Speaking this morning at Financial Services Expo London 2015 in Old Billingsgate, Faulkner reckoned that currently around 30% of landlords buy with cash. However she said many of them will struggle to make healthy returns without gearing the investment – she declared that advisers telling people to buy with cash are giving poor advice.
Faulkner said buy-to-let only makes sense compared to other investment classes based on returns from capital growth, although she warned that growth may slow in future as the government looks to curb price inflation.
She said: “Buy-to-let works because you gear the investment full stop. There shouldn’t be 30% of landlords owning property with cash. Yes buy with cash initially, get the deal of the century, get the property in good order then mortgage it.
“If somebody has bought with cash they will have had some great growth initially but in my view it restricts their ongoing growth and I don’t think people understand that.
“In some areas like London you will get far more money out of putting your money through a financial adviser. Yes you’ll get some capital growth but if it’s income you’re after that property is not going to deliver that much to you.”
Faulkner gave advisers a reality check, admitting that buy-to-let clients could find it harder to make money going forward with a lack of stock and capital growth.
She also spoke of a ‘catch 22’ where the most lucrative areas to invest in from a capital gains perspective will see landlords encounter negative cash flow before reaping the rewards – especially with the crackdown on tax relief for higher rate taxpayers occurring from 2017 to 2020.
Even though house prices in Liverpool and Sunderland still stand around 30% below levels from 2007 she didn’t envisage increases any time soon – although she admitted she would be tempted to buy in Cambridge as an investor, where the economy is booming.
She added: “My concern moving forward is that house price inflation won’t continue at the rate it has in the past.
“There is a mood in government that big house price increases aren’t the best thing in the world and that’s reverberated around the industry as well so there are moves to control that.
“Actually somebody has decided that we do have a housing crisis and we better go and build some more.”
She said: “The more lucrative areas are rubbish at yield so the danger is they will end up going cash flow negative for a higher rate taxpayer so we’re in a bit a catch 22.”
On the mortgage tax relief changes Faulkner said they will hit pensioners the hardest because of the age of the typical buy-to-let landlord, while she feared a deeper tax relief crackdown in the years ahead.
She added: “We have to remember that buy-to-let is 20 years old. There’s a huge number of landlords who are over 55.
“If the government decides to take the other 20% tax relief away… that’s going to effectively hurt pensioners.”