Days of the buy-to-let landlord are numbered, says Fergus Wilson
Britain’s biggest buy-to-let landlord, Fergus Wilson, says future investors will never be able to match the financial success he has enjoyed – and that landlords’ days in this country are numbered.
Fergus and his wife Judith bought nearly 1,000 homes in Ashford and Maidstone in Kent, but are now in the process of selling up. He reckons the much tougher lending criteria, with larger deposits and higher rental income requirements, will kill off the market for future buyers.
“It will be impossible to achieve in the future what Judith and I achieved. The constraints put on [buy to let] by the government will ensure that. It is keen to ensure there is never a repeat of 2008… it is being cautious, some will argue over-cautious. The days of the small buy-to-let landlord are numbered. Very many landlords are exiting because of restrictive tax conditions due to hit them.”
The number of houses bought with buy-to-let mortgages is already slumping, according to the Council of Mortgage Lenders. Its economist, Bob Pannell, predicts a “fairly substantial” fall in buy-to-let lending in 2017, suggesting that 2015 may turn out to have been “peak buy to let” year.
“We are already at or past the peak for buy-to-let lending,” he says. “We are currently running at around 6,000 new purchases a month using buy-to-let mortgages, compared with 10,000-11,000 in the corresponding period last year. The combination of a tightening in lending criteria and changes to tax relief are the key drivers.”
Paul Smith, chief executive of the haart chain of estate agents, says the number of buy-to-let transactions has tumbled 63% this year, amid what he calls a “war on landlords”.
“The scale of decline in buy to let in just 12 months is deeply worrying – landlords have clearly pulled out of the market and are unlikely to return any time soon. This is entirely the result of government policy, with Theresa May picking up George Osborne’s baton and proceeding to bash landlords with renewed vigour. The effect has been to more than halve the number of buy-to-let sales in England and Wales, and the inevitable consequence will be fewer properties available to renters next year, and higher rents.”
Buy-to-let lending will fall 20% next year, says Stuart Law, whose company Assetz has been among the biggest proponents of property investing. “Buy-to-let lending will be much lower in 2017 than 2016, perhaps 20% lower. The mortgage interest tax will lead to reduced borrowing in low-yield locations like London, and also lower mortgage loan-to-value levels generally. For landlords in London, selling up is already the reality. Property yields in the city are so low that some find themselves already subsidising their tenants even before all the tax changes come in. Beyond the M25, however, it’s another world.”
But at the CML, Pannell points out that only between 30%-40% of rented properties in the UK have a buy-to-let mortgage attached to them, and therefore won’t be affected by changes to tax relief.
Even landlords who are facing steep tax hikes may decide to carry on, because the alternatives are worse. Simon Rubinsohn, economist for the Royal Institution of Chartered Surveyors (Rics), says: “Yields have been compressed and returns aren’t as attractive as they were. But when you look at the alternatives, landlords do not find any greater comfort from the idea of putting their money in the banks or on the stock market.”
Research by Rics in August found that most landlords said the tax changes would make no difference to their plans, but the proportion saying they would decrease their property portfolios over five years was 40%.
At the Intermediary Mortgage Lending Association, director Peter Williams shares the view that landlords will stay in the market. “While the changes are significant, residential property remains an attractive investment – rents tend to rise at least in line with inflation. Though a minority of landlords may sell up as a result of the changes, this is unlikely to be as widespread as many believe.”
The good news for tenants is that the tax changes could dampen property speculation and create a fairer market, according to Dan Wilson Craw of campaign group Generation Rent. “The government has recognised that the appeal of buy-to-let investment is not only making it harder for people to buy their first home, but is drawing capital away from productive parts of the economy, such as job-creating businesses and building new homes.
“Both the stamp duty surcharge and withdrawal of tax relief will reduce the incentives for borrowing heavily to speculate on house prices, and help create a fairer housing market.”
But he says much more needs to be done to protect existing tenants. “While first-time buyers will enjoy a more favourable market, the tax changes won’t make the slightest difference to the chronic instability of the private rented sector. The government now has to help those who are stuck renting for years to come, with protections from unfair evictions and much greater investment in social housing.”
The big unknown is how rents will behave. At estate agency Jackson-Stops and Staff, Nick Leeming is not sure that landlords will be able to push up rents much. “Supply and demand is a crucial factor in setting the level of rent, and this will be the overriding consideration in landlord decisions to increase rent or otherwise. We are actually finding that, in general, tenants are increasingly savvy, willing to look around and unwilling to pay over the odds on rent. The burden passed on to tenants will therefore need to be limited for landlords’ properties to be competitive.”
But the Residential Landlords Association reckons that rent rises are inevitable. Policy director David Smith says: “These changes will simply place an upward pressure on rents which in the end will only cause difficulties for tenants.”
Stuart Law puts it more bluntly. “It is unquestionable that landlords will pass these new tax costs on to tenants. In my view it isn’t even a matter for debate. In buy-to-let circles this retrospective mortgage interest tax is at best unethical, or at worst taking people’s hard earned retirement income – and it’s not known as the ‘tenant tax’ for nothing. If they have to pay more it is crystal clear that this cost will end up hitting tenants, not landlords.”