According to the national accountancy group UHY Hacker Young, there has been a striking exit of landlords from the UK property market. The year leading up to April 5, 2023, saw the sale of an additional 151,000 buy-to-let and holiday homes. This movement is not a sudden impulse but part of an emerging pattern that has seen landlords progressively stepping away from their investment properties.
Rising Mortgage Rates and Declining Profitability
The profitability of buy-to-let properties has diminished substantially for many landlords in recent times. Neela Chauhan, a Tax Partner at UHY Hacker Young, highlights soaring mortgage rates as a central cause. Consider the average five-year fixed-term buy-to-let mortgage rate, which stood at a mere 1.72% at the end of 2021. Fast forward to the end of September 2023, and it has leaped to 5.55%. This steep rise in mortgage costs has squeezed landlords’ returns, sparking a reevaluation of the viability of their investments.
Taxation Changes Tightening the Noose
Tax changes have exacerbated the situation. Previously, landlords enjoyed the ability to deduct mortgage interest and other finance costs from their rental income, thereby reducing their income tax burden. However, a pivotal rule change in 2017 phased out these deductions, culminating in their replacement by a flat 20% tax credit on mortgage interest payments. This revision has coincided with the upsurge in mortgage interest rates, doubling the financial strain on landlords.
Chauhan points out that the “increase in interest rates has hit UK landlords incredibly hard,” with many questioning the sustainability of their investments. Some have already exited the market in response.
The Ripple Effect on Renters
The exodus of landlords and the sale of buy-to-let properties have broader implications. As Chauhan notes, tax changes have not only tightened the screws on landlords but also on renters. As landlords retreat and the available property pool shrinks, renters find themselves in an increasingly competitive and costly housing market.
The Financial Aftermath
This trend is mirrored in the capital gains tax figures, with HM Revenue and Customs (HMRC) reporting £1.8 billion paid on the sales of buy-to-let properties from April 6, 2022, to April 5, 2023. Moreover, the sales numbers have surged post-pandemic, from 98,000 in 2020/2021 to a staggering 153,000 in 2021/2022, barely dipping in the past 12 months.
Cost-of-Living Crisis and Rent Arrears
As if to add insult to injury, the cost-of-living crisis is influencing tenants’ ability to pay rent, exacerbating landlords’ challenges with increasing rent arrears. Subsequently, the number of evictions sought by private landlords has soared by 42% to 87,390 in the year to the end of June 2023.