The Irish buy-to-let market is more mature than the UK’s. While UK buy-to-let has only taken off in recent years, Ireland’s growth can be traced back to the mid 1990s.
The Republic is about five years ahead of the UK and, as such, it has provided some interesting lessons for those doing business in the UK .
In the summer of 1996, the Celtic Tiger was beginning to make its presence felt. Industry located in Ireland on the back of generous tax breaks, a plentiful supply of skilled labour and the country’s pending entry into the Eurozone. The country’s property market ‘ already buoyant ‘ began to boom on the back of this strong economy.
Investors, eager to benefit from house price inflation in excess of 20% a year, began to pour their money into the buy to let market. The competition for housing reached such an intensity in the Dublin area ‘ where much of Eire’s population is located ‘ many first time buyers, looking to get their feet on the first rung of the property ladder, found themselves competing against investors buying properties to rent.
New flats were being sold as quickly as they were being built, with comparatively few being sold to buyers who were actually going to live in them. A large proportion were being snapped up ‘off-plan’ by investors eyeing up rental income and capital appreciation.
A few months on in the autumn of 1996, the market was heating up to such an extent that annual price rises in the capital broke through the 30% a year barrier as property hunters scrambled to buy whatever they could lay their hands on.
In fact, investors started to convince themselves that the long established rental income equation no longer mattered because capital appreciation on the property was so high. They thought that while the mortgage may cost £800 per month, they could rent it out for less and still make at least 20% a year on their investment because of the property market’s growth. On flats worth £120,000, investors were confident of making £20,000-£30,000 a year on capital appreciation alone. Even cautious investors fearing an abrupt market readjustment, were willing take a long term view and put their money into the buy to let market.
More people entered the market as investing in property was viewed as a smart move if you had some money to spare. The growing band of new entrants spurred the market on to new heights and the Government decided it had to intervene.
If Ireland, at that time, had not been part of the Eurozone, its Government would have simply raised interest rates to slow the growth. However, by then the country had adopted the euro and was not able to set its own interest rates. In fact, the European Central Bank was actually cutting rates over this period, which encouraged people to put more cash into property.
All the Irish Government could do in the circumstances was to appoint a committee to produce a report on the subject. The report came to be known as the Bacon Report. A key recommendation of Bacon, and one that the Government swiftly implemented, was the abolition of tax relief on mortgage interest payments on buy to let mortgages. Almost overnight the mortgage interest an investor paid could not be set against income to reduce their net profit.
The move succeeded in slowing down the rate of growth, but it failed to halt it. People were still focusing on the asset appreciation of the property. The impact of the measure was also substantially diluted, as some people had neglected to declare their investment and had not been benefiting from the tax relief available to them.
Two years after the abolition of buy to let mortgage tax relief the market was still motoring ahead, as if nothing had been thrown in its way. The Irish Government had to take more stringent action. This time it did not stint and hiked stamp duty on buy to let properties substantially. This approach was much more effective in cooling the market. All of a sudden rates of return fell substantially.
The rise in stamp duty had the desired effect on house prices, rates of growth became less spectacular and many investors pulled out of the republic.
Some of them have now shifted their focus north of the border to Belfast, whereas in the rest of the UK, buy to let interest payments are tax deductible, with the result that Belfast has taken on something of the buoyancy that Dublin enjoyed a few years back. Belfast has been subject to investors from south of the border buying blocks of flats off-plan ‘ a similar pattern to Dublin during the mid-90s.
Across the border
Mainland UK has seen substantial numbers of Irish investors moving into the property market to benefit from more appealing conditions.
The Irish market has settled down since the hike in stamp duty and property appreciation is now at more sustainable levels.
The lesson to be learnt from the Irish experience is that we should watch out for a similar overheating of the British market. This is unlikely to be imminent, but UK Government ministers are concerned that the property market here is over-appreciating and that lenders should not be offering borrowers excessive income multiples.
A positive side of the growth in buy to let is that this country is no longer dependent solely on the first time buyer. When the property market all but collapsed in the late 80s, the problem was that first time buyers could not afford their mortgage payments.
Today, the first time buyer is up against landlords who see property as a good way of investing money. In the past, if you took away the first time buyer it meant that nobody else in the property market could move.
For this reason, the market is less susceptible to a crash and so the prognosis for the foreseeable future is very good with conditions being buoyant for at least the next two or three years.
Even if there is a steep economic downturn the rental sector could experience a boost by people no longer able to afford their mortgages. Meltdowns tend to occur when interest rates rise dramatically ‘ as they did during the late 80s ‘ with disastrous effects. However, back then there was not the ready supply of rented property there is today.
Repossessions may bolster the rented sector and, to the investor, lower property prices means a better yield on new property. So, oddly enough, a meltdown of the market may not be such a disaster. The investor’s short-term investment would go down in value, but time has shown that over the longer term it would bounce back. And in the meantime, benefits could be drawn from cheaper house prices.
This apparent win/win outlook does not mean that borrowers should view uncomfortable income multiples lightly. And the advisability of ‘non-status’ products, that enable clients to certify their own income, should be considered carefully.
With a degree of caution it is unlikely that the UK will repeat the Irish experience. Industry experts have been predicting the demise of the Irish property market since 1997 saying it was going to crash any day. But the crash has not happened yet.