Buy to Let crisis – The reason landlords are exiting

The Rental Crisis: Supply and Demand Imbalance

Introduction:

The UK’s rental market is in turmoil, facing an unprecedented imbalance between supply and demand. Landlords are grappling with higher interest rates, increased taxes, and a slew of new legislation, all while witnessing a surge in demand for rental properties. In this blog post, we will explore the reasons behind this crisis, its impact on both landlords and tenants, and what the future may hold for the rental market.

The Unprecedented Demand Surge:

The CEO of Foxens recently declared the current situation as the worst supply-demand imbalance in living memory. Just a couple of months ago, there were 97,000 registered tenants in search of a place to rent, but only 2,000 available properties. This staggering demand has predictably driven up rent prices, with the average now exceeding £1,350, and even higher in cities like London.

So, why is demand skyrocketing? One significant factor is the surge in net migration, with over 600,000 net migrants arriving in the UK in 2022. Many of these newcomers, including foreign students, Ukrainian refugees, and non-EU workers attracted by skill shortages, are looking to rent rather than buy. Additionally, rising interest rates, falling house prices, and the prospect of further declines are prompting potential buyers to opt for renting instead.

The Decline in Supply:

Between 2002 and 2015, low-interest rates made buy-to-let mortgages popular, leading to a surge in the supply of private rented accommodation. However, since 2016, this growth has dwindled, with only a marginal increase in the number of available properties in 2021 compared to 2016. Another critical factor is the significant decline in social housing, with approximately 1.4 million homes sold off and not replaced, pushing many low-income households into the more expensive private rented sector.

The Future of the Crisis:

The duration of this rental crisis will depend on several factors, including future wage growth and the state of the economy. While recent wage growth has been robust, an economic slowdown and rising unemployment could dampen demand. However, this is unlikely to resolve the underlying supply-demand imbalance.

Landlords Facing Challenges:

Landlords are also grappling with challenges. Rising interest rates, especially for those with interest-only mortgages, have significantly increased monthly mortgage costs. This rise cannot be fully passed on to tenants, limiting profitability. Tax advantages of buy-to-let have been eroded, and new legislation aimed at improving tenant rights has made being a landlord less attractive.

Landlords Exiting the Market:

The combination of higher interest rates, diminishing tax benefits, and changing market dynamics has led to a surge in landlords selling their properties. In just two months, 25,000 landlords sold their properties, with a net total of 330,000 exiting the market since 2016. Many are cashing in while house prices remain high and avoiding rising interest rate costs.

Buy-to-Let Trends:

Buy-to-let is evolving, with more purchases happening through limited companies rather than personal landlords. This shift toward commercial cash buyers is reshaping the market, mirroring trends seen in the US. Whether this is advantageous for renters remains uncertain.

Government Intervention:

To address this crisis, the government needs to play a more active role in housing construction. Existing policies have favored homebuyers, and solutions like Help to Buy have inflated prices. With the housing market facing uncertainty, the government must step in to increase housing supply, particularly in the private and social rented sectors.

Conclusion:

• The UK’s rental market is experiencing a severe supply and demand imbalance.
• Landlords are dealing with challenges like higher interest rates, increased taxes, and new legislation.
• Demand for rental properties is surging due to factors like high net migration, rising interest rates, and falling house prices.
• The supply of private rented accommodation has not kept pace with demand, leading to rising rents.
• A decline in social housing availability has pushed low-income households into the more expensive private rental sector.
• The duration of the rental crisis depends on future wage growth and economic conditions, but the supply-demand imbalance is unlikely to be resolved.
• Many landlords are selling their properties due to higher interest rates and reduced tax advantages.
• Commercial cash buyers are becoming more prevalent in the buy-to-let market.
• Government intervention is needed to increase housing supply and address the rental crisis effectively.

The UK’s rental market is facing a severe crisis marked by an imbalance of supply and demand, driven by factors like rising migration, interest rates, and taxation. While a fall in house prices may offer hope for affordability, it’s not a quick fix. To address the root issues, the government must prioritize increasing housing supply, offering a glimmer of hope for a brighter future in the rental market.