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The future of the London Buy-To-Let property market: Simulation with temporal Bayesian Networks
Anthony C Constantinou1, Norman Fenton1
1Risk and Information Management (RIM) Research Group, School of Electronic Engineering and Computer Science, Queen Mary University of London, London, United Kingdom.
Plos One
|June 28, 2017
Summary
UK tax reforms negatively impact Buy-To-Let (BTL) profits, especially for leveraged investors. While challenging, BTL investments in London may remain viable with moderate interest and capital growth rates.
Area of Science:
- Real Estate Investment
- Taxation Policy
- Financial Modeling
Background:
- UK government introduced significant tax reforms for individual landlords starting in 2017.
- These reforms aim to adjust the tax landscape for the Buy-To-Let (BTL) sector.
- Widespread concern exists that these changes could signal the end of BTL as a viable investment strategy.
Purpose of the Study:
- To evaluate the future performance of London-based Buy-To-Let (BTL) investments from an investor's viewpoint.
- To analyze the specific impact of the new tax reforms on BTL investment profitability.
- To model the uncertainties and investor interventions within BTL portfolios over time.
Main Methods:
- Development and application of a novel Temporal Bayesian Network model.
- Simulation of changing market circumstances and investor actions at various time-steps.
- Assessment of prospective BTL investment performance under different scenarios.
Main Results:
- New tax reforms are projected to reduce net rental income profits.
- Risk-seeking investors utilizing leverage are disproportionately affected compared to risk-averse investors.
- Rising interest rates exacerbate the risk of loss-making returns, excluding capital gains.
Conclusions:
- The tax reforms present significant challenges, potentially making landlord roles less desirable or non-viable for some.
- Despite reforms, BTL investment prospects in London are likely to remain positive within a reasonable range of interest rate and capital growth variations.
- The current trend of London property prices rising faster than rents is unsustainable and will likely necessitate adjustments in either capital growth or rental income rates, or a combination thereof.
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