Buy to let landlords need to take into account changing market dynamics, says new report

The buy to let market in the UK is likely to continue facing challenges in the next few years before regaining strength around 2021, according to a new forecast report.

London is no longer the best location for landlords and buy to let investors should carefully consider the latest changes in taxation when evaluating their next steps, according to the analysis from Shawbrook Bank.

It points out that after strong growth since the financial crisis until 2015, the number of buy to let mortgages for house purchases has dropped over the last two years. ‘Both the wider slowdown in the housing market as well as a number of government interventions have had an impact on the sector,’ it explains.

It also points out that demand for privately rented accommodation is expected to increase further in coming years while the buy to let sector moves towards further professionalisation and sustainable financial lending practices.

It adds that a number of major changes, the introduction of a 3% stamp duty surcharge on second homes in April 2016, the gradual phasing out of the tax deductibility of mortgage interest payments starting in 2017 and the tightening of mortgage underwriting standards following a consultation by the Bank of England’s Prudential Regulation Authority, have all had an impact.

It suggests that the ‘substantial’ changes in the tax code as well as the tightening of underwriting standards have contributed to the decrease in buy to let mortgages taken out, but adds that a cooling of the market would have happened regardless as the buy to let sector is closely linked to the wider housing market which is facing more tepid price growth and a regional decrease in transaction levels, especially in areas where affordability ratios are stretched such as in London.

‘Nevertheless, transaction levels have been noticeably lower since the introduction of the stamp duty surcharge. The change in mortgage interest tax relief will make buy to let investments for a large number of private investors less profitable, an effect that still has to fully play out as the tax relief is withdrawn gradually over the next years,’ the report adds.

The forecast suggests that buy to let market activity will further drop, though at a slower pace compared to the last two years. ‘Given a generally weaker housing market and the numerous government interventions we predict that transaction levels will fall to around 57,500 by 2023,’ it points out.

‘While the effect on overall house prices should be rather small, we expect yields to be higher compared to a scenario where the tax changes were not implemented, given that the lack of housing supply generated by buy to let landlords should drive up rents,’ it explains.

‘The good news is that the professionalisation of the sector and more sustainable lending practices are likely to have positive effects in the long run. Given that the PRS will play an increasingly important role in the UK’s tenancy mix, there is still a market for BTL landlords with a sustainable business plan and a good understanding of the legal and tax implications,’ it says.

It says that investors need to take on board that the regional focus of the sector is shifting. With its larger demand for PRS housing, London has long dominated the buy to let sector but a flat housing market and limited capacity for rental growth in the capital means that other places in the country offer better yields to investors, especially cities with large student populations.

It points out that Brexit adds a further layer of uncertainty with a number of City jobs at stake, so London’s housing market might be in for a further price correction while a clear drop in European Union immigration is already discernible in the data, translating into lower demand in the PRS.

‘We predict a downward trend in London, due to the challenges facing the professional investor and landlord community and their focus moving to building and maintaining a strong yield performance. This has led to a geographical shift in activity towards lower appreciating asset values that hold a higher yield, and a subsequent flight to regional areas that meet this criteria. Consequently there will be a natural slowdown in activity across the capital and we expect this to continue,’ the report adds.

It will be landlords with an extensive knowledge and resources within the buy to let market that are able to take advantage of the shifting landscape, according to Adam Male, director of lettings at Urban. He added that the average landlord with one or maybe two properties are feeling the pinch and having to exit the sector.

‘While raising professional standards and practices within the industry is, of course, a positive thing, this latest prediction of another three years of turbulence highlights how we need to help our buy to let landlords, not further penalise them,’ he pointed out.

‘ History shows that property will come good in the medium to long term and this latest report shows that with capital gain and rental income taken into account, investing in property is still worthwhile despite the short term challenges and suppressive actions of the Government,’ he added.