Activity in the buy-to-let market is expected to decline further over the next three years due to government interventions and a more general housing slowdown, a new report suggests.
Recent tax crackdowns on buy-to-lease regulation are expected to lead to a further ‘professionalization’ of the sector, while some hobbyist homeowners may see their properties go loss-making once the phase-out of mortgage tax breaks is completed in 2020 .
That’s the picture painted by a new report from Shawbrook Bank and the Center for Economics and Business Research that examines the impact of recent government regulations on the buy-to-let industry.
Decline in buy-to-rent: government interventions and a slowdown in the broader housing market have helped cool the sector
The introduction of a 3% stamp duty surtax from April 2016, coupled with a gradual reduction in tax breaks that homeowners can claim from April of last year and tougher rules mortgage loans affected activity in the sector.
The number of rental mortgages fell sharply in 2016 and 2017, from a multi-year high of 117,500 mortgages granted in 2015 to 74,900 in 2017, a decrease of 36% over two years.
Listen to the latest This is Money podcast on things to look out for when buying a home:
The report estimates the decline to continue, with up to 360,000 fewer rental mortgages granted by 2023 due to regulatory changes.
But while mortgage approvals will continue to decline for another three years, the market is expected to start stabilizing in 2021 and is expected to rise 0.5% over the next two years.
It is also expected that transaction levels will drop. to approximately 57,500 by 2023.
Shawbrook and Cebr said that while tighter mortgage controls and tax changes have contributed to the decline in buy-sell mortgages, a general slowdown in the housing market is also behind the decline.
“We believe that a market cooling would have occurred regardless, as the BTL sector is closely linked to the wider housing market, which is facing more moderate price growth and regional declining transaction levels,” especially in areas where accessibility ratios are tight, such as London, âhe said.
Mortgage approvals will continue to decline for another three years, but the market is expected to start stabilizing in 2021
The impact on amateur owners
Previously, private landlords who owned properties in their own name could deduct both mortgage interest and other eligible costs associated with a rented property from their rental income before calculating the amount of tax owed.
This meant that the income they had to report to HMRC was much lower than their rental income, which lowered their costs and kept a lot in a lower tax bracket.
But since April 6, 2017, landlords have started to see the amount they can write off for tax purposes drop by 25% each tax year until 2020, when they will have to report all of their rent as income, pay income tax on the total, then claim 20 percent of it as a credit.
Some owners could see their rental properties become loss-making
The report suggests that for some homeowners, especially high taxpayers with a portfolio of leveraged properties, their properties purchased to be rental will become loss-making if their mortgage interest cost is equal to or greater than 75 percent of income. rental.
As an example, a private landlord with rental income of Â£ 5,000 per month and mortgage interest charges of Â£ 4,000 per month would end up with an after-tax profit of Â£ 600 under the old tax rules, assuming that the owner pays 40 per cent income tax on the net profit of Â£ 1,000.
But once the changes are fully implemented in 2020, the same owner would suffer a loss of Â£ 200 per month as the tax bill drops from Â£ 400 to Â£ 1,200, exceeding pre-tax profit, according to the report.
“The withdrawal of the mortgage interest tax relief is a serious threat to a large number of leveraged homeowners and therefore we expect the demand for BTL mortgages to continue to decline over the next several years,” indicates the report.
The number of rental mortgage loans fell sharply in 2016 and 2017
In addition to the tax changes, homeowners will also see their profits cut off by the expected gradual increases in interest rates, which will lead to higher borrowing costs, as well as lower rent increases.
According to the ONS Experimental Rental Price Index for Private Housing, rents rose 1.1% in the 12 months to February, well below the general inflation rate. Rental growth has been particularly weak in London, the North East and Scotland.
“If these trends persist, landlords will have little leeway to raise rents much more than the local average without losing tenants, limiting their ability to respond to changes in the tax code by increasing rents,” the report said.
Homeowners will see their rental yields under pressure as house prices are expected to rise faster than rents
Rents will continue to soar, supported by a lack of housing supply generated by a decrease in the number of rental units. However, landlords will see their rental yields under pressure as house prices are expected to rise faster than rents, according to the report.
âWe expect average yields to drop from 4.9% in 2017 to 4.1% in 2023,â he says.
Meanwhile, the attention of rental investors will shift from London, where rental and house prices are falling, to the âhot spotsâ of the North West and Manchester.
All these projections are, however, conditioned on a smooth exit from the European Union. “Major upheavals” during the transition period from 2019 to 2021 could have “serious consequences” for the housing market, according to the report, which also pointed out that a drop in the number of immigrants could lead to a drop demand for rental properties.
âIn addition, immigration patterns – while notoriously difficult to predict – need to be watched closely. A clear drop in immigration to the EU is already noticeable in the data, translating into a drop in demand in the PRS, âhe said.
Rental agents expect rents to drop in London and the South East
Karen Bennett, Managing Director of Commercial Mortgages, said: âWhile the series of government and regulatory changes have had a significant impact on the industry, we have seen the impact felt most strongly among the community of ‘amateur’ homeowners who presented growth opportunities for professional investors.
“The recent political turmoil has had an amplifying effect on investor confidence, but positively, the market remains buoyant for those with a long-term strategy who rely on expert advice to fully understand the impact of these changes of politics. ”
Adam Male, Director of Rentals at online rental agent Urban.co.uk, said: âWe have seen a number of changes in the industry such as Section 24 and stamp duty increases in order to restrict the prolific owner from buying to rent; further delay the chances of ambitious homeowners in removing more stock from the sales market.
âHowever, this constant attack on the industry has in fact done the exact opposite and the latest research from Shawbrook shows that it is in fact the amateur end of the market that is affected and not the professional investor.
âIn contrast, it is those with the extensive knowledge and resources in the hire purchase market who are able to take advantage of the changing landscape and the average homeowner with one, maybe two properties feels the pinch and must leave the area. ‘
Some links in this article may be affiliate links. If you click on it, we can earn a small commission. This helps us fund This Is Money and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.