The future of the buy-to-let market
July 19, 2019
You may have been thinking of becoming a landlord and trying your hand at property management, but some of the recent headlines about the buy-to-let bubble bursting have you thinking twice. But there is no need to worry. Despite the difficulties facing landlords over the last few years, the buy-to-let market seems to be recovering and the future is looking positive.
Is the buy to let market dead?
Until recently, the buy-to-let market seemed to be going through a sluggish period over the last few years. Investors began retreating from the market after the government introduced a 3% stamp duty surcharge on second properties back in 2016, making it less profitable for owners of investment properties as they couldn’t offset mortgage interest against their profits. Under the new rules that are being phased in, landlords will progressively lose valuable tax relief on their privately-owned buy-to-let properties. This does not impact companies that own buy-to-let properties nor individuals that do not have a mortgage. Since April 2017, full mortgage interest tax relief has been gradually phased out, and by April 2020, landlords won’t be able to deduct any of their mortgage expenses from rental income to reduce their tax bill.
However, despite the policy obstacles, the buy-to-let landscape seems to be recovering thanks to a slowdown in the growth of house prices and continued demand for rental properties across the UK. Halfway through 2019, the number of sales for new properties coming into the market remained constrained nationally. New seller supply was down by an average of 5.0% when compared to the first half of 2018, while the national average for the number of sales agreed in the first half of the year was down by 4.3% on the same period last year.
Howard Archer, chief economic adviser at the EY Item Club, suggests that the slowdown in housing price growth is due to the current challenges facing the housing market. This includes concerns over Brexit, affordability constraints and other political and economic uncertainties that are increasing buyer caution towards home ownership.
However, despite house prices, supply and sales slowing down, demand for rental property remains strong, particularly among younger generations such as millennials. While landlord yields may have fallen as a result of the removal of tax relief and new rules in the UK property system, there is still money to be made on the buy-to-let market thanks to the cheap property prices and stagnant housing market.
The future of the buy-to-let market
While the housing market may be sluggish at present, there is evidence that house prices outside of London and the South East are beginning to pick back up, creating more balance across the UK property market.
In London, house prices are continuing to fall faster than any area in the UK as the number of sales in the capital has fallen by 25% over the past five years. However, new research suggests that this slump in house price growth is slowing. In October 2018, 80% of areas in London experienced a drop, whereas in June 2019 this had fallen to 68% of areas. Home & Property also report that London’s property market is showing positive signs of recovery as first-time buyers take advantage of the low mortgage rates and the market slowdown. House price growth in London is predicted to continue to plateau for the remainder of 2019, before picking up again in 2020 as the cost of buying realigns with the capital’s average salaries.
Then there’s the high level of buyer demand outside of the capital. In regions such as the East Midlands, North West, Wales and Yorkshire & the Humber, house prices have continued to rise year-on-year, helping to raise the national average house price to £309,348, which is just £91 away from the market peak a year ago. This has caused a new burst of optimism from home sellers as a result of continued buyer demand, as potential home buyers are taking advantage of the lower price of homeownership outside of the capital.
For property investors looking to take advantage of the rising house prices in hotspot areas, this is a great time to invest in areas such as Middlesbrough, Nottingham, Birmingham, Newcastle and other university towns, where the transactional flow has continued to increase. Even in London, landlords could take advantage of the continued house price drop before the downward trend ends and returns to an upward shift.
In recent research, the Residential Landlord found that 65% of letting agents thought that rent prices would increase in 2019, an increase from the 59% of agents who thought the same the previous year. In addition, more than half of the letting agents consulted predicted that rental demand would also continue to rise, while 78% expected the number of landlords working in the private rented sector to decrease in 2019.
Although this means fewer property managers will be operating in the private rental market, David Cox, Chief Executive of ARLA Propertymark argues that these changes are a positive step forward for the industry. As the new changes to the rental market push many landlords out of the market from rising costs and reduced yields, those that are able to adapt and survive will have ample pickings with the reduced competition coinciding with an increase in demand.
Despite the market slowdown of recent years, investing in the property and rental market continues to be a more reliable source of income than other forms of investment.
Ian McCafferty from the Bank of England has acknowledged that structural changes in the global economy mean that the UK can expect continued low-interest rates for savings, potentially for the next 20 years. Other traditional forms of investment, such as stock market investing is a popular wealth creation strategy and there are plenty of individuals who have made their fortune on stocks. However, the current volatility caused by the uncertainty of Brexit has made navigating the stock market an uneasy and high-risk venture.
As mentioned above, the evidence points to the revival of the property market’s former strength, meaning that investing in property now has the potential of good and potentially high returns in the future.
The predicted greater demand from tenants, coupled with rents rising with inflation and sluggish housing market makes investing in buy-to-let properties a worthwhile opportunity for substantial profit yields.
Like any investment, buy-to-let comes with no guarantees. But investing in bricks and mortar instead of stocks, shares or good old-fashioned saving could end up rewarding you with a healthy profit. To find out more about how to navigate the buy-to-let market, or to browse our tenanted properties available to purchase now for immediate profit, or simply to model what the costs and yield might look like for a buy-to-let opportunity, get in touch with our experienced team today.