Strangling the landlords

Letting agents are now regularly being accused of profiteering from the shortage of rental property by pushing up rent. This is an absurd allegation but it is worth looking at what factors…

Squeezed landlord image

Letting agents are now regularly being accused of profiteering from the shortage of rental property by pushing up rent. This is an absurd allegation but it is worth looking at what factors are responsible for the huge increases that we have seen in property rents over the last few years.

Adam Walker image
Adam Walker

The answer of course is that the Government has brought in successive legislation that has driven up the cost to a landlord of providing a rental property. The biggest single issue is the shortage of property which has driven up capital values. If the price of the average dwelling was to reduce by £100,000 then the average rent could be reduced overnight by about £400 per calendar month. Unfortunately unless they build several million more houses this is unlikely to happen.

Savage fines for minor breaches are frightening landlords so much that they are giving up.

The second biggest factor is the sudden increase in interest rates that followed Liz Truss’s disastrous budget in October 2022. A landlord of a £300,000 property with an interest-only mortgage for 70% of the property’s value saw their interest payments increase overnight from about £500 per calendar month to £1500 per calendar month. No wonder they needed to put the rent up!

A third factor is the change in the way that buy-to-let landlords are taxed. Landlords used to be able to offset all of their mortgage interest costs against their profits. Now, unless they own their property via a limited company, a higher rate taxpayer can only offset about half their interest payments against their property. A landlord with a 70% interest-only mortgage on a £300,000 property held in their own name is now approximately £300 per calendar month worse off as a direct consequence of this tax change. Once again, the only way to recoup this is by increasing the rent.

A fourth factor is the ever-increasing cost of complying with complex compliance regulations. This increases rents in two ways. Firstly, landlords need to recover the direct cost of local authority licences, electric checks, gas safety certificates and the virtually compulsory inventory and check-out fees. The only way they can do this is through higher rates.

Complex compliance

The second effect of increasingly complex compliance legislation and the savage fines that are imposed for minor breaches is that it is frightening landlords so much that they are giving up and leaving the market. In 2022 193,000 BTL landlords sold their properties. The basic laws of supply and demand mean that this will inevitably drive up rents.

Another factor that is frightening a lot of landlords is the constant thrust that no-fault evictions will soon be banned. Landlords are understandably worried that this will make it more difficult to deal with problem tenants and that it will also become much harder to increase rents in line with increasing costs.

The outlook for BTL landlords is not all doom and gloom though. A lot of long-term landlords cannot afford to sell up because they would have to pay an enormous capital gains tax bill. A high percentage of these landlords have only very small mortgages or are mortgage free so they have not much affected by the increase in interest rates. For these landlords increasing rents make the BTL market an increasingly attractive investment and some of them might soon take advantage of falling home prices and increasing yields to add to their portfolio.

Recent government legislation anti-landlord rhetoric has been almost entirely responsible for the huge increase in property rents. If they had set out to deliberately increase rents by as much as possible they could not have done a better job. As far as most BTL landlords are concerned market forces will allow them to recoup their losses over time. As far as the poor tenants are concerned it seems as if they will continue to pay ever higher rents until there is a fundamental change in government policy towards the housing market.

Adam Walker is a business sales broker who has worked in the property sector for over 40 years.

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