Property Prices Due to Increase in 2006!

1st October 2005

T. Wyn Jones

Forecasts indicate a significant increase in property prices in 2006 due to the introduction of the new rules governing Self-Invested Personal Pensions (SIPPS).

Buy-to-let mortgage specialists are predicting a 3 billion-pound boost to the property market next April when the new rules come into effect. The new rules will allow SIPP investors to put residential property, both in the UK and abroad, into their pension scheme where both the rental income and capital gains will be shielded from tax.

In addition, I am advised, investors can obtain tax relief on contributions to the SIPP of up to £215,000 a year or 100 percent of their income, whichever is the lower.

The buy-to-let market accounts for some 20 billion pounds of lending a year so a 3 billion-pound increase is significant and could add further fuel to the house price increases we have seen these last few years.

Reports are of a flood of enquiries from smaller investors attracted by the big tax breaks available when the new rules come into effect in April 2006, I certainly have seen an increase in the number of property valuations I have carried out for such pension schemes.

However, this influx in buyers coupled with the limited supply of the smaller & cheaper houses (those thought to be more attractive to the “buy to let” pension schemes) will ultimately result in an increase in house prices placing the lower price end of the housing stock further out of reach of the local first time buyers.

If this process is taken to the nth degree we may find ourselves in the position we were in years ago in that the more properties that are bought in this way the greater the supply of rental property. If other dynamics remain the same this increase in supply will result in a corresponding decrease in market rent. As the market rent decreases so the rental market becomes increasingly appealing to the individual. The end result? Proportionally fewer people owning properties.

As to whether this scenario occurs and we revert back to what is the norm for the rest of Europe for percentage per capita of home ownership I do not know. But if this does occur it may mark the end of what is now the great British preoccupation with property prices and home improvements with associated spin off publications & television shows.

Thank goodness I hear some people say.