By Mike White of letting agent Martin & Co in Norwich
“Moves by the Coalition to raise Capital Gains Tax could decimate the buy-to-let market, with fears of a fire sale as landlords rush to dispose of their properties before the hike”. So say the doom and gloom merchants (or perhaps the estate agency fraternity looking for new instructions).
However, it is true the new Government has announced changes to CGT. It is likely to be charged at the same rate that people pay their normal income tax – ie, 20%, 40% or 50%. It means that in most cases, CGT will be paid at 40% rather than the current 18%. The hike is likely to kick in next April, although 9at the tiem of writing) this is not clear.
Commentators in the market are claiming the steep rise would chiefly hit landlords selling buy-to-let properties and people disposing of second homes. And, allegedly, estate agents are already reporting instructions from landlords “desperate” to sell up ahead of the “huge tax hike”, and are warning new investors will stay out of the property market.
Well now, let’s put a bit of logic into the mix and see if these “grave warnings” aren’t just short term hyperbole. First though some facts:-
- CGT has only been at the historically low rate of 18% since 6th April 2008. Prior to that it was at a variable rate of 20 or 40 % with most people paying 40% on the net gain after allowances. (Remarkably similar to what’s being proposed)
- The Buy to Let market was at its peak between 1996 and 2006. It has been static at best and in decline at worst since the global financial meltdown first reared its ugly head in late 2006.
- Property Investment is not (and never has been) a game played over the short term. It has always been optimised over a longer term and measuring success by the total yield achieved (i.e. both income and capital gains).
- The fundamentals of property are the same as ever they were; namely not enough houses to go round and would be first time buyers unable to get onto the housing ladder.
- The demand for rental property has continued to grow year on year for at least the last 15 years and given the fundamentals is likely to continue to do so.
- The new Government is committed to tax reductions over time (but have the small matter of a £156bn deficit to deal with pro tem).
So who to believe; the short termist knee jerkers, or someone like me who thinks property investment is quite a good place to be right now. With rents rising again after a two year hiatus and mortgage rates at their lowest levels –EVER- net income yields are good. Capital gains are not so good but will come back over time; just inflating a property price by annual RPI on a compounded basis will provide a good return. For example, the average house in Norwich costs around £160,000, take a modest inflation rate of 3%, compound it over say 15 years and your property would be valued at just under £250,000 at year 15. That’s a gain of £90,000 without taking into account any rental income over the same period! Let’s say the rent is £650 per month or £7800 per annum and bear in mind that it will go up by inflation over the period, therefore rental income alone will be somewhere in the region of £148,000 over the same timescale. So a total return of £238,000 on an investment of £160,000. That equates to a gross yield of just under 10% per annum. Where else can you get those sort of returns without putting your capital at severe risk of going up in a burst of a bubble? OK, ok, I know I’ve only talked about total yield and not net yield – yes of course there will be costs along the way and the overall net yield will be lower than stated. Equally property inflation could be a lot higher than a modest 3% (it always has been in the past). I’ve simply quoted this example to show some balance to the argument put forward by the Henny Pennys of this world.
Oh, by the way, something all these commentators have failed to mention is that all those would be sellers will incur costs of sale (mostly estate agency fees) and still need to find an alternative place to invest the proceeds which will have costs of entry!
Theres only 3 investment decisions a property investor can make; Buy, Sell or Hold. Trouble is an estate agent doesn’t make any money by advocating a decision to Hold. Trouble is a letting agent does so who on earth do you believe?
For more information, please contact Mike White at Martin & Co Letting Agents in Norwich on 01603 766860.
