Alan Cleary - Managing Director of Precise Mortgages
Landlords have had a bumpy ride over the past three years what with the introduction of the stamp duty surcharge and the phased loss of tax relief, but they’ve proved a resilient bunch.
The latest English Housing Survey1 from the government, published in late January, showed that the proportion of households in the private rented sector has not changed for five years. In 2017-18 the private rented sector accounted for 4.5 million - equivalent to 19 per cent - of households in the country. This is double the size of the private rental sector in 2002, but is a proportion that has remained steady since 2013-14, despite the challenges set in front of landlords.
It’s interesting timing as 31st January was the first time landlords had to file their self-assessment tax returns to include a 25 per cent reduction in tax relief on their buy to let mortgages. It’s also the first time that this reduction will have resulted in a bigger tax bill to pay.
In other words, the crunch on landlords is beginning to bite.
While we deal with mainly professional and portfolio landlords, we are aware of there still being a contingent of smaller scale landlords who hadn’t fully accepted that their finances were about to change. Presumably now, reality will have hit home.
This is likely to prove a kick for those landlords who are still to adjust to the new market dynamics. It’s funny how the loss of cool hard cash can focus the mind. This year’s tax return will have included the loss of just 25 per cent of their relief; it’s going to get worse from here on in.
We would expect there to be a further sell-off of properties, largely in areas of the country where capital values remain high and yields are harder to maintain with the loss of relief.
But this is no bad thing. The property market suffered back in 2008 when a flood of buy to lets hit estate agents’ books as amateur landlords sold out, often at a loss, following a boom in buy to let lending and inner city developments built specifically to cater to landlord demand as opposed to tenant demand.
This time around is not like that. For a start, tenant demand is strong across the country, supporting the commercial argument for continuing to be a landlord. Capital values are softening in London and the South East, but house price inflation continues to be positive further north where capital outlays are lower for new investors. Affordability criteria is sensible and builds in more than a sufficient buffer, even should the ongoing Brexit negotiations (or lack thereof) depress economic growth in the UK this year.
We are seeing a redeployment of capital in the private rented sector; not the end of buy to let.
Professional landlords are reshaping their portfolios, spreading capital more evenly to bring down portfolio loan-to-values and minimise mortgage costs. Use of other income is increasingly incorporated into affordability calculations to allow landlords more flexibility on how and where they use their capital.
They are seeking out more profitable properties to replace those that have been or are being sold. Semi-commercial, multi-lets and houses in multiple occupation have seen a big uptick in popularity over the past couple of years.
Limited company buy to let has dominated the purchase market for obvious reasons, something we expect will continue this year and next.
It may sound contrary to the lending figures coming out of UK Finance2, which show a drop in the number of new purchase buy to let approvals in November, but the buy to let market in this country is growing. Perhaps not in size, but in maturity, its development is undeniable.
With headlines claiming the imminent demise of buy to let, it can be easy to worry that the market is dying a slow and painful death.
Nothing could be further from reality. Markets go through phases, just like people. Buy to let was born only 20 years ago. Quite rightly, it’s learning to be more grown up. That is not only good for landlords, it’s also good for lenders, brokers and stability in the wider market.
Source: 1 https://www.gov.uk/government/collections/english-housing-survey