No one in their right mind would invest in buy to let (BTL) – at least that seems to be the current consensus.
According to surveys released to the media there is a stampede of landlords for the exit, prompted by Labour’s Renters’ Rights Bill, set to extend tenant rights further than the already-feared Tory Renters’ Reform Bill.
You can see why many would think now was a good time to call it quits given the proposed legislation’s direction of travel – Section 21 abolished, legally enforceable repair deadlines, and new council powers to inspect and regulate private rental housing. And then there is the possibility of rent caps.
Add to this higher BTL mortgage interest rates and you might wonder whether things could get any worse for the UK’s beleaguered landlords.
And yet, interest in the sector has not evaporated. Despite the uptick in landlords exiting the sector, there has been no exodus.
BTL mortgage approvals are still much higher than they were in 2020, only showing declines in 2021-23. Some predict BTL mortgage approvals will start to rise again during 2024 and gather pace as we move towards the end of the decade.
Why is this predicted, given the more hostile environment for landlords? Perhaps investors see the bigger, longer-term picture. A picture that points to a continuing mismatch between surging demand and static supply.
Demand for homes in the private renting sector (PRS) has already hit record levels, as any letting agent will testify, on the back of the UK’s rising population. At least 0.5 million people settled in the UK during 2023, taking the population to well over 67 million.
In the years ahead, this primary driver of demand is likely to continue and be further boosted by the UK’s continual shift towards single-person households (up 8.9% over the past decade).
A fast growing population consisting of fewer people willing to share, will put intense demand on the existing housing resource.
This surging demand for homes is certainly not going to be met by new-build any time soon. Labour wants to build 1.5 million homes in five years, but housebuilders suggest that this target is unlikely to be met. In any case, meaningful numbers of new homes will not appear until towards the end of the five-year window.
Also remember this comes after year-on-year failures to meet building targets of circa 300,000 per annum.
It is estimated that continuing short supply of new homes will mean that the private rental sector will have to increase by 227,000 homes a year over the next decade in order to meet the forecasted demand for 1.8 million extra households by 2032.
But PRS supply has not been growing at anything like this rate. It has actually been falling: in 2022 PRS supply was 25% lower than 2019.
Against such a backdrop, it is not really surprising that rents have been hitting highs in some cities.
High-and-rising levels of demand combined with limited supply mean landlords have been able to offset extra costs and risk via rent rises. A trend that is set to continue for the foreseeable future as landlords retain the negotiating upper hand.
Sure, the market is more demanding than it used to be, but the fundamentals are strong.
So long as landlords have their mortgage expenses under control and ensure responsible tenants are in place via increased focus on selection, they can expect to grow rental income and even make a decent profit.
Labour’s rental reforms will not come into effect for at least 18 months, and the hope is that wise heads may prevail to prevent rent caps being introduced given the supply-reducing impact such controls have had in Scotland.
Contrary to what many might think, rather than wilting, the UK’s BTL market is likely to further strengthen in the years ahead.
David Wylie is commercial director of LendingMetrics
