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With the outlook for savers continuing to look dismal, many people continue to invest in the tried and tested route of bricks and mortar which generally offers high returns, especially as far as the buy-to-let market is concerned, as investors benefit from both rental yields and rising property prices.
The buy-to-let boom of recent years has fed the stereotype that Brits are obsessed with property. Ever since Margaret Thatcher declared her belief in a ‘property-owning democracy’ and introduced Right to Buy in 1980, the UK was converted into a country that saw houses as something to make money from, not just to live in.
Having long provided mega double-digit returns for investors, investment in buy-to-let has outperformed all major asset classes in recent years, with total annual returns from buy-to-let property hitting over 11% last year.
However, the government’s decision to introduce a number of measures to curb the growth of buy-to-let landlords has prompted concern that the buy-to-let windfall may be coming to an end.
From a landlord’s perspective, it has been a difficult 18 months or so, with a raft of changes designed to bring the booming housing market under control and create what the former chancellor George Osborne described as a “level playing field” between homeowners and investors.
Aside from the introduction of the stamp duty surcharge in April 2016, the scrapping of the 10% ‘wear and tear’ tax relief for landlords who rent out furnished homes and the existing phasing out of mortgage tax relief, even tougher mortgage lending conditions are set to be introduced for portfolio landlords at the end of September.
So whilst investing in property has long been perceived to be a safe alternative to the failing of the pensions industry, the reality is that for many people buy-to-let suddenly looks like an unattractive proposition.
While some landlords will undoubtedly pass extra costs onto tenants by increasing rents, research shows that others are making plans to exit the market due to the government’s new rules as renting becomes financially unsustainable for them.
The number of buy-to-let landlords in the UK has already fallen by 154,000 since 2015 despite the volume of rented homes increasing by 171,000 over the corresponding period, and yet the average size of a landlord portfolio has increased to a new recent high of 1.44 properties, fresh figures show.
Countrywide’s latest monthly letting index for August reveals that while the number of landlords has fallen over the last two years, owed largely to negative changes introduced by the government, there has been an increase in the supply of homes available to rent, from 4.9 million in 2015 to 5.1 million today.
The increase in housing supply is unsurprising given that most big high street banks are offering savings rates of just 0.5% or lower. In stark contrast, the gross yield on a typical rental property in England and Wales now stands at more than 4%, supported partly by a 1.6% rise in private rents last year to an average of £954 per month, the latest figures from Countrywide reveal, illustrating why buy-to-let is such an attractive investment option.
Would you switch a property producing say at least a 4% gross rental yield and offering good prospects for future capital growth for a savings account generating less than 0.5% gross a year? No, is almost certainly your answer.
Despite a new range of anti-landlord measures, the reality is that the rental market remains steady in the face of the various economic and political headwinds the sector has faced recently.
According to the latest HomeLet Rental Index, the average cost of a new tenancy in the private rental market in the UK rose by 2.4% to £939 per month in August 2017, with rents in 11 out of the 12 regions surveyed recording an increase over the year.
At least for now, some analysts truly believe that buy-to-let has had its day due to a mixture of the government’s clamp down on tax relief and higher stamp duty rates as well as mortgage eligibility changes by the Bank of England.
But while the government has changed the traditional buy-to-let landscape, which will undoubtedly have ramifications for the rental market longer term, the fact remains that demand for private rented accommodation is growing, void periods remain low and yields are broadly stable, while prospects for future capital growth continue to look promising.
Without a material improvement in the supply of new housing against a background of strong population growth and household formation, landlords will almost certainly continue to experience strong rental demand, not to mention see the value of their properties rise – certainly in the medium- to long-term.
Make no mistake, the private rented sector now forms a crucial part of the UK’s housing tenure mix, and that is unlikely to change anytime soon, which is why investment in residential property should remain a popular choice for many people,
Assuming the fundamentals that have fuelled demand for buy-to-let up until now, including a supply demand-imbalance, high property prices, low saving rates, stock market volatility and the perception many people have that investing in property is as safe as houses, then buy-to-let will remain popular.
In the face of political and economic uncertainty – domestically and globally – a stable return on UK property will remain a safe long-term investment for the two million or so private landlords in Britain.