Buy to let market shrinks 1% per year
By Chloe Cheung FTAdviser
The buy to let market has declined 1 per cent every year in the past five years and is expected to see a further shock under the lockdown measures, which could lead to a rise in rent prices, according to research.
Rental deposit replacement scheme Ome looked at the percentage of buy-to-let mortgage loans approved over the past five years as a percentage of all loans, using figures from the Financial Conduct Authority.
It found a gradual decline in the number of landlords entering the market with new stock every year since 2015, with an average annual reduction of 1 per cent.
Ome said the value of the buy-to-let market is now £35.6m, compared with £37.4m in 2015, as it predicted that a further fall in rental stock entering the market during lockdown could lead to higher rental and deposit costs for tenants.
Matthew Hooker, co-founder of Ome, said: “Through no fault of their own, agents and landlords are facing a very tough few months with some tenants unable to pay their rent and some landlords facing much longer void periods due to a drop in market activity.
“The buy to let market has already seen a notable decline in appetite following increases to stamp duty and changes to tax relief, with the number of buy to let mortgages declining steadily since 2016. It is no coincidence that rents have also climbed rapidly during this time."
Even before coronavirus the market had been impacted by rule changes, which meant landlords have been unable to deduct any of their mortgage expenses from taxable rental income from April 2020, receiving a tax credit based on 20 per cent of their mortgage interest payments instead.
An additional 3 per cent stamp duty surcharge on second homes was also introduced in April 2016.
A poll by Accumulate Capital last year found that 37 per cent of landlords were planning to sell at least one of their properties, with 61 per cent blaming increasing regulations and taxes.
Ome said growing demand had led to average UK rent rises of 4 per cent a year since 2015, with the average rent now stood at £743 a month, compared with £627 in 2015.
It said over the past five years the cost of a rental deposit had increased at a rate of 3 per cent per year.
Ome predicted that further increases this year would see the average rent reach £776, and deposits £900, despite the introduction of a five-week deposit cap in June 2019.
Additionally, the scheme predicted that any lasting reduction in rental stock caused by the coronavirus crisis could lead to a significantly larger increase in cost for tenants in the long run.
Mr Hooker added: “As a result of these latest market developments, we could see many decide to exit the sector, or opting to refrain from a buy to let investment for the foreseeable future at least.
"This further reduction in stock would have grave implications for the nation’s tenants who have already seen the cost of renting increase due to an imbalance between demand and supply.
“The industry has already predicted an increase in rental costs due to the ban on tenant fees but with even less stock now likely to be available, this increase in rent and the upfront deposit required to secure a property could be far higher than predicted.”
Piers Mepsted, managing and compliance director at Financial Advice Centre, said: "Supply and demand will, as always, be the market barometer in determining rental sale prices.
"There is a strong consensus that landlords will need to be even more mindful of this as unemployment increases and tenants have less in their pockets each month to spend in the months to come."