Are landlords losing their incentives to remain in the buy-to-let market?

"Whatever business you are in, if it is not profitable or barely profitable, then there is no incentive"

Are landlords losing their incentives to remain in the buy-to-let market?

Landlords are experiencing a decline in profits due to high interest rates and mortgage costs, according to Savills.

The estate agency highlighted that landlords are seeing profits evaporate in their least lucrative year since before the financial crisis.

A typical buy-to-let landlord taking out a new mortgage between April and June this year will make an annual cash loss for the first time since 2007, once mortgage interest payments, repairs and tax are factored in.

Is the incentive for landlords to remain in the BTL market declining?

Gareth Davies (pictured), head of business development for commercial lending at Hodge, said all landlords cannot be counted under the same umbrella.

However, Davies said that regulation has increased considerably and the time and cost of managing properties for all is greater.

The introduction of Banning Orders through the Housing and Planning Act 2016, and the shielding of tenants from excessive deposits and fees through the Tenant Fees Act 2019 have both come into play in recent years.

“Rapid increases in mortgage costs has also resulted in some landlords now facing outgoings that are no longer covered by the rental income generated,” he said.

When combined with the historical removal of the ability for private landlords to use interest to reduce their personal income tax bill, Davies said, the profitability for some individual landlords has indeed been hit significantly.

While the costs around owning property have undoubtedly increased, Davies said landlords who own their properties as limited companies and have wider, more diverse, income streams tend to be impacted to a lesser extent.

“Given the rapid cost increases, a reduction in profits over the next few years may well arise for some of these landlords, but as rents continue to increase, as is expected, and ultimately catch up with higher borrowing and management costs, the gains are likely to return and grow again too,” he said.

Do BTL landlords need government support?

Regulation around buy-to-let properties, Davies said, is a devolved issue and each part of the UK has slightly different requirements. However, he said the amount of regulation and cost involved in being a private landlord has increased considerably in recent years, wherever your assets are located.

“While there is unquestionably a positive intention behind this regulation and legislation, for many, the reality is somewhat different,” Davies added.

The side effect, Davies said, is landlords vacate and stock is sold, typically to owner occupiers, rental stocks reduces, availability is limited and rents increase.

“There are a large number of small, private, individual landlords who simply no longer see any value in being a buy-to-let landlord and unfortunately, it is the tenants who are most likely to suffer,” he said.

The government, Davies believes, needs to make being a smaller, professional landlord appealing again, and financial incentives is a good place to start. 

For private landlords selling buy-to-let properties, he said the tax free allowance on the capital gains has been almost halved, and when this is combined with increases in the cost of finance and owning property, the incentive to remain a landlord is dwindling.

“Whatever business you are in, if it is not profitable or barely profitable, the incentive to continue or to return to the market is minimal,” he said.

The Autumn statement, Davies said, resulted in National Insurance contributions being cut to help the self-employed, including professional landlords, alongside a promised increase in Local Housing Allowance to support tenants on the lowest incomes.

Moreover, Davies said there is work being done around Permitted Development Rights to allow houses to be converted to apartments in the face of pressures around supply and demand.

“There are small pockets of assistance but, as with the current under-supply of housing across the UK, there does not appear a consistent plan from the government to rectify the position,” he said.

The ultimate challenge, Davies added, is that there are currently not enough homes for people to live in, either to buy or rent, and without appropriate incentives for developers and landlords to invest, this is only likely to continue.

How will the BTL market fair in 2024?

Davies believes that 2024 will undoubtedly be a challenging year, with most experts predicting further falls in average house prices. 

In addition, he said refinancing a portfolio from a pre mini-Budget rate to a current rate is impacting landlords irrespective of how much mortgage rates may have reduced over the past three months or so.

“However, the base rate appears to have stabilised and, with inflation reducing, assuming the market responds, the outlook moving into 2024 is certainly more positive than it was going into 2023, which was a year of instability and uncertainty,” he said.

Stability, Davies added, is vital and if these markers continue to provide positive feedback, then confidence will follow, encouraging investment and borrowing, and re-energising the market in the process.

How do you believe the buy-to-let market is fairing presently and what are your expectations moving into 2024? Let us know in the comment section below.