Over recent years, as successive governments have tightened lettings legislation and increased the tax burden on landlords, some with investment properties have seen their profits reduce. And now, with the cost-of-living crisis, mortgage rates at their highest level for well over a decade and the Renters (Reform) Bill making its way through Parliament, some landlords are understandably beginning to wonder if it’s still worth having a rental property.
That decision is a very personal one, which will depend on:
If you went into buy to let with the intention of holding the property for the long term, it’s likely that property will still deliver good returns over time versus, or alongside other types of financial investment. So, if you’re not dependent on a certain level of monthly profit, it may just be a case of riding out any short-term reduction in cashflow.
How are prices and rents doing?
As far as rental income is concerned, the figures are currently robust. Average rents are continuing to rise in most areas, and year-on-year increases have once again hit record levels since the series began in 2006.
For the 12 months to May this year, ONS data shows:
And data from Zoopla shows that rents for new lets increased by 10.4% in the year to April (9.1% excl. London).
But will and can this level of growth continue? Average UK rents as a percentage of earnings are now at their highest level for more than a decade (28.3%, versus a 10-year average of 27%), nevertheless, more than half of renters are reporting that paying their rent is ‘somewhat’ or ‘very’ easy, with only 15% saying that it’s ‘very difficult’. In addition, spending 30% of earnings is considered affordable, so ‘on average’ there is still some room for rents to rise more, but this is very location specific.
As a result, we’re expecting rental growth to slow, but certain not stop – particularly given the ongoing chronic shortage of supply versus demand in most of the UK.
Looking at average property prices, although Zoopla reported in June that sellers were having to accept offers that were, on average, 3.8% below the original asking price, we have to view that in the context of the excellent house price growth that we’ve seen over the past few years. Rightmove has reported that asking prices went up by 6.3% in 2021 and by another 5.6% in 2022, and their data for the last five years shows the average asking price has increased from just under £310,000 in June 2018 to around £375,000 in June 2023. So, even with prices predicted to fall by up to 5% by the end of 2023, most landlords should have seen good enough growth since before the pandemic for that not to be an issue. And, of course, property investors have to appreciate that the market has cycles and doesn’t just keep going up without a break!
So, in terms of rental income and capital appreciation, the figures look good, but what’s certainly proving an issue for many landlords is increased expenditure. General inflation means the cost of maintenance, repairs and other goods and services relating to the operating of rental properties have risen, and those who have buy-to-let mortgages will either already have seen monthly payments increase or will do when they next refinance.
That said, around 40% of landlords own all their properties outright, while a further 24% own some outright and others with a mortgage. Only a third have mortgages on all their properties (money.co.uk). The same report suggests that the average non-portfolio landlord has mortgage borrowing of around 55%, while it’s just 44% for landlords with four or more properties - and with that kind of equity, landlords should be able to access relatively good interest rates. And our own Landlord tracker revealed in June that Landlords remain generally positive about the market: 68% plan to maintain their portfolio and 6% plan to expand it.
So, broadly speaking, even though mortgage rates are currently rising, the majority of landlords may not find their profits too badly impacted.
What about the Renters (Reform) Bill – is it bad news for landlords?
Our view is that the vast majority of landlords, who already let in a very professional manner and look after their property and tenants well, shouldn’t be negatively affected as and when the Bill passes - assuming the contents doesn’t change much. And this has been reinforced by our own Landlord research which suggests that “The majority said that the Renters Reform Bill not affect their approach to property investment. Asked ‘Will the bill change your approach to property investment?’, 40% said ‘no’, compared to 33% who said ‘yes’ (27% are currently undecided).”
There will be a fee for signing up to the Ombudsman and the new portal, but the Government has made assurances this will be ‘proportionate and good value’. And we don’t anticipate the other changes – even the removal of Section 21 evictions – will make a huge difference to landlords, who rarely choose to evict a tenant without a good reason, and that’s still going to be possible under strengthened Section 8 grounds.
But if you are still unsure whether to hold on to your rental property/ies or sell up, here are five steps that should help you make a decision:
Of course, regardless of what’s happening to average prices and rents across the UK, local markets can vary wildly – even from one end of town to the other. So, before making any decision, we’d recommend you speak to local property experts, such as the team in your local branch, to understand exactly what’s happening in the immediate area and what we believe is likely to happen to the rental market over the coming months.
Looking for advice?
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