What is going on in the rental market? – Are landlords getting greedy, or are they being squeezed – We analyse

The Mayor of London once again renewed his call for private sector rents to be frozen in London as Rightmove found that the average rent in London jumped 15 per cent over the 12 months to January to reach £2,480 at the end of last year, while inner London rents climbed above £3,000 for the first time.

Office for National Statistics (ONS) reported that rents across the UK rose by 4.7 per cent from 12 months to February. Have landlords become greedy, or are they being squeezed, leading to record rental increases?

What has changed in the private rental sector?

Scotland introduced a cap on rent rises:

Last year, to lessen the impact of the cost-of-living crisis on people who rent homes in Scotland, the Scottish Parliament introduced a 3 per cent cap on rent rises during private tenancies and a ban on evictions.

According to an analysis by Hamptons, the estate agency, annual rent growth on newly let properties has risen dramatically from £660 to £830, an increase of almost 26 per cent, as there is no cap on new tenancies. According to Rightmove, supply is down by 20 per cent, and rent caps will further reduce the supply as landlords put their investments on hold. In the first three months of 2023, 14 per cent of all sellers in Scotland this year have been landlords, a record high.

If rents were to be capped as the Mayor of London is advocating for, it could make things even worse; as a result, it will be as has been in Scotland, the supply will decrease further, and rents will rise even faster.

Tax changes bought in 2016-17:

Scrapping the Mortgage interest relief:

There have been a series of tax changes since 2017, which have led to the private rental sector being taxed very differently than any other industry or business. In 2017, Chancellor George Osborne announced that mortgage interest payments would no longer count as an expense for landlords, meaning that mortgage payments could no longer be accounted as a business expense. It was replaced with a mortgage interest tax relief system where basic and higher rate taxpayers could get tax credits worth 20 per cent on mortgage interest payments. The table below shows how this was phased in over three years.

Figures from ONS show that private rental inflation since records began from 2006 till 2020 averaged 1.9 per cent annually in England. Since April 2021, when the mortgage interest relief was scrapped in full average private rental inflation has increased to 2.5 per cent annually. 

These increases align with the NRLA (Nation Residential Landlords Association) poll conducted in 2018, which suggested that 43 per cent of landlords will increase their rent because of scrapping mortgage interest relief due to them having to pay higher taxes. 

Lowering Capital Gains Allowance:

According to research by Hamiltons, in 2022, landlords sold 35,000 more properties than they bought, with the rental sector losing, on average, 66 properties daily. It is no surprise as the government last year slashed the allowance for capital gains by half from April 2023 to £6,000, and the threshold will be halved further from April 2024, where the allowance will only be £3,000.

Unsurprisingly, as NRLA’s quarterly survey laid bare, its members found that in Quarter 3 of 2022, 65% of landlords reported that the demand for privately rented housing increased. Despite this, the survey also found that only 12% of landlords said they planned to increase the size of their portfolio over the next 12 months, compared with 28% of respondents who said they planned to reduce it.

The private rental sector may be the only sector where demand grows exponentially, but investment does not follow relative to demand. The government policy to lower the capital gains tax allowance will see more landlords rationalise their portfolios.

Stamp Duty levy of 3% on rental properties:

The investment in Buy-to-let needs to catch up with demand, and government policy and tax changes have worsened things. Investment in buy-to-lets has never recovered from the introduction of the 3 per cent stamp duty surcharge that was bought in by George Osborne in 2016. The estate agency Hamptons reports that 12 per cent of homes in Britain were bought by investors so far in 2023, up from 11 per cent in 2020. This year’s figure is the highest share since 2016, when the percentage of homes bought as investments were 13 per cent. It has not kept pace with rocketing demand for private homes to rent. The increase in demand is at the core of the current rental crisis rather than a significant landlord sell-off.

Other Factors:

Upcoming Energy Efficiency Legislation:

Another critical concern for landlords is upcoming energy efficiency legislation requiring all new lets to meet a minimum Energy Performance Certificate (EPC) rating of C (A being the highest and G being the lowest) by 2028. Recent research suggests that landlords need to be more prepared, 1 in 5 need to be made aware of the upcoming legislation, and nearly half think that energy standards are merely guidelines, not the law, according to a survey carried out by the Mortgage Advice Bureau.

Sixty per cent of all privately rented homes have an EPC rating of D or below. The average cost of upgrading to achieve an EPC rating of C or below is estimated at £9,260 per property. According to the estate agency Knight Frank, the upgrade cost is more than the annual average rent in 40 per cent of local authorities in England. The sums don’t add up for most, and this will probably see more landlord exodus closer to 2028. This policy has sensibly been delayed by three years.  

Interest rates rising:

The Bank of England’s (BOE) base rate rose from 4 per cent to 4.25 per cent last month. According to Moneyfacts, the average two-year buy-to-let mortgage has risen from 2.77 per cent to 5.81 per cent. It has more than doubled in less than a year. An average £200,000 mortgage would have increased from £450 to £968 monthly. 

Flora Harley, head of environmental, social and governance (ESG) research at Knight Frank, says, “If legislation around minimum EPC standards is passed, the additional costs placed on landlords – which comes on top of rising mortgage costs, changes to mortgage interest relief and the erosion of capital gains tax allowance – may lead to some landlords to look to rationalise or leave the sector entirely”.