Golden days of buy-to-let are over in Britain
Who wants to be a landlord? Look at the speed of rent rises across Britain and you would think everyone would be mad for it. A report just out from Hamptons shows rents on newly let British properties rising at one of the fastest rates on record — up 12 per cent year-on-year in August and up 30 per cent since the beginning of the pandemic. That’s ahead of the rate of inflation and six times the average annual rise in the three years before 2020. Hay meet sunshine.
But here is the odd thing: everyone isn’t mad for it at all. Far from it. Instead, says the National Residential Landlords Association, a record number of buy-to-let investors are planning to sell. In the second quarter, new buy-to-let mortgages made up only 8.1 per cent of the total market — 40 per cent less than the same quarter last year, according to the Financial Conduct Authority.
What’s the problem? To answer that, we need to look first at what once made buy-to-let so popular.
In the golden years, it made sense. You bought a house with a cheap mortgage. The rent you charged covered that and the costs plus a bit. After 20 years, you have a house for which you paid nothing but the original deposit (yes, I’m pricing the time spent dealing with tenants and admin at nothing). You might also have made a capital gain, of course, but as long as you never had to sell when the price was lower than the sum of the deposit, the stamp duty you paid and the remaining mortgage, then any capital gains were a bonus.
The key here is that the traditional buy-to-let investor did not need to be interested in the things investors usually focus on, such as yield and capital gains. They just needed to break even on a cashflow basis every year, and there was an almost-free house at the end of the game. Lovely.
Not so today. All the things that made this work have reversed. Look at the costs. Rates are an obvious problem. The average two-year buy-to-let fix today will cost you 6.54 per cent, nearly two percentage points more than this time last year, according to Moneyfacts. If you had been looking for a two-year loan two years ago — even five years ago — you would have paid more like 3 per cent. There is no way to put a positive spin on the pain of having taken out a mortgage when the base interest rate was 0.1 per cent — as it was in November 2021 — and refinancing when it is 5.25 per cent.
But there is more to higher costs than the rate shock. Think taxes. Back in 2015, a sharp rise in rates would have hurt less, largely because you would have received remarkably generous tax relief on your mortgage payments. That relief is long gone. Even before the rate rises of the past few years, the effects were bumping up buy-to-let tax bills and pushing cashflows sharply into negative territory.
To this, you must add rising regulatory costs. It is hard and getting harder to evict bad tenants, for example — it can take six months plus to reclaim a flat, says the NRLA. Then you must add net-zero rules. Landlords are being forced to have energy performance certificate ratings of at least C, with huge fines for those who do not make the grade in time — although the rules may change. Fewer then 50 per cent of landlords have a C rating. Fixing that does not come cheap if you own Victorian terraces. So why not sell up to an owner-occupier who does not need an EPC rating for now?
There’s more. Since the boom days of buy-to-let, a few extra wealth taxes have been tipped on to the landlord load. There is an extra three percentage points of stamp duty on every purchase and an extra eight percentage points of non-indexed capital-gains tax on every sale.
Finally, there is rent-control risk. The eagle-eyed will have noticed that Scottish rents on new leases are up more than the average — 13.4 per cent in the past year. That’s not because Scottish landlords are uniquely lucky. It is because Scottish rent controls allow for only a 3 per cent rise in rents for existing tenants every year. That makes landlords both keen to leave the market and desperate to push up rents between tenancies if they are staying on. The result is that buy-to-let purchases in Scotland are at a record low and rents are up 43 per cent since the beginning of the pandemic.
All these things are more likely to get worse than better — in Scotland and the rest of Britain, Labour appears no fonder of landlords than the present government. Why risk finding out if they intend to extend rent controls nationwide or to align unindexed capital-gains tax rates with income tax rates?
If house prices were still rising fast, all this might not have been enough to push landlords out — especially if there were guaranteed capital gains at the end — but they are not. Given the above, it is hard to see how they could. House prices fell at an annual rate of 5.3 per cent in August, according to Nationwide numbers. The number of mortgages in arrears is rising, too: the latest Bank of England figures from its quarterly survey of lenders show they are up nearly 30 per cent on last year, and that is with another 1.6 million borrowers needing to refinance over the next 12 months. It is still a very small percentage of the total — just over 1 per cent — but the direction and speed of travel are unnerving. Give it another 12 months and both arrears, forced sales and prices might take a very nasty turn.
For the past few decades, low interest rates, lowish regulation and sharply rising house prices have made buy-to-let the dream investment. Everyone wanted to be a landlord. Today, no one does. That is not great for landlords, but it’s absolutely terrible for tenants — yet the government ministers who claim to be on their side appear not to have noticed.
• Merryn Somerset Webb is a senior columnist for Bloomberg Opinion, covering personal finance and investment, and host of the Merryn Talks Money podcast. Previously, she was editor-in-chief of MoneyWeek and a contributing editor at the Financial Times. She is also a non-executive director of two investment funds, Murray Income Trust and Blackrock Throgmorton Trust