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'Landlords aren’t abandoning buy-to-let'

Bank of England Interest Rates

Despite a couple of years of increasing interest rates, the UK buy-to-let private rented market is showing some remarkable resilience.

All the evidence points to the fact that despite the Bank of England’s series of 14 consecutive bank rate hikes, there hasn’t been a significant shift in the outlook of most landlords, that’s according to the Investor’s Chronicle this week.

It seems, according to the IC, landlords are not abandoning the rental market at the rate expected by some, despite the series of 14 rate hikes that have significantly altered their financial landscape.

According to calculations based on Pantheon Macroeconomics research, reported by the IC, the interest rate for a two-year fixed interest-only mortgage with a 75 percent loan-to-value (LTV) ratio has increased from a just 1.3 percent prior to the rate hikes, to an eyewatering 6.2 percent in as little as two years. The result is landlords are struggling with an average monthly repayment increase of £550, when their previously generous fixed-rate deals expire.

During 2003, there has been lots of speculation about the rate at which landlords were selling-up and leaving the sector, and also there’s been lots of discourse about whether the rapidly increasing costs were forcing landlords to either increase rents or simply leave the property market altogether.

Increasing regulation of the private rented sector and the looming prospect of tougher rules which favour tenants included in a forthcoming Renter’s (Reform) Bill passing through Parliament – but likely to face considerable delay and perhaps changes before it becomes law – is another factor in some landlords’ decisions to leave.

Rental sector is large and economically significant  

With one in every five homes now in the private rented market the about-turn in interest rates, coupled with high inflation now embedded in the economy, these developments have significant consequences for the private rented sector (PRS).

It is also having a damaging effect on rental housing supply, as undoubtedly some landlords have decided to leave, while other landlords are either putting expansion on hold, or new potential landlords are failing to invest.

The cost of living crisis is also affecting tenants, with wages generally having fallen behind inflation over recent years and the cost of must goods and services rising sharply. The Bank of England (BoE) consequently is becoming especially concerned about the financial vulnerability of tenants compared to owner occupied households.

Research carried out by the BoE indicates that tenants have to allocate a bigger portion of their income to housing. They possess fewer savings than owner occupiers, and they tend to earn lower incomes. What’s more, tenants on average are carrying more debt, and a substantial proportion of the renting population are reporting that they have increased their borrowing over the past year.

This potential vulnerability in the now 20 per cent of households who rent, says the Bank, “amplifies the potential for issues in the private rental sector to escalate into broader macroeconomic challenges.”

With inflation having reached over 10 per cent and only coming down slowly, rising prices of essential goods and services perhaps justify the BoE’s concerns. Increased tenant housing costs, by way of the often necessary rent increases imposed by landlords, means that these additional costs will erode any financial cushion most renters may have.

The Bank’s report underlines that: "higher debt and lower savings would make renters more likely to face hard financial choices in the future - like defaulting or cutting spending - which could trigger or worsen a wider economic downturn."

Underlying PRS stability

But looking more closely at the underlying position of the private rented sector produces data that is is demonstrating some resilience inn the face of these hardships. Zoopla evidence shows that, according to the IC, nearly 40 percent of landlords have no outstanding debt, while an additional 30 percent have mortgages with LTV ratios of less than 50 percent.

So, in theory, this should alleviate somewhat the upward pressure on rents caused by those landlords with escalating mortgage costs having no choice but to drive up their rental prices. Despite this, there is some conflicting data from the Office for National Statistics (ONS), which indicates that year-on-year rent growth reached a record high of 5.5 percent in August.

However, the latest round of wage settlements has experienced record growth, with average weekly pay rising by almost 8 per cent, a figure which compares favourably with an inflation figure now falling below this.

Room for further rent increases

The IC reports that economists at Pantheon Macroeconomics say, "a smaller share of households’ incomes is being absorbed by rent, suggesting landlords still have room to implement further increases, even if pay growth now slows as labour market slack builds."

The story that landlords are leaving the sector in droves is hard to substantiate or confirm. As the IC says, “There is also limited evidence that landlords are departing the market due to higher mortgage rates. Tracking this trend is challenging, as it necessitates the connection of various property-level data sets while making nuanced judgments about transactions between different types of property owners.”

Departures slower that expected

The BoE’s own research using a different methodology finds that while landlord departures have exceeded new entries over the past two years, the reduction in size has been less pronounced than other sources and indicators have been suggesting.

As their thesis geos, new investors are more likely to carry high LTV ratios. This leaves them vulnerable to the rise in mortgage rates and therefore less inclined to buy rental property or expand on an existing portfolio.

Data from Pantheon shows that the value of new lending to buy-to-let investors dropped to £5.7 billion in the second quarter of this year, down from £9.7 billion in the first quarter, and a legacy average of £9.2 billion between 2015 and 2019.

“Although it may appear surprising initially, the slow rate of departures aligns with the situation,” says the IC.

“Most landlords have fixed-rate mortgages, which limits the number of refinancing occurring simultaneously. Furthermore, many landlords view their investments as long-term assets, with more than half regarding buy-to-let properties as part of their pension, according to the government's English Private Landlord Survey. Consequently, the supply of rental properties is anticipated to increase gradually rather than surge.

“In the wake of nearly two years of interest rate hikes, the rental market exhibits remarkable resilience.”


Interest rates