A tax break that will encourage more investment in buy-to-let properties could prevent first-time buyers from getting on to the housing ladder, the government was warned on Thursday.
From April, investors will be able to include residential property in self-invested personal pensions (Sipps). Properties invested in a pension will qualify for tax relief of 22 per cent for basic rate taxpayers and 40 per cent for higher rate ones.
But on Thursday Shelter, the homeless charity, and the Affordable Rural Housing Commission, a government watchdog, ,joined the criticism warning that the new pensions regulations could cause a boom in second home ownership.
People in rural areas were being driven out of the housing market by prosperous urban migrants who "often mop up vital rural housing and drive astronomical prices rises", Shelter said.
The group added: "The new self-invested personal pension scheme risks worsening an already dire situation by providing financial incentives for people to buy second homes."
The rules will make it easier for well-off people who may already own residential property to accumulate more. Critics say this will put pressure on first-time buyers struggling to enter the property market. First-time buyers have fallen from 50 per cent to 28 per cent of purchases - a record low.
Elinor Goodman, a journalist who chairs the Affordable Rural Housing Commission, said: "On the face of it, it does seem contrary to the idea of trying to keep prices down in the country."
Her report, due in March, is likely to raise the prospect of parts of the country introducing sales controls in an an attempt to limit sales of property to local people - a measure already introduced by some national parks. But concerns are not confined to rural areas, with prices across the country at a record level of six times average earnings.
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Union leaders have also attacked the extension to Sipps. Tony Woodley, general secretary of the Transport and General Workers' Union, said that it was "totally unacceptable" to give wealthy people "billions" in tax relief while thousands of workers went without pensions.
There is already about £13bn invested in Sipps and that is growing by £3bn a year. If even half of Sipps investors put their money into residential property, that could mean billions of pounds flooding the property market once the new rules take effect.
Standard Life, Europe's biggest mutual life assurer, this week reported huge growth in demand for Sipps.
John Lawson, technical manager of pensions at Standard Life, said Sipps sales had risen from £15m in the first six months of last year to £60m. "We have seen a lot of interest in Sipps from financial advisers who say their clients want to invest in residential property. It seems to be existing buy-to-let investors who want to buy more properties through their pensions," he said.
Ronnie Ludwig, partner at accountancy firm Saffrey Champness, believes the changes could lead to a property spike next year with prices rising rapidly for a short period.
"It is estimated that £11bn will go into the property market through Sipps when the new rules come in next year and this will obviously have an affect on property prices, even if it's just in the short term," he said.
"People have become disillusioned with traditional investment methods and turned to bricks and mortar for their pension investments. The new tax breaks will encourage more people to put their money into property," said Mr Ludwig.
Other experts are highlighting the constraints on Sipp investments that could restrict demand. Investors will be able to borrow a maximum of only 50 per cent of their pension fund value towards buying a property, for example. All rental income from a buy-to-let held in a Sipp will have to be put in the pension fund.
Meanwhile, ministers are set to make a separate decision on whether to allow property companies to become real estate investment trusts, a type of tax-efficient investment vehicle.
