The recent change in tax laws regarding mortgage interest payments have resulted in a growing level of uncertainty in the buy to let sector, especially among landlords. It is common knowledge that landlords and agents have benefited dramatically over the last ten years primarily due to the credit crunch. To understand the direction that we may be headed I often find it useful to understand where we have been and indeed where we are now.
Where we are coming from
It has become almost impossible for most people under the age of 30 to buy their own property unless helped out by a parent or relative. Deposits required are much higher and multiples/proof of earning criteria are tougher and more heavily enforced. This has meant an influx in tenant numbers with many more young people forced into renting rather than buying, especially in prime central London.
Whilst tenant numbers have been increasing in London and the South East there has also been a dramatic increase in the amount of investment into the buy to let sector with a majority of new builds being sold to both domestic and overseas buyers solely as rental investments. UK buy-to-let property is now a major global asset class and I believe that we will see many more institutional investors joining the market, especially in Central London where there will be an abundance of new build properties.
The only big drawback for Landlords in Central London over the last few years has been a fall in rental yields. This has mainly been brought about by a dramatic rise in property values (entry price to buy-to-lets has risen), a larger number of properties being brought to the rental market and very few Landlords selling and leaving the market (due to low interest rates it has been very cheap to hold property as an asset).
Over the last decade everything has on balance been very rosy for Landlords. Until now…
Buy to let tax changes
This year we have seen a rise in stamp duty for buy to let investors. Next year landlords will only be able to offset 75% of their mortgage interest payments against income along with the removal of the 10% “wear and tear” allowance. This percentage will then decrease annually by 25% until it reaches 0% in 2020.
This is not great news for those investors who are heavily geared and rely on their rental income to run their property/portfolio in the short term. For those with high gearing and no other viable income to cover the shortfall they will be pushed into negative cash flow. As the reality of these changes start to loom closer many people will be forced to sell out of the market.
For those landlords who are not over geared and taking a long term view on the market things will likely get much better over time. I predict that provided the tax change actually happens a good 10-15% of Landlords will sell out of the market over the next two years. This combined with an ever increasing tenant base (for reasons mentioned above) will ensure that supply and demand shift very much in favour of Landlords.
Rents will go up and yields will subsequently rise. Combine a higher yield with possible buying opportunities in a softer sales market and you have a combination of cash rich landlords buying from those who are over extended and the next generation of rental investors coming to market.
Draker for Landlords
We focus solely on rentals which means our staff are dedicated to finding you tenants that are just right. Not to mention letting your property at the best possible market rate.
Do you have a property that you would like to rent?