UK house prices: Is it RIP to buy-to-let investors after George Osborne tax hike?

Has George Osborne slain the buy-to-let dragon? After the chancellor unveiled plans to hike taxes a major new survey of landlords suggests as many as 200,000 now plan to quit the market -- potentially releasing hundreds of thousands of extra properties for first-time buyers.

Buy-to-let is perceived by some as gluttonous rent-seeking by those wealthy enough to exploit a housing shortage in parts of the country for their own gain, by cashing in on rising house prices and rents, at the cost of those struggling to get a footing on the housing ladder. Kent Reliance, a building society, said in its Buy to Let Britain report there are five million renters in England alone, and the private rented sector is now worth £1.2tn after growing 16% in a single year.

In his July 2015 budget, Osborne put buy-to-let investors in his crosshairs by scrapping a tax relief that allowed them to offset the interest on their monthly mortgage repayments against their income tax bills on the rent they receive. Then in his November 2015 Spending Review he went one further by hiking stamp duty on purchases of additional residential properties – adding 3% on top of the standard rates. There is an exemption for big institutional investors, whose buy-to-let investment is seen as important to getting more homes built.

The Residential Lettings Association (RLA) surveyed over 1,100 of its members and found that 10% now plan to exit the market and 33% will consider no longer investing in buy-to-let. There will also be a late rush to beat the higher levy, with 46% trying to complete property purchases before the new tax year on April 1. A run to the exit by buy-to-let investors could go some way to easing the shortage of property for sale, particularly in London and the south east, and slow significantly the pace of house price growth. Many aspirant homeowners are shut out of the market by high house prices because they cannot afford the deposit on their first mortgage.

House prices have grown rapidly in recent years. In many areas of the country, this has been a recovery from the property crash triggered by the financial crisis. But in others, such as London, a severe shortage of housing supply and intense demand has sent prices surging well past their pre-crisis levels. This increase has been made more painful by several years of falling wages in real terms as price inflation outstripped pay rises.

House prices grew by 7% on average in the year to October 2015, according to the Office for National Statistics (ONS). The average home now costs £300,000 in England. In London, which has seen double-digit house price growth, this figure is £531,000. Excluding London and the South East, the average UK house prices was £217,000. But the rapid price growth of recent years may be changing, thanks in part to the crackdown on buy-to-let.

"UK house prices should stop rising," said Scott Corfe, associate director of the Centre for Economics and Business Research (CEBR), a think tank. "The gradual emergence of housing supply (a good thing), the prospect of rising mortgage rates, international uncertainty about the UK's relationship with the EU and the government's ill-timed and badly thought-out attack on the buy-to-let sector are likely to weaken the housing market. By the end of the year prices could be lower than at the beginning, especially in London where buy-to-let is most prominent. Only the chronic shortage of housing will hold prices up."

Surging house prices and rents have brought opportunity and returns for those with the capital available to buy property to rent. A 2014 report by the buy-to-let mortgage lender Paragon exposed the scale of the boom since the financial product was first introduced to the market in 1996. Nearly a fifth of the housing in England is now in the private rented sector as investors and when you look at the returns on buy-to-let investments, fuelled by a national obsession with property, it is easy to see why.

"Every £1,000 invested in an average buy-to-let property, purchased with a 75% loan-to-value (LTV) mortgage in the final quarter of 1996, would have been worth £13,048 by the final quarter of 2013, a compound annual return of 16.3%," said Paragon's report. "The same investment in UK commercial property would have grown to £3,654; in UK equities (shares) to £3,082; in gilts (UK government bonds) to £2,924; and in cash to £1,949."

A Treasury report into the private rented sector from 2010 found that small landlords, not institutions, dominate the private rented sector, estimating that 74% of such properties are owned by individuals or couples, and two-thirds of those owning five or fewer. Some of those may now cash in and leave the market after Osborne's changes.

Others who stick around, however, are considering raising rents on their tenants to pay for the higher tax burden. A poll by the listings site SpareRoom.co.uk of 1,054 landlords found 45% saying they planning to hike rents on their tenants in 2016. Nearly a fifth – 18% – said rents would rise by more than 3%. Of those putting rents up, 38% said it was a direct consequence of the government's changes to the buy-to-let regime. "The worry is that tenants will bear the brunt of these changes," said Matt Hutchinson, director of SpareRoom.co.uk. "And if renters end up being the ones to shoulder the burden of legislative change, something has gone very, very wrong. The private rental sector is already under immense pressure."

Some buy-to-let investors are turning themselves into companies to mitigate the tax changes. The Kent Reliance report, published in December 2015, said buy-to-let lending to limited companies doubled to 5,000 a month after Osborne's tax relief announcement in the budget. In September alone, applications from companies to Kent Reliance for buy-to-let mortgages increased by 213%. "A company structure means investors are taxed on profits at corporation tax rates, and there are full reliefs for business costs such as mortgage interest, although there are other costs to consider," said the report.

We will have to wait and see the scale of the impact Osborne's buy-to-let changes have. But if those 200,000 buy-to-let investors are good on their word, it'll be a decent boost for the supply of homes in the market, and some welcome, if rare, good news for first-time buyers.