Why the bad news for landlords is just beginning

Good news for hard-pressed, hard-working, would-be first-time buyers last month, rents in the UK were down year-on-year.

Well, not strictly across the UK. The average figure fell, but it was dragged down entirely by figures for London and southeast England.

Still, it's a momentous occasion. Rents in the UK haven't fallen on this basis since November 2010, according to Countrywide, Britain's biggest estate and lettings agency.

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So what's going on? And does this signal some sort of turning point for the UK's mad property market?

The light at the end of the tunnel

In February, the average national monthly rent in the UK fell by 0.6% year-on-year, to £921.

In reality, rents went up in most places (particularly Wales up 5.3%) but fell hard in London and fell a bit in the Southeast. In London, rents were down by 4.3% to an average £1,246 a month. And in the southeast of England, rents fell by 2.6%.

So what's going on? Believe it or not, it's down to supply and demand.

Since 1 April last year, anyone buying a second home has had to pay an extra 3% in stamp duty. Naturally, all of the people who had been idly considering buying themselves a little piece of investment property heaven rushed to get their deals done before then.

As a result, says Countrywide, the number of properties to let has grown significantly in recent months. Last month, there were 10% more properties available to let across the UK than in February 2016. The figure for London was 18%.

At the same time, the number of tenants looking for properties hasn't budged by much. In fact, in London it's fallen by about 3%.

So demand is stable or weakening. And the number of properties around has gone up. As we all know, if supply goes up, and demand stays the same, then you get falling prices.

So is this likely to continue? Have we reached a turning point? I suspect that we might have for renters, at least.

I don't see this oversupply of property vanishing particularly quickly. Also, I suspect that we might see a rise in the number of distressed landlords before too long.

Why the bad news for landlords is only just beginning

This is a classic story of what happens when governments start to change their minds about the way things "should" work. Under chancellor George Osborne, the current government began to get fed up with amateur landlords.

We can only speculate as to why, but at least part of it must be because of the substantial drop in the percentage of property owners in the UK. The Conservative party has always been attached to the idea of a property-owning democracy and seeing the home ownership figures tumble to a 30-year low of 64% last year can't have been reassuring.

On top of that, lots of young people want to buy a house. There comes a point where the electoral calculus tips over and it's worth courting their votes rather than those of the amateur landlords. Maybe we reached that point.

Anyway, Osborne made two big changes. One change was that he introduced a significant surcharge on second properties. He perhaps meant that to prevent people from investing in buy-to-let. However, it also meant that anyone who was attached to the idea of buying a second house pulled their purchase forward, creating a spike in the number of rental properties hitting the market.

But it's the second change that will prove to be the biggest future headache for all those landlords who snapped up properties eagerly ahead of last April. Osborne also made owning a buy-to-let property far less tax-efficient than it has been up until now.

That change starts to kick in from next month. Landlords will no longer be able to deduct their mortgage interest costs from their rental income when calculating the amount of tax they'll have to pay. This tax change is being phased in gradually it starts from next month, and will be put into place fully by 2020.

The net effect is that if you're a higher-rate taxpayer with a big buy-to-let mortgage, then you'll pay a lot more tax. Some basic-rate payers will too, because they'll be bumped onto a higher tax bracket. And some people will find that these tax changes make it impossible for them to make a profit on their rental properties.

So what have we got? One change that persuaded a lot of people to pile into the buy-to-let sector in a hurry. Which is now being followed by another that has the potential to turn a lot of those buy-to-lets into appalling white elephants.

Will rents go up to compensate landlords for the loss of tax advantages? Probably not. As I've explained before, rents should already be as high as the market will bear. If the extra money was there to be had, landlords would already have it. As it is, there doesn't seem to be much extra juice to squeeze out.

Equally, this doesn't affect all landlords to the same extent. If the person next door can afford to let their property for less than you because they have a less leveraged property and a lower tax bracket, then you'll struggle to compete.

So what's the likely outcome? Some amateur landlords might be forced to sell. But unless and until interest rates go up, I suspect they'll be in a minority. Others will operate at a loss, hopeful of capital gains at some point in the future (which, after all, is why a lot of amateur landlords buy in the first place yields really don't justify it otherwise).

But it'll probably take a while for the oversupply of rental properties to diminish. Meanwhile, with the tax appeal of buy-to-let vanishing rapidly, there'll be less competition for first-time buyers when they come to purchase entry-level properties. In turn, that means that tenant demand will be lower too.

In short, I reckon we're hitting a bottom in home ownership now. I suspect it's going to start picking up. The weakest hands among the landlords will be shaken out, opportunities for first-time buyers will improve, and rents will stabilise.

This is just a theory. Maybe it's wrong. And I'm not expecting an epic collapse in house prices (that really boils down to credit and that's still very loose for now). But I certainly wouldn't be planning to enter the buy-to-let market right now.