Recent data indicates a significant decline in the number of homes bought by landlords, reaching a 14-year low. The proportion of homes sold to buy-to-let investors has dropped substantially, with only 10% of transactions in the first half of this year involving such buyers. This marks the lowest percentage since estate agent Hamptons began tracking these figures in 2010.
Additionally, the number of mortgages granted to buy-to-let investors has more than halved, reflecting a broader trend of reduced investment in rental properties. The decrease in both home purchases and mortgage approvals suggests a notable shift in the market dynamics for property investors.
The decline in buy-to-let investment is contributing to a shortage of rental properties. Last month, there were 42% fewer rental homes available compared to June 2016. This decrease in availability is linked to a drop in the landlord mortgage market, which has contracted for the first time ever this year, according to UK Finance.
In the first quarter of 2024, the number of outstanding buy-to-let mortgages fell by 59,000, from 2.039 million in 2023 to 1.98 million. This drop indicates that existing buy-to-let mortgages being repaid are not being replaced with new ones. The number of new buy-to-let mortgages granted also decreased significantly, from 25,280 in the final quarter of 2022 to just 12,422 in the first quarter of 2024.
Aneisha Beveridge, head of research at Hamptons, explains that the current rental shortage is not due to a large-scale sell-off by landlords but rather a result of fewer new investors entering the market.
Why aren’t landlords buying homes?
Buy-to-let investments began to lose their appeal in 2016 when the Conservative Government introduced several significant changes in tax and regulations affecting landlords. One of the major changes was the introduction of a 3% stamp duty surcharge on additional properties, which increased the cost of purchasing a £300,000 property from £2,500 to £11,500. Additionally, landlords were no longer able to deduct mortgage interest payments from their income tax, further reducing the financial advantages of property investment.
In the current climate, higher mortgage rates are adding another layer of discouragement for potential buy-to-let investors. According to Moneyfacts, the average rate for a five-year fixed-rate buy-to-let mortgage is now 5.5%. This means that for a £200,000 interest-only mortgage over a 25-year term, landlords would be paying £917 per month. This represents a significant increase compared to late 2021, when rates for similar mortgages were available at less than 3%. The combination of higher mortgage rates and reduced tax benefits continues to make buy-to-let investments less attractive to many potential landlords.
Is the Labour Government scaring landlords?
Some landlords might also be cautious due to the recent election and the potential plans of the new Labour Government. According to data from Hamptons, the proportion of homes bought by investors has been steadily decreasing throughout the year, dropping to 9.7% in June.
If current trends continue, it’s projected that there will be around 113,630 new buy-to-let purchases in 2024. This would represent a decline of 75,900 purchases compared to 2015, marking a 40% drop.
Aneisha Beveridge comments, “Tax and regulatory changes since 2016 have been the primary reasons for this decline. However, the impact has been worsened recently by higher interest rates and growing political uncertainty regarding potential rental reforms.”
Most investor purchases this year have been made by cash-rich landlords with large portfolios who are continuing to expand their holdings.
Hamptons estimates that by the end of this year, private landlords will have sold 328,750 more rental homes than they have bought since 2016. This trend persists even though the proportion of homes sold by landlords has been decreasing over the past three years.
So far this year, private landlords have accounted for 13% of all property sales, a decrease from 14% in 2023 and 16% in 2022.
Hamptons projects that private landlords will sell an additional 146,060 homes this year, surpassing the 113,630 new buy-to-let purchases expected.
Rents are rising
The decreasing availability of rental homes combined with growing demand is causing rents to rise at nearly three times the rate of inflation.
In June, the average rent for a new tenancy was £1,347 per month, marking a 5.8% increase compared to the same period last year, according to Hamptons.
Aneisha Beveridge from Hamptons points out that the limited supply is a major factor driving strong rental growth, and this trend is expected to continue. While some properties that would have been bought by investors are now owned by first-time buyers, high mortgage rates and increasing rents are likely to keep many potential homeowners in the rental market for a longer period.
Although the number of individual landlords is decreasing, some investment firms are stepping in to address the shortage.
Pension funds and insurance companies are collaborating with house builders and developers to create large-scale rental housing projects, known as build-to-rent developments.
These investors hold onto the properties rather than selling them, effectively becoming corporate landlords.
These new developments feature apartments and houses tailored specifically for renters in various locations across the UK.
However, the rents for these properties are often higher than the market average due to added amenities like gyms and communal lounges. According to Savills, around 106,000 build-to-rent homes have been completed since June 2016, which is insufficient to fully address the shortfall caused by the reduction in individual landlords.
Landlords favour North East of England
According to Hamptons, the proportion of homes bought by landlords has decreased across all regions except the North East since 2015.
In the North East, the share of properties purchased by landlords has increased slightly from 24 per cent in 2015 to 25 per cent in 2024.
London has experienced the most significant decline, with the share of landlord purchases dropping from 17 per cent in 2015 to just 8 per cent this year.
This decline is attributed to lower rental yields in the capital, which have reduced landlords’ ability to manage higher expenses.
In Scotland, buy-to-let activity is the lowest, with only 5 per cent of homes sold to investors so far this year, down from 10 per cent in 2015, according to Hamptons.
According to Rightmove, renters in Scotland are now facing the highest level of competition for rental properties.
During the Covid pandemic, Scotland introduced stricter rental regulations and a 6 per cent stamp duty surcharge on second home purchases at the end of 2022.
Previously, Scottish landlords could only raise rents on existing tenancies by up to 3 per cent, unless they obtained special permission. This cap was removed on 31 March, allowing landlords to set rental prices without restrictions for the first time in 18 months.
Despite these rent controls, average advertised rents in Scotland have increased by 11.1 per cent compared to the previous year, according to Hamptons.
Landlords look for high yields
Rental yield measures the percentage return an investor can expect on the purchase price of their property each year, before accounting for taxes and other costs.
For instance, a 5 per cent gross yield on a £200,000 property would generate £10,000 in annual rental income.
Due to high mortgage rates, new buy-to-let investors are now focusing on areas with the highest yields to make their investments viable.
Six of the top ten local authorities with the highest proportion of buy-to-let purchases are located in one of the three Northern regions.
In Sunderland, for example, 45 per cent of homes were bought by investors in the first half of the year.
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