The fallout from the war on landlords
The rental crisis: Investors fleeing the market and the rise in rents are affecting us all.
Our business is primarily about buying houses and flats – though we do have a busy rental search department in London.
Why would the majority of our clients be interested in the rental market, in London but also anywhere in the country? To paraphrase Trotsky on the subject of war, you may not be interested in the rental market but the rental market is interested in you. Though you might own your own house, your children may be trying to find somewhere to live after leaving university. You might like the theatre, but where are the actors going to live? And the nurses in the hospital you might need to use? Or anyone without access to some capital, the starting point for any mortgage? As rents go up, disposable income falls – not good if you are a consumer-facing business. You may not need to stand in a queue of 30 people to rent a damp slum but, in one way or another, it affects you.
It is now being called “the rental crisis”. What does this look like? In a nutshell, a massive mismatch between supply and demand.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Focusing on London, Rightmove reports that there are an average of 25 requests to view per available property. The number of lets (deals done) is down by 60% from the period between 2017 and 2019. Average rents are now more than 30% higher over the same period, with an 8% increase this year up to August. There are now 41% more tenants looking for 35% fewer properties. Though the rate of increase has slowed slightly in London this year, the trajectory is still upwards. As rent (and mortgage payments) are the main monthly outgoing for most people, certainly those under 40, the effect on the consumer is not pretty. No wonder travel agents, bars and restaurants are reporting tough times. Pay the rent or go on holiday? Not a choice really.
Like the proverbial frog in the pot, this process has been going on for some time and has two main causes. The first has been what amounts to a war by the government on landlords. This started with the withdrawal of the ability to put mortgage interest costs against rental income for tax purposes. This was finally phased out in 2020 and made the returns from residential property distinctly less attractive. This only applied to residential property, not commercial, the logic of which is not immediately apparent. At the same time government regulation, entirely well meant in protecting tenants’ interests, has made life as a landlord more difficult. The latest Renters (Reform) Bill, among other things, outlaws no-fault evictions. In 2016 a 3% surcharge was added to stamp duty for anyone purchasing a buy-to-let.
The other key factor is the rise in interest rates. This has had two effects. For any landlords who were wondering if the returns made up for the hassle, it made up their minds for them, and they have exited the market. For those thinking of going in, the income sums didn’t add up and the prospect of capital gains (which has fuelled the market for the last 30 years) has turned into a prospective capital loss in a falling market. On the other side of the fence, interest rates have dealt a blow to prospective buyers who can no longer afford to buy and are now thrown back on the rental market, adding to the ranks of too many tenants chasing too few properties. A perfect storm on both sides of the rental divide and a classic example of the law of unintended consequences.
The irony is that much of the government legislation doesn’t affect the truly egregious landlords who are mainly at the bottom of the market, servicing students and those on social security. This is a market where deposits are often just deferred rent and where the minimum standards for just about anything are often not met. These are properties that can yield north of 10%, compared to barely 2% net in London. Higher interest rates affect the first but are, to some extent, compensated for by higher rents and desperate tenants. But they fundamentally change the equation for the second.
Where does this all end? Not soon, certainly, with a lame-duck government that has had 15 housing ministers in the last 13 years: a prize for anyone that can name the latest? If they’ve been midwives to the mess we are in, it’s unlikely they will be clearing it up, certainly not in a year. So what will Labour do? They are not ideologically on the side of landlords – rentier is a pejorative term in left-wing circles. But it must be obvious that a dysfunctional rental market is bad for everyone and with higher interest rates becoming the new normal, the owner-occupied market isn’t riding to the rescue. It is unrealistic to think that a Labour government is going to row back on legislation that protects tenants, but the tax treatment of interest on buy-to-let mortgages is something that might make potential landlords think again and keep existing ones in the game.
The reality is that being a residential landlord is hard work, and the circumstances that drew investors to this market have changed. Labour doesn’t need to hug a landlord – only to accept that while one side of the market needs protection, the other needs to be made profitable enough to make the sweat worthwhile.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
Related articles
- Rents hit a record high - but is the opportunity for buy-to-let investors still strong?
- The most profitable areas for buy-to-let
- With rents set to rise, should you take a chance on buy-to-let or give up?
- Which is best - buy-to-let or shares?
Charlie Ellingworth has a history degree from Oxford and started his career with Jardine Matheson in Hong Kong. He is a co-founder of Property Vision, the market-leading property search company, which was sold to HSBC Private Bank and then bought back by the existing partnership. He is a director and trustee of the Cadogan Estate as well as other property-based entities. His novels, Silent Night and A Bitter Harvest were published by Quartet. He is involved with helping refugees and sails and flies small planes and paragliders. He lives in Somerset and London and is married with three sons.
-
RICS: Property listings rise, but buyer demand cools
New listings are putting a spring in the step of the UK housing market – but where have the buyers gone? We delve into the latest Royal Institution of Chartered Surveyors (RICS) survey
By Ruth Emery Published
-
How to protect your money from the dark web
The dark web has become a hotspot for credit card fraud and other financial crimes. Here’s how you can protect your private details and stay safe
By Oojal Dhanjal Published
-
Meta’s AI splurge rattles investors
Meta's decision to join the AI race is driving investors away
By Dr Matthew Partridge Published
-
Is it a good time to invest in the UK?
Temple Bar Investment Trust is a diversified bet on British equities and looks excellent value, says Max King
By Max King Published
-
Top-quality, rapidly growing European stocks are selling at enticing valuations
Timothy Lewis, portfolio manager at JPMorgan European Growth & Income tells us where he’d put his money
By Timothy Lewis Published
-
AstraZeneca CEO’s £1.8mn pay rise approved despite shareholder opposition
AstraZeneca hiked its dividend to persuade shareholders to accept CEO Pascal Soriot’s pay rise. Is he worth his salary?
By Dr Matthew Partridge Published
-
Adidas, Nike or Jordans - could collectable trainers make you rich?
The right pair of trainers can fetch six figures. Here's how you can start collecting vintage Adidas, Nike or Jordans now
By Chris Carter Published
-
The industry at the heart of global technology
The semiconductor industry powers key trends such as artificial intelligence, says Rupert Hargreaves
By Rupert Hargreaves Published
-
Three emerging Asian markets to invest in
Professional investor Chetan Sehgal of Templeton Emerging Markets Investment Trust tells us where he’d put his money
By Chetan Sehgal Published
-
What to consider before investing in small-cap indexes
Small-cap index trackers show why your choice of benchmark can make a large difference to long-term returns
By Cris Sholto Heaton Published