Rents are still rising but could reach their limit by 2025 – is buy-to-let still worth it?

Landlords have been hit with higher taxes and rising mortgage rates but your buy-to-let could still benefit from rental growth of almost 10%, research suggests.

The perks of property investing have been drastically reduced in recent years with extra stamp duty charges for landlords, slowing house price growth as well as curbs on mortgage interest relief.

This has come to the fore in recent months as rising buy-to-let mortgage rates further dent the profits that landlords can make on a buy-to-let portfolio.

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But there are still opportunities for rental growth, according to Savills.

Analysis by the estate agency and property brand suggests the short supply of stock will keep UK rental growth strong in the short-term.

It is predicting that rents will rise by 9.5% by the end of 2023, which is lower than the 11.2% seen in 2022 but it is still higher than any other year on record, according to Zoopla’s rental index.

Savills said a continued imbalance between supply and demand in 2024 will keep rents 6% higher but it warns an “affordability ceiling” will limit growth between 2025 and 2028.

Emily Williams, director in the Savills residential research team, says it is difficult to see where an increase in rental supply will come from over the next couple of years until interest rates and mortgage pricing drops.

“The end of a series of national lockdowns sparked increased rental demand in mid-2021 that has consistently outstripped supply ever since,” she says.

“At the same time, the rising cost of debt has impacted the profitability of many mortgaged landlords. 

“This, together with a changed tax and policy environment, is forcing an increasing number to sell their properties.

 “As a result, competition for stock is tough, and tenants are having to bid upwards to secure a tenancy, supported – but only in part – by a strong growth in incomes, fuelling rents upwards in the short-to-medium term. “

Where will rents rise by the most?

The Savills forecast estimates that rents will have risen by 18.1%  on average across the UK between 2024 and 2028.

It predicts growth of 6% next year but then a drop to 3.5% and 3% in 2025 and 2026 respectively – when mortgage pricing and interest rates are expected to drop - before rental growth falls to 2.5% and 2% in 2027 and 2028.

Landlords in the North West and south of the country will see the largest increase in rent at 6.5% next year, while the lowest will be 5.5% in London, the North East and Yorkshire. 

Rental growth will slow from 2025 though, hitting as low as 1.5% in the North East by 2028, according to the research.

Is buy-to-let still worth it?

Buy-to-let yields have been hit by higher mortgage rates, tax clampdowns and slowing house price growth, making many landlords question if owning a rental portfolio is still worth the effort.

There are reports of landlords selling up but that could mean picking up stock to add to your portfolio.

Additionally, the lack of supply means rents are still high and landlords can still get an inflation-beating return, especially if you don’t have a mortgage.

Savills does warn that there is an “affordability ceiling” for renters though as there are only so many rental increases that they can take.

Rising rents are already stretching the finances of those in the private rental sector (PRS).

Savills estimates that the average PRS household is spending 35.3% of their income on rent, up from 33% in 2021/2022.

This is forecast to be stretched further in 2024, but rents will then reach “affordability ceiling,” Savills warns.

The rental market is already feeling the impact in London, according to Savills, where rents take up a much higher proportion of income – at 42.5%.

That is up 31% in the past two years, and as a result, renters have already exhausted their capacity to bid upwards. 

As a result, month-on-month rental growth has fallen from an average of 1.2% in 2022 to 0.6% so far in 2023 – and is likely to remain lower than the UK average over the next 18 months.

Howard Levy, director of mortgage broker SPF Private Clients, says there are two types of landlord at the moment, those who became accidental landlords and are selling up, while the other group of experienced landlords are staying put and building their cash reserves as much as possible.

"These landlords have passed on higher borrowing costs to their tenants by way of increased rents, while the shortage of supply caused by some leaving the sector is also pushing up rents," he says.

"With many landlords fixing for five years a while ago as a result of the better stress tests offered by lenders, they are in the fortunate position that their cash reserves are still growing while they are on relatively cheap deals and rents have risen."

That is set to change though, Levy warns. 

"Many will be fixing again, in some cases at nearly double the rate they were paying, resulting in much reduced profits. The question then will be: do rents continue rising to cover these higher costs or is there a ceiling that the rental sector can stomach?" he adds.

"Will we see tenants having to downsize to smaller properties with the same rent for a two-bed now only covering a one-bed, for example?

"Many landlords who own rental property in their own name will either have to sell or incorporate the business to be able to proceed as a going concern.  Taxation is a large influence for these investors, as with the higher gross rents comes higher taxation, irrespective of mortgage costs."