Analysis by property advisors CBRE suggests that one in ten landlords may sell up by the end of 2023.
1. Reduction in Rental Properties
Their report suggests that the UK rental market is expected to lose about 10% of rental homes by the end of 2023 if landlords continue to sell their properties at the current rate. Since 2022, 127,000 properties have been lost, and between 2016 and May 2023, a total of 400,000 properties have been sold off by landlords.
2. Reasons for Selling
Why are landlords selling? There are several factors:
- High Mortgage Costs: Paying back the loan for the property is becoming more expensive.
- Tax Rises: Changes in tax policy have led to more tax being paid when purchasing rental properties and on rental income itself.
- Increasing Regulations: New rules and requirements make owning and managing rental properties more challenging and costly.
3. Impact on Rent Prices
With fewer rental properties available, the demand may outpace the supply. This imbalance is contributing to rising rents, and it could accelerate further as landlords continue to leave the market.
4. Challenges with Mortgage Interest
Previously, landlords could claim full tax relief on mortgage interest payments, but that changed in 2020. Now, with rapid inflation leading to higher interest rates, many landlords find it more difficult to meet the banks’ lending criteria for remortgaging.
- Interest Coverage Ratios: These require the rent from tenants to cover 125% to 145% of the loan’s interest. As interest rates rise, the rent needed to cover these costs also rises, squeezing both landlords and tenants.
5. Affordability for Tenants
Tenants are finding it increasingly difficult to afford rent. On average, renters in the UK spend 32% of their salary on rent (37% in London), and the industry recommends that this should not exceed 40%. The average rent for newly let properties has also risen by 9.3% in the past year.
6. Dilemma for Landlords
Landlords are caught in a tough spot. Some can’t raise the rent enough to cover the new mortgage rates, so they feel forced to sell, making their business no longer viable. This also leads to difficulties for vulnerable people to find places to live.
Conclusion
For prospective investors, this highlights a complex and challenging environment in the UK rental property market. The combination of rising costs for landlords, tax changes, and increasing regulations is leading to a decline in available rental properties. This, in turn, is causing rents to rise and putting pressure on both landlords and tenants.
Investors looking to enter or expand in this market should carefully consider these dynamics, consult with property investment specialists, and perhaps seek opportunities in areas where these challenges might be less pronounced. It could also be a chance to find value in a market in flux, but caution and expert guidance would be advisable.