UK Buy-to-Let Housing Market Sector to be Hit by Housing Benefit Cuts

Housing-Market / UK Housing Jun 29, 2010 - 09:35 PM GMT

Best Financial Markets Analysis Article The ConLib coalition government's emergency budget intention is to lower the cap on housing benefit payments from £1000 to £400 per week (£20,800 per year) in an attempt to address the rampant and out of control fraud that takes place that runs in the several billions per year which is likely to hit the buy-to-let sector as the £400 weekly cap will force landlords to cut rents charged and thus act as a disincentive to invest in the buy to let sector.

Housing benefit costs Britain a huge and unsustainable £21 billion per year and it is the new governments intention to reduce this initially by £2 billion. However this in my opinion marks just the first phase that aims to cut the benefit by at least 1/5th or £4 billion per year.

Many people reading this will be shocked to learn that the housing benefit payment caps are so high, after all £1000 per week amounts to £52,000 per year for one benefit, which is more than than the total earnings of 90% of workers. Ridiculously high housing benefit payments also act as a DISINSENTIVE to work as those in receipt of housing benefit even at half the old limit £1000 per month would need to earn salaries in the region of £75,000 per year to result in a net income that matches their total benefits take.

An example of the impending impact on the buy to let sector was recently presented on Channel 4 News, the case of a single parent who chose to live in Islington (London) who was in receipt of housing benefit of £583 per week towards a rent of £690 per week. The sob story was that the single parent family could not afford to live in the £690 per week house in Islington if housing benefit were capped at £400 per week, this despite the fact that over 90% of hard working tax payers who are NOT in receipt of housing benefit ALSO cannot afford to live in a £690 per week rental property.

Clearly the answer here as is likely to occur across the UK rental market is for the person to move to a property within the persons means or seek to gain employment that is better able to afford a rent of £35,580 per year.

Whilst many in the buy to let sector have gorged on an out of control and easily defraudable housing benefits system during Labours inept reign, the answer is clearly NOT for the state to continue to step in and provide a huge £30,316 in housing benefits alone which is MORE than most peoples total annual earnings.

Another measure announced in the emergency budget is to cut housing benefit by 10% for those that have been on job seekers allowance for more than 1 year from 1st April 2013 that will cut approx £200 million per year, the aim of which is to pressure the recently unemployed from becoming long-term unemployed.

Therefore the ConLib governments housing benefit cuts will impact initially on the high end rental market by means of acting as a significant measure for driving private rental yields down as more properties become vacant as housing benefit claimants are forced to move to lower rental properties and thus this will exert downward pressure on house prices as the total receipts of the buy to let sector will contract by approx £2 billion and thus will act as a catalyst for a number of buy to let investors to sell especially as potential returns will already been reduced by the rise in the Capital Gains Tax from 18% to 28% which acts as a disincentive to invest.

This analysis is part of a series that will culminate in a multi-year UK house prices trend forecast that will seek to more than replicate the original 2 year bear market forecast of August 2007 made right at the very peak of the UK housing market (22 Aug 2007 - UK Housing Market Crash of 2007 - 2008 and Steps to Protect Your Wealth ), which also builds up on the 100 page Inflation Mega-Trend Ebook of Jan 2010 (Free Download Now), which contained the following UK housing market analysis (updated graph):

UK Housing Bear Market Election Bounce

The UK housing market peaked in August 2007 and entered into a 2 year bear market exactly as forecast at the time (22 Aug 2007 - UK Housing Market Crash of 2007 - 2008 and Steps to Protect Your Wealth ), analysis which projected towards a fall in UK house prices from August 2007 to August 2009 of between 15% and 25% that has subsequently came to pass as UK house prices bottomed in March 2009 after having fallen by 23% from the 2007 peak.

The UK housing bear market has experienced a strong bounce off of the March 2009 lows and now stands up approx 10% off of the low as a consequence of unprecedented measures as mentioned in this ebook, the Labour government has succeeded in temporarily bringing UK house price falls to a halt and triggering an Election Bounce.

The impact of the inflation mega-trend on the UK housing market will be for UK house price to be supported in nominal terms, however this it does NOT ignite the feel good factor that triggers housing market booms which only follow when house prices begin to significantly rise in REAL terms i.e. after inflation.

Whilst the current corrective bounce looks set continue into the middle of 2010 (allowing for a potential one month blip as a consequence of the bad January weather), this rally is still seen as a correction within a housing bear market that is expected to remain in a depression for many years, before house prices succumb to the effect of the inflation mega-trend and start to rise.

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Comments and Source: http://www.marketoracle.co.uk/Article20716.html

By Nadeem Walayat

http://www.marketoracle.co.uk

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on UK inflation, economy, interest rates and the housing market and he is the author of the NEW Inflation Mega-Trend ebook that can be downloaded for Free. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 500 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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Comments

03 Jul 10, 01:00

Housing Benefit and the Emergency Budget of June 2010

Dear Nadeem Walayat,

I was interested to read your post on the budget, UK Buy-to-Let Housing Market Sector to be Hit by Housing Benefit Cuts, and was glad to see you had covered the issue of the housing benefit changes. I thought you might be interested in a full analysis we are publishing today of the budget measures related to housing benefit.

Our paper, Housing Benefit and the Emergency Budget of June 2010, can be downloaded for free from our website:

http://www.bshf.org/published-information/publication.cfm?thePubID=8EE7CD39-15C5-F4C0-998147558D33B53E

The (very) short version is that we think it's right that the government looks at the UK's system for providing support with housing costs, but we think there are some very significant risks in the particular measures that were announced in the budget. The system ought to ensure decent housing is affordable by all in society whilst managing the long-term public expenditure, and the measures risk harming both objectives.

Do feel free to post about this and to share the link with your readers, or to get in touch with me if you have any queries about the work.

Kind regards,

Jim

Jim Vine MCIH

Head of Programme (UK Housing Policy and Practice)

Building and Social Housing Foundation

Memorial Square

Coalville

Leics

LE67 3TU

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