UK rents to rise by 15.5% in next five years with several factors adding to growth
Rents in the UK are set to rise in the next five years and the first interest rate rise in a decade could contribute to that, it is suggested.
The Bank of England has increased its base rate from 0.25% to 0.5%, back to where it was 18 months ago and still an historic low, but experts believe it will have an impact on buy to let landlords.
Indeed landlords have already been hit by a number of extra costs, including an extra 3% stamp duty on additional homes and the phasing out of mortgage interest tax relief. The upcoming ban on letting fees in England is another issue that some think will prompt landlords to increase rents.
The latest five year forecast from real estate services firm Savills says that while rents in the UK are likely to be flat over 2017, they will rise by 2.5% next year and in 2019, then by 3% in 2020 and by 3.5% in 2021 and 2022, a cumulative growth of 15.5%
The forecast shows that London is likely to see an ever bigger five year rise of 17% even although this year rents will have fallen by 3%. It predicts rents growing 3% in London in 2018 and 2019, 3.5% growth in 2020 and 2021 and 3% growth in 2022.
Savills also forecasts that interest rates will reach 2.25% by 2022 and average mortgage rates reach 4% over the next five years and suggests that landlords will increasingly focus on their yields, therefore looking increasingly at buying in urban locations outside of London.
The firm says that new buy to let buyers could fall by 27% to just 55,000 by the end of 2022 as tighter mortgage regulations, increased stamp duty charges and the phasing out of mortgage interest relief combine to restrict buy to let investor activity.
‘We have seen the earliest signs that some mortgaged buy to let investors may be selling stock. Those entering the market will be looking very carefully at yields and that will put the spotlight on urban markets outside the capital,’ said Lucian Cook, head of residential research at Savills.
Real estate firm JLL is also forecasting that the lettings market will be a little more robust in the next five years but is predicting more muted rental growth of 2% per annum in 2018 and 2019. But it also says that the rental market will continue to expand, both because of continued unaffordability in the sales market but also supported by the growing trend of renting by choice. It suggests rents will rise steadily by around 2.5% per annum from 2020 to 2022.
According to John Goodall, chief executive officer of buy to let specialist Landbay, the first rate rise in a decade could fire the starting gun for an increase in residential rents. ‘Landlords have had to face a catalogue of challenges over the past couple of years, from stricter regulation, reductions to tax relief, and a significant stamp duty tax hike when buying a buy to let property,’ he said.
‘Many expected these would be passed on to tenants, but low mortgage rates have enabled landlords to absorb much of these costs, especially those that are wary of tenants facing negative net wage growth, so a base rate rise could make all the difference,’ he pointed out.
‘Whether tenants are renting as a stepping stone on the way to home ownership, or in some cases choosing to rent for life, this generation are relying on a well-served buy to let market to ensure rental growth doesn’t become unbearable,’ he explained.
‘What is now needed is some firm Government commitment to improving standards, affordability and supply of rental properties. Fast approaching, this month’s Autumn Budget will be a chance for the Chancellor to reassure the industry on its plan for tackling this growing demand for housing,’ he added.
Angus Stewart, chief executive of Property Master, predicts that the buy to let market will become increasingly professionalised as smaller players facing increased cost and regulation will seek to exit the sector.
‘For those that remain we can expect many to begin re-mortgaging before rates move any higher and it is interesting to see that there has been a mixed response from lenders certainly in the run up to today’s decision with a number continuing to offer low fixed rate deals,’ he said.
Andrew Turner, chief executive at Commercial Trust Limited, believes that buy to let landlords should take their time before making any rash decisions, looking at their business model and consider what is best from an investment perspective.
‘For many buy to let landlords with existing mortgages, the change will not have an immediate impact if they are on a fixed rate deal. Those on tracker or variable rates may see a change to their repayments, but it should be remembered that we are seeing these increases from an historic low base,’ he said.
‘The decision to increase the base rate is likely to trigger a reaction from buy to let mortgage lenders. Consequently buy to let mortgage interest rates are likely to increase and in some cases have already done so, in anticipation of today’s news,’ he explained.
‘Landlords should not panic. Whilst rates will go up for the first time in a generation of home buyers, we are unlikely to see any dramatic increases, with the likelihood that future rises will be small and incremental,’ he added.