A story of affordability, demand, supply, costs, and taxes
There has been a number of buy-to-let property news and data releases in the last few weeks. When we combine these with what we know for certain about the UK property investment environment in 2017, we can make a considered estimate of how rental prices may move in the next 12 months.
In this article, I review the recent buy-to-let data. What it may be telling us about the rental market, and what it could mean for your investment property rental prices next year.
Rental affordability
Two rental surveys released in November came to the same conclusion: rental growth is slowing across the UK. One of the surveys suggests that rental prices have fallen month-on-month. Both conclude that average rental prices were higher in September/October 2016 than they were in October 2015.
They also both concluded that the areas where rental price growth was weakest were those in which buy-to-let investors have previously benefited from the highest rental increases. London and the South East in particular.
Depending on which survey you read, the average rental in the UK is now either £902 (HomeLet) or £947 (Countrywide).
For tenants, the slowing rate of rental price growth will be a relief. Rents have been increasing at a faster pace than wages. Tenants have been squeezed. The slowing rate of rent growth appears to indicate that buy-to-let landlords are balancing their returns with rent affordability.
Other news from the surveys show that:
- Less than a quarter of agents reported rental increases
- Only 35% of tenants leased a home with a spare bedroom, down from 59% in 2016
Interestingly, the Countrywide survey – which showed average rents had fallen by 1.7% month-on-month – recorded the biggest annual rental price growth in Scotland. Here it found that rents had increased by 4.6% year-on-year. Scotland banned letting fees for tenants in 2012; it could be that landlords north of the border are beginning to claw back these fees in higher rents.
Rental demand
Letting agents across the UK are reporting that tenancy periods are lengthening. Almost three-quarters of tenants found by reputable property managers and letting agents are staying in the same property for at least 13 months. More than a quarter of tenants stay put for more than two years.
Our tenancies are following this trend. When we show your property to prospective tenants, we make sure we ask the right questions to ensure your property is right for them. The tenant is happier, and you benefit from longer tenancies.
Demand for rental properties continues to increase. The need for housing for students, a more mobile workforce, and migrants increases. News releases from various letting agents across the country are indicating that prospective tenant numbers are on the rise, too. We’re witnessing applicant numbers at their highest since the first quarter of 2015.
The longer tenancy periods and higher tenancy applications are an indication that renting could be replacing buying as a lifestyle choice. Perhaps that tenants who have found the right property with a good landlord are reticent to move when faced with high competition for rental homes.
Rental supply
Supply of rental properties has remained stable since the EU Referendum. Despite scaremongering that the combination of the vote for Brexit and increasing stamp duties and investment property taxes would force property investors to sell.
However, there is an oversupply of apartments in some locations. Before you invest, you should properly assess the market and take advantage of in-depth property investment research. There is evidence that interest in investment property from buy-to-let investors is increasing. Investors keen to benefit from the rental demand that is forecast to grow strongly for the next two decades.
A recent report from ARLA (the Association of Residential Letting Agents) showed that its members have the highest number of rental properties available per branch for 18 months. Its research found that letting agency branches now have an average of 193 properties on their books, up from a low of 171. While this is being seen as positive for renters, our experience is that increasing numbers of buy-to-let investors are walking away from the stress of DIY landlord and benefiting from full-service property management.
Costs and taxes
The ban on letting agent fees for tenants is another stab at property investment profits. While the effect of the measure announced in the Autumn Statement is likely to be less than many fear. Buy-to-let landlords will be hoping it is the last in a long line of policy decisions that have attacked rental profits, which includes:
- Stamp duty increases of 3% on investment properties
- Maintenance allowances limited
- Mortgage tax relief restricted to 20%
When taken as a collective measure, there is no doubt that all of these new costs have not helped buy-to-let investors balance their cash flow. With the possibility that mortgage rates will rise next year. As a buy-to-let landlord you may be concerned about your ability to raise rents.
What does 2017 hold for rental prices?
I don’t believe that slowing rental growth in the fourth quarter is a cause for concern. Traditionally, landlords are more reticent to raise rents as we move into winter. A vacant property in winter is historically more difficult to tenant, especially in the run-up to Christmas when families simply don’t want the upheaval of moving.
While the fall in the pound is likely to push inflation up. It may not cause the squeeze on incomes that many expect. The economy is growing, and exporting companies have been big beneficiaries of lower sterling values. Unemployment is forecast to continue falling, and more people are expected to be in work. In these circumstances, wage settlements are likely to at least keep pace with inflation. We should also remember that wages have been growing faster than inflation for the last two years.
Buy-to-let property investors may be keen to recoup the costs of the ban on letting agent fees, and higher rate taxpayers will find their profits take a hit from the next step in the decrease in mortgage tax relief from April.
Demand for rented property looks likely to continue to grow. With house prices now more expensive in terms of wage income than at any time since 2008 (Nationwide).
However, you’ll need to monitor the rental market closely on a local level to remain competitive and retain your best tenants. You’ll need to make a judgement call when raising rents. Is the higher rent worth it, if it means losing an exceptional long-term tenant? Read our recent blog post “How to raise rents and retain the best tenants” for tips that will help you maximise rental profits while keeping your property affordably competitive.
You may also want to keep an eye on the trend for tenants renting smaller homes. If this trend becomes embedded, then savvy property investors could buy smaller and realise higher yields.
Finally, whatever your rental price policy, and while the economic indicators are good for the next 12 to 24 months, the future is not carved in stone. As we move towards exit from the EU, there will be winners and losers. Stay vigilant and look for early signs of rental default. Often the landlord is the last person a tenant will tell that he or she has lost their job or had overtime slashed.
In my next buy-to-let landlord blog, I’ll be examining how to protect yourself from rental default.
In the meantime, contact one of the Ezytrac team or me on +44 1522 503 717. Discover how we research market rents and help landlords negotiate rent rises that will stick.
Yours in effortless property management,
Brett Alegre-Wood MARLA MNAEA