Tax Changes and Tighter Regulation Slowing the Growth of the Private Rental Sector

A series of tax changes and tighter regulation for landlords is slowing the growth of the private rental sector, despite its value hitting a new high, according to the seventh edition of Kent Reliance’s Buy-to-Let Britain report.

The value of the private rental sector in Great Britain currently stands at almost £1.4 trillion – an increase of 6.4% (or £82.6 billion) in the past year. Rising house prices have been the key driver of this growth, with the average rental property climbing in value by 4.2% in the last year.

The total number of households living in rental housing is growing much more slowly. There are nearly 5.6m households across Great Britain living in private rental homes – just 2.2% more than a year ago. This is less than a third of the rate of growth recorded in 2014.

Tax Changes and Tighter Regulation Slowing the Growth of the Private Rental Sector

Slower growth reflects landlords’ fragile confidence in the sector. Just 41% of landlords are confident about the prospects for their portfolios. While this is a slight recovery from the record low hit in the second quarter (Q2) of 2017, back to the level seen at the start of the year, it remains far lower than in recent years. Confidence has been hit by tax changes regarding the amount of mortgage interest that landlords can offset against tax, rising costs and new mortgage rules that have tightened criteria.

Tenant demand is growing more slowly too. Just 5% more landlords reported rising tenant demand than those reporting a decline – the lowest balance in at least five years.

This has been reflected in easing rent price growth. The average rent across Great Britain now stands at £895 per month. Although this is another new high, the typical rent increased by 1.5% annually – down from 2.4% a year ago – with sluggish growth in London weighing on the national average. Rents are likely to continue to climb, as 29% of landlords expect to increase rents over the next six months – ten times the number who expect to reduce them. As taxation rises over each of the next three years, buy-to-let landlords could look to pass on higher costs to tenants where possible.

Where supply is expanding, larger-scale landlords are driving it. In a survey of 856 landlords, carried out in association with BDRC Continental, among those that bought or sold properties in the last three months, investors with more than ten properties made a net addition of one property. There is no growth among those with fewer than five properties. Given that investors with just a single property account for 62% of the landlord community, a lack of growth in this segment of the market is dragging on the expansion of supply.

Those landlords still buying properties are increasingly doing so as a limited company, rather than as an individual, which allows them to continue to offset mortgage interest costs against tax. Kent Reliance’s data shows that, in the first three quarters of 2017, more than 70% of buy-to-let applications for property purchases were via limited companies – up from 45% in 2016. As the amount of mortgage interest that landlords can offset against tax progressively diminishes over the next four years, interest rates rise and tax bills climb, this will spur on demand for incorporation.

Professionalism in the private rental sector is also being driven by the Prudential Regulation Authority’s (PRA’s) recent intervention in the market. Since the end of September, lenders must account for much more detail of a landlord’s portfolio (if they have four or more mortgaged properties), their experience and track record, assets and liabilities, and business plan before lending. For many landlords, this means creating business plans for the first time and considering longer-term planning for their portfolios.

Andy Golding, the Chief Executive of OneSavings Bank, which trades under the Kent Reliance and InterBay brands in buy-to-let, says: “Landlords are swallowing the unpleasant cocktail of higher taxation and tighter regulation, and this is undermining the expansion of the private rented sector. A fundamental shift in the landlord population is now underway, as buy-to-let moves from being a popular past time for hundreds of thousands of British amateur landlords, to the preserve of committed long-term investors with experience and expertise. The pace of professionalisation will only increase following the PRA’s latest moves, and incorporation continues apace.

“Creating a more professional sector is no bad thing, but there is a limit to the amount of change the sector can absorb before we see a damaging reduction in supply – an outcome that would see rents increase for tenants and reduce their ability to save for a deposit for house purchase. Landlords’ confidence is better, but still clearly fragile, and, as the new tax reforms gradually come into force, any further financial burdens may prove to be a tipping point.”

He continues: “The need for a strong and stable private rental sector has not changed, notwithstanding the Government’s housing announcements in the Budget. The removal of Stamp Duty for 95% of first time buyers should provide some help for those with savings, but it will also bolster house prices – the same side-effect Help To Buy is having. The housing market is significantly more complex than can be solved with some demand side stimulus. The private rental sector fulfils a vital role in our society and our economy, a role that needs to be reflected in an evolved housing policy.”