Rent increases set to outstrip house prices in 2017

From tax hikes and legislative changes to property hotspots and rental returns, we take a look at what 2017 may have in store for the private rented sector.

Tenants are set to see the cost of renting a home rise faster than their incomes and faster even than house price growth this year, it has been predicted.

Jeremy Leaf, North London Estate Agent

People residing in private rented accommodation are expected to bear the cost of tax increases for landlords as they are widely expected to result in a reduction of homes on the rental market that in turn will place upward pressure on rental prices.

The existing rules that permit landlords to offset all of their mortgage interest against tax will, from April 2017, be phased out, restricting the amount of mortgage interest landlords can offset against tax on their property investments.

By April 2020, once they have been withdrawn altogether, it is likely that higher-rate tax payers will only receive 50% of the relief that they currently get, with various experts having already warned that landlords will be left with little alternative but to pass higher costs on to tenants.

The phasing out of mortgage tax relief from April, coupled with the introduction of the 3% stamp duty surcharge on additional properties last year, as well as stricter buy-to-let mortgage lending conditions as the Prudential Regulation Authority seeks to cool existing lending practices in the sector, will inevitably push some landlords out of the market, which Jeremy Leaf, north London estate agent, believes will push up rents.

“We expect rents overall will rise faster than house prices as landlords sell or decide not to expand their portfolios,” said Leaf.

“Their decisions will be partly down to higher stamp duty and, more significantly, reductions in tax relief and additional legal responsibilities,” he added.



Another major issue that could leave private landlords with little alternative but to increase rents is the government’s plan to ban on letting agents’ fees to tenants.

The proposed policy was announced in the Chancellor’s Autumn Statement last November, and was clearly designed to shift the costs onto landlords, who will need to recoup the costs elsewhere, inevitably through higher rents.

“The ban on letting agent fees to tenants will only put more upward pressure on rents despite affordability constraints,” Leaf added.

A recent survey from online letting agent Upad found that 40% of landlords plan to increase rents if existing tenant fees are passed onto them to pay.

Only a third of the respondents questioned said that they would definitely not raise their rents, meaning that potentially two-thirds of tenants, or up to 2.6 million renters, could face a permanent increase in rent as a direct result of last year’s announcement.

“Frustratingly for everyone involved, this research suggests that landlords will be left with no choice but to further increase rent,” said James Davis, CEO and founder of Upad.

As such, rent arrears will then be the biggest issue in 2017, according to David.

He continued: “With pay increases at an average of 1%, inflation at 2% and rents increasing 5%, there is a growing void between what tenants can afford with their take home pay.”



Tougher buy-to-let mortgage lending conditions are also expected to place upward pressure on rental values.

A number of major lenders have announced in recent weeks that they are increasing their rental stress rate for buy-to-let landlords as regulators seek to cool what it perceives to be aggressive buy-to-let lending practices.

With most lenders now applying a 5.5% stress test rule and banks looking to lend based on a 145% rent multiplier – helping to ensure borrowers can repay their mortgages if interest rates increase – many landlords will have to hike rents just to meet these tougher lending conditions when attempting to remortgage their properties.

Alison Pallett, director of sales, Bank of Ireland UK Mortgages, said: “These changes have been undertaken in order to comply with PRA regulation, which requires lenders to apply a minimum stress rate.


Investor demand

Despite concerns that many buy-to-let landlords plan to exit the market, early signs are that there is still plenty of appetite among property investors seeking to add to their buy-to-let portfolios in spite of the various tax changes.

The outcome of the EU referendum, and the subsequent macro-economic uncertainty dampened purchase lending in the third quarter of last year, with many landlords initially opting for a cautious approach.

But the latest buy-to-let mortgage lending figures from Mortgages for Business show that the share of lending for purchases in the buy-to-let market rose from 28% in the third quarter to 38% in the fourth, which was comparable with the 38% recorded in the second quarter – before the EU vote.

David Whittaker, CEO of Mortgages for Business, said: “It is encouraging to see that the share of lending for purchase in the buy-to-let mortgage market returned to normal in Q4 2016.

“Following a notable shift towards lending for remortgage in the third quarter, landlords showed they were once again willing to commit to new purchases.”

“While changes to stamp duty on second properties and landlords’ tax relief mean that landlords need to approach their investments intelligently, there are still excellent returns to be had in the market – especially compared to other asset classes,” he added.


Better ROI up north

Despite Brexit and various tax changes, houses prices in the UK will probably remain in positive territory over the next 12 months, with various experts expecting the north of England to lead the charge.

Stuart Law, owner and founder of Assetz, said: “I believe that we are looking at national growth of around 3% in 2017 for house prices. This will be driven by healthy growth in the towns and cities outside of the M25 where investors can get better long-term yields for a sensible price point and this will counter growing weakness in the London market.

Stuart Law, owner and founder of Assetz

“The storm clouds are gathering over London. The city is already experiencing a reversal in its fortunes when it comes to housing.

“Official statistics show signs of house price growth turning negative in some of the capital’s most desirable boroughs and this trend is likely to continue.”

