Prior to covid, it was no secret that the lettings market was becoming unworkable for a greater number of property owners in London. Rents had steadily fallen by an average of 10% over 10 years (2010-2020) and the government made some hefty tax changes that resulted in less net income for every private landlord.

Cash flow margins were looking tight, and many were concerned that they would not be able to carry on. if you combine these pressures with an increase in stamp duty and more costly compliance it is is easy to also see why there were also far fewer landlords entering the market than there were leaving.

Whether intentionally or not, these punitive measures resulted in a gradual shortfall of rental property in London for quite a few years before covid hit. It is easy to forget that nearly all landlords are so by choice and can easily invest elsewhere.

Our industry has now flown into the storm of inflation where no one goes unchecked by the increase in the cost of living across the board. Some of our landlords are now faced with a massive increase in their mortgage costs per month, against the backdrop of paying more stamp duty, tax, and greater compliance costs. If rents don't go up, more landlords will sell, and fewer new landlords will join the market. The level of available property would continue to decline over the next few years.

Some are arguing that this would be a good thing and more property would enter the market for private ownership, but that was before the cost-of-living crisis and a tripling of interest rates for buyers, making homeownership an even more distant prospect for many would be homeowners. Anyone who has recently tried to get a mortgage will agree that there is an inflexibility and massive reduction in risk appetite of lenders and regardless of shiny mortgage adverts, there is now a set of rules from the FCA that strictly governs most residential lending. The mortgage industry has become “computer says no” at an alarming pace. 

If you are thinking of selling your rental, stop…just for a minute and think through the next two years. 

The sales market may well be about to take a nosedive. The same dynamic of supply and demand that will boost income for Landlords, that sent rents through the roof so quickly, is in reverse in residential sales. We will only know the severity of things as this new situation plays out in front of our eyes and prices adjust. Even if best case the sales market becomes sluggish, buyer confidence is on the wane and will not likely increase anytime this year. The sales market may well flood with optimistic landlords that are looking for an easy way out in the same short window. All the while rents are continually going up delivering the best return for landlords in over a decade. Try to sell now, a buyer will no doubt smell the blood in the water and try to get your property at a lower price. People will quickly see that the stock levels on the sales market are ticking up, prices ticking slowly down, and no doubt read all the same news feed and newspaper articles as we do. 

If enough rental stock gets removed from the market and then sits on a sluggish sales market, even if it doesn’t sell, the rental crisis for tenants will deepen and rents will likely rise further. Currently for tenants in Central London, availability is almost more critical than affordability. 

The solution however may not be that far away. As inflation rips through our economy, salaries will also rise. They already are in most industries (Salaries increased by 6.4% in 2022 and are likely to rise again by 5% in 2023 as a response to inflation) and over time rents will likely hit a similar affordability rate as before. 

Extra rent makes it feasible for landlords to keep hold of their investments and may even attract a higher percentage of new landlords. The other area that could underpin a settling and even cooling of rental prices will be some smart changes by the government. Landlords need to urgently be attracted back to the sector. 

Landlords should be allowed to offset their mortgage payments against their rental income again and stamp duty should be lowered back to the same level as everyone else. These moves won’t revolutionise supply, but it will bring more people back to invest and will ultimately give tenants more choice at a fair rent. 

Realistically most landlords are invested in the rental market, not for the yield in rent, but to cover their costs and to one day pass on their property to future generations or to benefit from long term capital growth on both debt and equity when they eventually sell. The primary issue for our tenants in London right now is not price, but availability, which over the last few years has become untenable, if we ignore the short-term effect of Covid. We have had dozens of applications per property for the already faster moving more affordable stock. Supply needs to be addressed before prices can stabilise and only the government can step in to reverse the changes that were made that contributed to this crisis in the first place. Our landlords need help and support to have confidence in the long-term viability of the sector. Properties sitting on the books of a declining sales market will not help our tenants or our landlords. We are in a perverse situation with housing that no one could have predicted. The more landlords that leave the market, the tougher it gets for our tenants and conversely, the better it gets for landlords that stay. Hang in there, enjoy the extra rent and plan for a stabilising and fall of interest rates over the next few years.