As the onslaught on the small-scale buy-to-let landlord continues, and it begins to dawn on many more landlords that tough times are ahead, the question on many lips is: is buy-to-let investing worth the candle, can you still make money?
The three pronged attack from government: a new punitive tax regime, stricter regulation with numerous new Acts of Parliament affecting the sector, and now more rigours mortgage application restrictions certainly presents landlords with challenges, but all industries go through good and bad times. In comparison to the buy-to-let boom times, yes it will be tough, but this was an exceptional period.
The stamp duty rise we can cope with, after all, in proportion to long-term gains it’s pretty small beer, but the mortgage interest relief and capital gains tax penalties hard harder to swallow.
Under the Rent Acts (applying to pre 1989 tenancies) tenants enjoyed strong security of tenure and could be evicted only on very limited grounds. The UK rental market was virtually non-existent after these rent controls, and we don’t want to see that again.
The Thatcher administration began to change all that with the introduction of shorthold tenancies in 1980, which really kick-started the rental market. But in 2015 the pendulum began to swing back slightly, in favour of tenants, with new provisions introduced in the Deregulation Act 2015, and in Scotland and Wales the swing could go much further.
The mortgage restrictions centre on lending criteria and affordability. Landlords now have to prove to lenders they can meet mortgage payments in the event of a significant interest rate rise before being granted a buy-to-let mortgage.
So, negativity abounds as we see landlords leaving the sector and others curtailing their investment plans, which is only to be expected when any asset class takes a bit of a dive. But is the buy-to-let investor really the endangered species some commentators would have us believe?
My view is there’s much that can be done to counter the blows that landlords have received, and that longer-term, Government might come to realise how much the housing sector in the UK needs and relies on small-scale landlords.
There is strong evidence to show that the Government’s policy of solving the housing market problem, by encouraging institutional investment into the build-to-rent sector, has not taken off as it was hoped.
A recent study (Understanding the Next Housing Crisis) carried out by researchers at the University of Reading, and presented as a paper at the Royal Economic Society’s annual conference (April 2017), concludes that Britain will never build enough houses to make property affordable for young people: “The increases in housing supply required to improve affordability have to be very large and long-lasting: the step change would need to be much larger than has ever been experienced before on a permanent basis.”
The sheer aggregate size of the small-scale buy-to-let landlords’ investment in the private rented sector, and the scale of the housing shortage, means that the small-scale buy-to-let investor, those with under ten properties (around 80% have under three) is here to stay.
As for those responsible landlords, providing a much needed community service with well managed properties, providing they are in the right locations with good tenants, they will always be profitable long-term.
What we don’t want to see is a self-fulfilling prophecy of doom and gloom. Often the best time to invest is when things are looking at their worst.
With an undersupply of accommodation in many locations (do your research), a population growing at the fastest rate in Europe, and could grow by another 5 million in the coming years, mortgage rates at record lows, Brexit likely to open up more opportunities than it closes, major investments like Cross Rail and HS2, and an economy still growing at record levels, we have reason to be optimistic.
So, can we still make money in buy-to-let? You bet we can, but we need to be more business savvy in the way we go about it than we needed to be in the past.
Tom Entwistle, Editor.