The effects of unsustainable high prices and increases in stamp duty for wealthy purchasers are deterring investors and the low yields combined with the new mortgage interest tax is likely to show a trickle of London buy-to-let sales becoming a flood, holding back prices but pushing up rents as a result, according to Law.

He points to the problems at Nine Elms and other over-supplied locations as a direct result of overseas sales levels collapsing, which is likely to result in a big pull back in development for the foreseeable future.

But while the market slows in London and the south of England, Law says that many shrewd investors recognise that the north, not London, is where the best yields can be found.

He continued: “I expect that we will see overall growth of rents of 4% in 2017 as landlords seek to cover the impact of the new mortgage interest tax and capitalise on some potential reduction in the size of the rental property market.

“2016 saw buy-to-let investors begin to sell up in London and this could grow to a rush in 2017 but rather than leave buy-to-let we expect them to reduce mortgage debt and buy more for cash or with smaller mortgages in higher yielding locations around the country like Manchester, Leeds, Birmingham and many other regional cities.

“London investors have been hounded out by a combination of low yields and the curbs to mortgage interest tax relief or ‘tenant tax’ as I call it as we expect it to be passed on in rent rises. The lesson in 2017 that people must learn is that buy-to-let isn’t dead – it has just gone north.”

Paul Smith, CEO of haart estate agents, acknowledges that in some parts of the country, especially London, a buy-to-let property no longer makes the same return it once did, and he too identified the north of England as being ripe for investment.

He said: “Investors will naturally gravitate north where values are cheaper and yields are higher – you can pick up a small portfolio of two bedroom terrace properties in Doncaster for the same price as a one bedroom flat in a new build London development.”

Rental yields

In terms of high rental yields, property website Rightmove suggests that buy-to-let investors look no further than the North West of England in places like Merseyside and Lancashire.

Bootle in Merseyside currently offers a yield of 9.3%, Birkenhead is 7.5% and in Lancashire Burnley’s yield is 7.2%, while Accrington is 7.1%, Rightmove said.

The top locations when it comes to demand from tenants searching for property on Rightmove is also currently dominated by the north, including Ashton-Under-Lyne and Oldham in Greater Manchester, and Stockport in Cheshire.

In London, more affordable areas such as Rainham, Bexleyheath and Erith came top as tenants looked for better value in outer London areas.

“Investors looking for the strongest yields could consider investing in certain areas in the North West where both demand and yields are high,” said Sam Mitchell, Rightmove’s head of lettings.

She continued: “Those with a number of properties in the capital may find that tenants are more price sensitive, so setting realistic rent levels will be the key to avoiding void periods.”

Rental prices

Rents in London are by far the most expensive in the UK, but in terms of rental price growth, gains in the capital have come to a virtual halt in recent months, reflecting the fact that the reduction in the pace of rental price inflation is most marked in areas of the country where rents were previously increasing fastest.

In Greater London, rents on new tenancies rose by 2% over the year to December to reach an average of £1,508, but this represents a sharp fall from the 7% plus annual growth recorded 12 months earlier, according to HomeLet’s latest Rental Index.

Overall, the data shows that the average UK rent for a new tenancy starting in December was £892 per month, which although higher than December 2015’s average of £877, is £6 lower when compared to November 2016.

Annual rental price inflation has dropped from a high point of 4.5% in March 2016 and the rate of inflation has now been declining or remained stable in each of the past six months.

Martin Totty, chief executive of Barbon Insurance Group

Rental price inflation is still running ahead of general inflation as measured by the consumer price index, but the slowdown seen during the second half of 2016 suggests that many buy-to-let landlords recognise that tenants have, or are, reaching an affordability ceiling, according to Martin Totty, chief executive of Barbon Insurance Group, HomeLet’s parent company.

He said: “While demand for rental property remains strong, landlords always have to be mindful of tenants’ ability to pay higher prices.

“The data recorded by the HomeLet Rental Index during the second half of last year suggests we have now begun to approach an affordability ceiling, particularly in areas of the country where rental price inflation was previously highest.”

Despite the slowdown, the latest HomeLet Rental Index reveals that rents increased in 11 out of the 12 regions surveyed over the year to the end of December, with the East Midlands the only region to see annual rents fall, down 0.4% year-on-year.

Across the UK as a whole, rent accounted for an average of 28% of tenants’ household income before tax, down slightly on last December’s figure of 28.4%. In London, the equivalent figures are 31% and 31.2%.

Totty added: “While the industry has speculated that landlords will increase rents to mitigate the impact of factors such as the impending reductions in mortgage interest tax relief, this may prove problematic given the pricing trends we’re currently seeing in the market and the potential for higher inflation and a squeeze on real earnings in 2017.

“The private rented sector is now having to cope with a series of disruptive elements, just at a time of great economic uncertainty, and amid a continuing systematic imbalance between supply and demand for residential property. The assumption that landlords have sufficient means to bear higher costs will soon be tested. Tenants must hope they do.”

Room for growth

The fact that rent increases have dropped back across many areas of the country may add weight to the idea that an affordability ceiling is now becoming an issue. But when you look at the various external factors at play – from tax changes to tighter mortgage lending conditions – along with the fact that there is a general shortage of homes to let in this country, the indications are that rents will continue to rise, with the national percentage increase in values set to outstrip house price growth in 2017.

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