There may never have been a better time to be a landlord in Britain. Interest rates on mortgage debt are at all-time lows. The government is making plenty of cheap money available. Rents are rising, yet there is no shortage of tenants. It’s all good news for buy-to-let landlords.
But there is trouble ahead. The biggest worry for most investors is probably the threat of house prices falling, or interest rates going up, both of which would batter their returns. But in fact, there’s a far bigger threat that should be bothering them. A political backlash is brewing against Britain’s new breed of landlords. They are going to get the blame for everything from rising prices to unaffordable rents – and fair or not, that is the real threat to their portfolios.
There is no great mystery as to why so many people are jumping on the buy-to-let bandwagon. The Bank of England has driven down interest rates to virtually nothing, while the government is pumping money into supporting cheap mortgages. It helps that Britain has a growing population, but very few new houses being built. It also helps that even now it remains hard for first-time buyers to save enough for a deposit, particularly if they end up having to pay stamp duty too.
The net result is that rents are high, demand is strong from tenants, and the cost of servicing the debt on a buy-to-let mortgage is very low. So it is hardly surprising that more and more people are becoming landlords. At a time when most other investments offer very little in the way of yield, and quite a lot in the way of risk, a portfolio of properties to rent out seems one of the simplest ways to earn a decent return on any spare cash you have.
The figures make it clear how fast the boom is accelerating. In the second three months of this year, 40,000 buy-to-let loans were advanced, compared with 33,000 in the first three months. It may well be growing even faster than that – not every landlord has to finance their investment with a specific loan. Home ownership has dropped to 65%, a level last seen in 1987, and 17.4% of the population now lives in private rented accommodation – almost all of it provided by small private landlords.
Landlords always face risks, of course. If house prices collapse, they’ll be left with a capital loss. And interest rates might rise, even though Bank of England governor Mark Carney has promised to keep them low for at least another three years. But the biggest risk that landlords may be missing is not financial. It’s political.
The rise of private landlords is starting to create a backlash – and it’s going to intensify. Already the Labour Party is discussing rent controls. Its housing spokesman, Jack Dromey, has been reported as privately favouring such controls. Even if he seems to have backed away from that in public, he is arguing for longer rental agreements to try to curb soaring rents, particularly in London.
In the last election for London mayor, Labour’s candidate Ken Livingstone argued for a ‘living rent’, by which he meant that rental payments should not be more than a third of a person’s pay. Housing charities such as Shelter are not arguing for explicit controls – not yet anyway – but like Labour, they want longer agreements. In the years to come, we can expect this chorus to grow louder.
You can argue the rights and wrongs of this. One reason why rents are rising so fast is because there is not enough supply. Local councils don’t give permission for enough new houses to be built. An influx of private landlords into the market has nothing to do with this. They are simply responding to the incentives created by the government and the Bank of England.
Nor would the proposed solutions make the market work any better. Rent controls were imposed for years after World War II, and all they did was destroy the private rental industry – no one is going to want to go into any industry where the government controls the price (because you can be sure the controlled price will be a lot less than market rate). All that would do is create a sudden exit.
Likewise, if tenants want longer contracts, they are free to negotiate them with their landlord – there is no need for the government to mandate how long people can stay in a property. Flexibility is one of the advantages of renting, after all.
If a government wanted to make housing more affordable, it would be better off easing planning controls and cutting stamp duty rates. And if it really wanted houses to become cheaper, it wouldn’t be offering taxpayer-backed mortgages and encouraging the Bank of England to keep interest rates low. Hammering landlords is not a solution to any of this.
But the fairness of the arguments may not make much difference. If house prices keep rising, and rents alongside them, and if landlords appear to be growing rich on the back of that without doing much work, then people will get angry. Britain’s housing market is so completely politicised already, and so distorted by government, that rent controls could easily be introduced. If a political backlash against landlords gathers steam, it will reduce returns dramatically – and a lot of investors could end up getting burned.