, changed form and been expanding in another area. Still don’t be afraid as our valiant “great and the good” are on the case.

HM Treasury will consult on tools for the FPC related to buy-to-let lending later in 2015, with a view to building an in-depth evidence base on how the operation of the UK buy-to-let housing market may carry risks to financial stability. The FPC will continue to monitor this sector closely.

A bit like the sheriff in the film Smokey and the Bandit I think.

Tax changes

If you have a boom then governments and establishments immediately see scope to tax it. This is now in process for the buy-to let boom. Back in the summer Budget there were plans laid for the future.

Currently, individual landlords can deduct their costs – including mortgage interest – from their profits before they pay tax, giving them an advantage over other home buyers. Wealthier landlords receive tax relief at 40% and 45%. This tax relief will be restricted to 20% for all individuals by April 2020.

A trim for some although the obvious critique is that it is “So Far Away” (Carole King).

Yesterday we saw a change in that the tax raising became more immediate.

From 1 April 2016 people purchasing additional properties such as buy to let properties and second homes will pay an extra 3% in stamp duty.

So we have a classic establishment move which was estimated to raise around £1 billion a year in an area where the tax take has risen a lot in recent times. It was a bit over £6 billion in 2011/12 rising to £10.8 billion in 2014/15. Thus the UK Treasury has been very grateful for the house price boom and no doubt gives an appreciative nod to the “independent” Bank of England which triggered it.


Firstly let me make it clear that I have no beef with individual’s making a choice to buy and let a property. It is the collective issue and the way that the UK economy has been twisted towards it which has meant that money and effort has flowed to it as opposed to other others such as manufacturing. The consensus for house prices that “The only way is up” has twisted our expectations and has consequences for the flow of funds and entrepreneurial effort elsewhere. It is a factor in us moving towards a rentier society. Also by driving house prices higher it makes them ever more unaffordable for first time buyers which means that more are pushed towards renting and the cycle becomes more like a fly-trap than an economic choice.

What happens next? In the short-term (until April 2016) we may see a flurry of purchases ahead of the tax change. After then I am not so sure. If we look at the gains from buy to let then I have been looking at a few yields around London and the gross yield seems to be of the order of 5%. I know that there are costs and void periods but they may not be far off covering a mortgage. Should that be so then the Stamp Duty needs to be compared to the prospect of a capital gain which have been?

UK house prices increased by 6.1% in the year to September 2015

Ah so six months worth of capital gain? We need to look back longer for a better perspective. The UK ONS has a mixed-adjusted measure for pre owned house prices which started at 100 in February 2002 and as of September was at 220.9. So if we add 3% to the 100 we are left mulling the words of Newt in the film Aliens.

It won’t make any difference.

So whilst a couple of tax nudges to the buy-to-let market are welcome and indeed likely to be popular there are clear and present dangers. The first is that they look good but in reality change things only at the margin. The second is that they are all about tax or as Steve Winwood put it.

While you see a chance take it,