It was for many years all too easy to get a buy-to-let mortgage and become a landlord but increased legislation, EPC ratings and the removal of tax incentives have seen many landlords abandon ship. However, it is the increase in interest rates which is cutting short many landlords’ buy-to-let journey. Despite passing on any increase in costs to the tenant via a rent rise, in today’s high-inflation fuelled market, this still may not cover it. On top of this, they then have to factor in any additional improvements needed to be EPC C ready for new tenancies in 2025 and existing in 2028. All this added instability has caused the current rental crises for buy-to-let landlords.
Many Landlords are prolonging doing work in the hope the policy gets jettisoned, which will cause further chaos if implemented, as we approach the deadline. Are they right to wait, and see? It all comes down to money. If you can’t afford it with the recent mortgage rates but could once, they come down, maybe. But I suspect further stock will be dumped, fuelling the current lack of supply crisis. Why? Because around 70% of landlords bought with a mortgage, aka future money as opposed to real-time money, so any investment into their asset is delving into those funds that might be supplementing income during the current cost of living crisis.
But what is making many landlords “yield” is the lack of a good yield. Despite rental prices soaring in September, they increased by 3.6% up from 3.4% the month before. Many Landlords, especially first-timers, bought with half an eye on capital appreciation, which generally is code for a low yield. The hope is, when it’s time to cash in, the property will have increased in value, offsetting the lower yield. For many, remortgaging the difference between borrowing at under 1%, which was the rate in 2017, to 5-6% now, means the numbers just don’t stack up, so they are faced with selling in a downturn, which is far from ideal.
London rental market
London is most at risk as central London yields typically sit around 3-4% making them vulnerable to quick-fire sales. This would lead to a decrease in rental stock in the very city that’s the most in need.
The city’s change in fortunes has been erratic. During the pandemic, landlords couldn’t evict non-paying tenants, and many reduced rents or took mortgage holidays to survive. As offices, colleges and the young returned, rents soared. But just as there was a glimmer of sunshine, a large cloud of inflation came in, causing the current unaffordability crisis for both tenants and landlords.
What caused the rental crisis?
Right to buy was introduced into the housing act in 1980. This gave social housing tenants the opportunity to buy their home at a discounted rate if they had lived in the home for 3 or more years. This drive to make Britain a “nation of homeowners” backfired though when the Government neglected to restock the property shelves, whilst the population multiplied. Having sold off their assets at a discount, they found rebuilding them to be more expensive. So, to bolster the dwindling number of UK rentals, the Government decided to incentivise the buy-to-let market with tax incentives.
Aided by cheap borrowing, many homeowners who were looking for alternatives to their pension, took up the mantle of landlord.
With all of the gear and no idea, problems arose when fair-weather landlords, looking to make a quick and easy buck, realised they had to maintain their asset in order to appease their tenants. Resentful, of the hassle they ignored or delayed in the hope they’d give up, for years, some got away with this approach but as legislation tightened their ability to look the other way became harder.
Fast forward a few years and the Government was now under pressure to stop landlords from snapping up stock from wannabe homeowners, so having reeled investors in to plug the rental market gap they then distanced themselves, by changing the rules. Abruptly at first, with a 3% stamp duty surcharge to second homes in April 20216 and then more gradually as the percentage of finance cost deductible from rental income reduced from 2017 to 2020 to 0%. No more could landlords offset mortgage payments and costs against tax unless they registered as a limited company and so began the gradual exodus.
This, on top of years of speculation about further reforms which some welcomed whilst others skimped on, guarantees or protections for landlords, meant the outlook on the buy-to-let market shifted.
Landlords are an entity we love to hate but without them, the current rental crises will be a lot worse. Yes, more homes are desperately needed but given how high inflation is, it’s unlikely builders will build with any vigour till it recedes. So, let’s remember not all landlords are bad, many haven’t increased rents to current levels with existing tenants as they want to help. As for those abusing the system, let’s hope the new PM and his cabinet will work both with tenants and landlords in this time of economic crisis, to turf them from the market, leaving those who understand a buy-to-let is not only an investment but also a home for someone.
First printed in the Property Reporter here