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As the Wealth Gap Widens, the Buy to Let Market Grows.

Why is it a problem if the buy to let market grows?

Buy To Let Market Grows

Despite efforts by the UK Government to help first time buyers get on the property ladder the buy to let market grows and thrives. People with extra disposable income often see property as a safer investment than private pensions, stocks and shares, gold or art, thus they increase demand for property that they can invest in.

Property investment provides two benefits and this is why the buy to let market grows even when economic forecasts are less rosy. Firstly, property prices tend to rise faster than the rate of inflation, this has been the case over the last twenty years in London and the UK. This means that the promise of an increased return on investment pushes up demand for additional property from homeowners and investors as the buy to let market grows.

As the buy to let market grows, first time buyers find it harder to afford property, trapping them in the private rental market. As demand for private rented property grows, rental prices increase which is seen as a direct link as the buy to let market grows.

Can prices fall as the buy to let market grows?

An economic recession is one way that house price rises may be curtailed or reversed. Another is a rise in interest rates that make mortgages more expensive and put off buyers looking for property as the buy to let market grows. If demand no longer matches supply, house prices may fall as people look to sell their homes.

It is also likely that if house prices fall, it may intensify interest from property investors, which means that it will remain difficult for first time buyers to complete house purchases.

What are the dangers if the buy to let market grows further?

If the buy to let market grows to the point where the Government seeks to act to reduce its size and transfer power within the housing market back to homebuyers rather than property investors, there would be a threat to how the buy to let market grows. This could be done through increasing stamp duty on buy-to-let properties, increasing tax on rental profits or even limits on how many properties can be owned by individuals or businesses linked to individuals.

If the government takes action by incentivising buyers, it could raise demand as the buy to let market grows rather than instead of its growth. This would be more likely to cause house price inflation and fuel further demand, meaning the buy to let market grows even faster. This is one of the reasons why the Help To But ISA has failed to help alleviate the problem of first time buyers being priced out of the market in the UK and in London in particular. Further help to buy schemes have also been scrapped because they have proved ineffective as the buy to let market grows on unabated.