An opinion-piece in Bloomberg echoes what many pundits are saying about the Buy-to-Let market in Britain. Summary –
The property market, especially the buy-to-let sector, has long been a go-to investment option for many in the UK. The allure of passive income, property appreciation, and the dream of being a landlord has drawn countless investors. But as recent trends and data suggest, the golden days of buy-to-let may be behind us.
A Skyrocketing Rental Market
At a cursory glance, it might seem like the buy-to-let market is flourishing. The latest report from Hamptons indicates an impressive trajectory for rental rates. Newly let UK properties have witnessed a significant 12% hike year-on-year in August, marking a staggering 30% increase since the pandemic’s onset. These rates far outpace the rate of inflation and exceed the average annual rise seen in the three years before 2020. In such a landscape, one would assume there’s a stampede of investors wanting to be landlords.
The Twist in the Tale: Landlords Exiting
Contrary to these rent rise figures, there’s an unexpected phenomenon unfolding. According to the National Residential Landlords Association (NRLA), an unprecedented number of buy-to-let investors are contemplating selling. Statistics from the Financial Conduct Authority mirror this sentiment: in the second quarter, new buy-to-let mortgages comprised only 8.1% of the market, a drop of 40% from the same period the previous year.
Reflecting on Buy-to-Let’s Heyday
To truly understand this shift, we need to rewind to the era when buy-to-let investments were the talk of the town. The allure was straightforward:
- Purchase Strategy: Secure a property using a reasonably priced mortgage.
- Rental Income: The rent charged would cover the mortgage, maintenance costs, and still leave a tidy sum.
- End Game: After about 20 years, you would effectively own a property having paid little more than the initial deposit. Plus, any capital gains during this period were icing on the cake.
The primary goal for these traditional investors was breaking even year-on-year, leading to virtually owning a property outright in the long run.
Present Day Hurdles
The simplicity and allure of the past stand in stark contrast to today’s challenges.
Mortgage Woes
Interest rates have become a prominent thorn in the side of potential investors. The current two-year buy-to-let fixed rate stands at 6.54%, nearly 2% higher than just a year ago, as reported by Moneyfacts. Those who took mortgages when the base rate was a mere 0.1% (November 2021) face the brunt of refinancing in today’s 5.25% scenario.
Tax and Regulatory Pressures
Then there’s the tightening grip of the taxman. A few years ago, an interest rate hike wouldn’t have been as painful, given the generous tax reliefs on mortgage payments. These reliefs are now memories of the past. As a result, landlords now wrestle with surging tax bills and dwindling cash flows.
Regulations, too, have become trickier. Evicting problematic tenants can be an ordeal, sometimes stretching over six months. The push for environmental compliance adds to the burden. The mandate for properties to have at least a C rating on their Energy Performance Certificate (EPC) has left less than half of all landlords compliant. Meeting these standards, especially for older properties, demands hefty investments.
Additionally, new wealth taxes have been introduced. There’s an added 3% stamp duty on purchases and an extra 8% non-indexed capital-gains tax on sales.
The Scottish Scenario and the Rent-Control Spectre
Scotland’s rental landscape offers a cautionary tale. Though new lease rents have surged by 13.4% in the past year, it’s not merely due to good fortune. Stringent rent controls in Scotland cap annual rent hikes for existing tenants at 3%. Such measures make landlords wary of the market and eager to maximize rents between leases. The result? Buy-to-let acquisitions in Scotland have plummeted, and rents have soared by 43% since the pandemic began.
With the Labour party not showing any particular affection for landlords either, there’s palpable apprehension about potential nationwide rent controls and alignment of capital-gains tax rates with income tax rates.
Property Prices and Mortgage Arrears
To add to the complexities, house prices are no longer the stable giants they used to be. In August, there was a 5.3% annual dip in house prices, as per Nationwide’s data. Concurrently, the Bank of England highlights a concerning trend of rising mortgage arrears — up by almost 30% from last year. This uptick, despite representing just over 1% of the total, hints at potential future turbulence.
Looking Ahead
For decades, the potent mix of low-interest rates, manageable regulations, and consistently soaring house prices rendered buy-to-let investments irresistible. But today, the terrain has shifted. As landlords reconsider their positions, this change has profound implications, not just for them, but for tenants as well. Amidst these shifts, one can only hope that policymakers take note and navigate a path beneficial for all stakeholders in the property market.