Stats show BTL transaction numbers have plummeted
The recent surge in mortgage rates and the impact of the "mini" budget led to a significant drop in buy-to-let and second home purchases in the last quarter of 2022. According to provisional data from HM Revenue & Customs, the number of transactions for these types of properties decreased by 18% in the fourth quarter compared to the same period in 2021, and by a whopping 31% from the third quarter of 2022.
Buyers of buy-to-let and second homes in England and Northern Ireland are required to pay an additional 3% surcharge in stamp duty, and this has resulted in the share of stamp duty receipts from these properties falling to 35% from 42% year on year, the lowest level since the third quarter of 2016 when the surcharge was first introduced. The "mini" budget of September 2022 sent shockwaves through the mortgage market, particularly affecting buy-to-let investors as it led to a steep increase in mortgage interest rates, forcing many potential buyers to reconsider their plans.
BTL borrowers that have interest-only mortgages are particularly heavily hit by interest rate fluctuations. Mortgage Introducer figures show that while a two-year fixed mortgage for a buy-to-let borrower would have been around 2.9% in February last year, that same mortgage would be almost 6%. In the short term, the figures aren’t going to get any prettier – stamp duty data is only registered after completion so the latest data won’t show the full effect of the mini budget.
The grim figures, however, do offer opportunities for cashed-up investors. With the Telegraph heralding this as a “golden opportunity” it would appear that not everyone thinks that the party is over. Rents are rising – the ONS reported a 4.2% rise in December – and if prices continue to fall it means that rental yields will jump. Andrew Wishart from Capital Economics has said that he expects rental returns to reach 5.3% next year – the highest returns in nearly a decade. Even though those figures may look rosier than we might expect, it is not all good news for intermediaries – experts are reporting that there is a large amount of investors who are now buying with cash rather than a mortgage.
Buy To Let “virtually pointless” for many landlords - claim
A property industry trade body chief says buy to let is “virtually pointless” for landlords with substantial mortgages who seek income from rent. The situation is worsening because of proposed energy efficiency changes, says the National Association of Property Buyers.
“The proposed upgrade to EPC legislation is the latest in a long line of disadvantages of owning a Buy To Let. To make properties cheaper to keep warm, and to help the country meet its green targets, landlords will soon have to spend up to £10,000” warns NAPB spokesperson Jonathan Rolande. From 2025, under the current proposals all newly rented properties will be required to have an EPC rating of C or above. Currently, properties only require an EPC rating of E or above. Existing tenancies will have until 2028 to comply with the new rule changes.
“Whilst landlords of expensive properties in places like London or Manchester can take this in their stride, the thought of spending £10,000 on a home worth £80,000 will be a catalyst to see yet more landlords flee the sector. If these homes sell to owner occupiers, there will be increased scarcity of homes to rent, potentially forcing up prices yet again. Many landlords are already getting out and I suspect more will follow. At the moment if a landlord has a sizable mortgage, owning BTL for the rental income is virtually pointless. Months or even years of profit can disappear in one go if there’s a costly boiler issue or the managing agent of the block decides a new lift is required.”
Rolande says that while awareness is beginning to grow around these proposals, there is still much consideration that needs to be given to the actual impact that these changes will have on landlords and property owners. He warns that there is “a real concern” that a substantial amount of properties risk potentially being declared ‘unrentable’ and subsequently ‘unsellable’ or ‘unmortgageable’ due to landlords being unsure about what the changes will mean for current and prospective tenancies.
Landlords Are Selling – And it Isn’t Hard to See Why
The downturn in the housing market is continuing, roughly as expected, a slowish puncture rather than a blowout, with prices and activity softening, and quite a big drop in mortgage approvals partly reflecting last autumn’s mortgage rate shock. But how are landlords responding to this downturn?
Are they throwing in the towel or sensing an opportunity, as in recent downturns, to buy?
By coincidence I recently came across some detail analysis on this subject from CIL, the management consultants. I have spoken at their annual economic seminar for a number of years, so know them well. CIL looked at, among other things, the buy-to-let market.
Of the roughly 5.1 million private let residential properties in the UK, just over 70% are on mortgages, the rest debt-free. Of those on mortgages most, 53% of the total, or three-quarters of the mortgaged stock, are interest-only. CIL looked at the vulnerability of this private rental stock to rising mortgage rates.
At a 2% mortgage rate, some 100,000 suffer from negative cash flow – rents being insufficient to cover mortgage payments – rising to 400,000 at 4% mortgage rates, and a very hefty 900,000 at 6% mortgage rates. This leaves landlords with a range of options, including raising rents, accepting lower profitability or negative cash flow, refinancing, or selling some or all of their properties.
This will be a familiar thought process to many people reading this.
Some will hang on for the capital gains later, though softening property prices make this less of a certainty than it once appeared to be. In anticipation of higher mortgage rates, though ahead of the events of last autumn, when they shot much higher in response to the Truss-Kwarteng September 23 mini budget, CIL carried out a survey of landlords and found that 19% were planning to sell.
After a scary few months that appears to be happening, though the precise scale remains uncertain.
The latest RICS (Royal Institution of Chartered Surveyors) residential market survey, for January, was very downbeat, with a net balance of 47% of surveyors reporting falling house prices, and the balance for new buyer enquiries negative for the ninth successive month, this time by a hefty 47% also. Dotted through the survey were reports of landlords selling up, with Albright Surveyors in Wandsworth, London, saying, “Smaller landlords are selling up due to rising interest rates and tax increases.”
Across in Bromley, Jonathan Price of Southside Property Management Services, said, “The government’s continued demonisation of private landlords will come back to haunt them, we are already seeing long-term landlords exiting with very few new entrants.”
This is not a new phenomenon, of course, but it appears to be gaining momentum.
Robert Oulsnam & Co in Birmingham found that “the principal cause” or rising rents was “landlords selling the property when they become vacant rather than renting it out again”.
Dotted across the Midlands, and indeed elsewhere in the country, were reports of “persecuted” landlords selling. Many, “perturbed” by regulatory reform as well as higher mortgage rates, are “reconsidering their position” according to Franklin Gallimore of Tenbury Wells. The position is even worse in Scotland, where rent controls have added to the list of disincentives for landlords, as they were always likely to do.
According to Grant Robertson of Allied Surveyors, “The modest reduction in the draconian measures brought in by the Scottish Gov allowing landlords to raise rents by 3% has done nothing to encourage new landlords into the market nor slow those exiting. Surely we can now see these polices for what they are – to remove the PRS (private rented sector) from the market!”
In Wales meanwhile, Paul Lucas of Haverfordwest, said, “Government regulations and influence have severely limited the rental supply which is now outstripped by demand, resulting in higher rents.”
These reflections from agents and surveyors are too widespread to be ignored.
On the face of it, rising rents are a boon for landlords, but when one cause of those rising rents is a drop in the number of properties available to rent, it suggests that things are far from healthy. It is not just higher mortgage rates. Many smaller landlords feel that they have been under attack for years.
For some, tougher energy efficiency requirements, which are fast coming down the road, are the final straw.
For others, it is other factors. There has, to be fair, been better news on mortgage rates in recent weeks, with interest rates expectations coming down and the gilt market settling. Once landlords have made their mind up that it is time to sell, and that they have had enough of the red tape and cost, it is hard for them to change.