A recent surge in higher mortgage rates has significantly impacted landlords, particularly those with loan-to-value (LTV) mortgages of 50-75%, a bracket that encompasses approximately 20-30% of all landlords. Many would think that this will lead to landlords selling properties en masse, but the situation is slightly more complicated than that.
The Impact of Higher Mortgage Rates
Rising mortgage rates inevitably mean landlords will allocate a larger portion of their rental income towards repaying lenders. This can cause a strain on their income and cash flow, leading to an increased likelihood of selling when they approach refinancing.
Regions such as London and the South East, two of the most expensive property markets in the UK, account for 51% of all landlord sales. Property prices in these areas are high. Coupled with relatively low rental yields, the economics of being a landlord in London is challenging, especially in the face of increasing mortgage rates.
What’s the solution?
For landlords grappling with higher mortgage interest payments, one option is to inject equity at the time of refinancing. However, concerns over low yields and the risk of further price falls make this an unattractive choice for many.
Is There a Landlord Exodus? Will there be one soon?
Despite the challenging economic and regulatory landscape, fears of a mass exodus of landlords may be overblown.
Sales data indicates a steady flow of private landlords selling up since 2018 without any signs of acceleration. While individual landlords are selling, corporate and institutional investors are stepping in. This keeps the supply of privately rented homes stable.
However, the data also reveals an undersupply of rental properties. There are 33% fewer homes available to rent than the five-year average, while demand continues to surge, 50-85% above the average.
1 in 10 homes for sale on Zoopla formerly rented out
Over 1 in 10 homes for sale on Zoopla are former lettings. That’s a telling statistic, rental stock is being sold.
However, this data has been quite consistent for the last 3 years as a percentage of private landlords exit the market. This is, according to most expert opinions, as a result of tax changes and higher borrowing costs.
Before the pandemic, half the number of ex-rental homes put up for sale went unsold. These properties went back to being rental properties, or they were bought by another investor at a later date.
This contributed to limiting the loss of rented homes from the private rented sector. Recently, however, the proportion of returning stock has dropped to 30%. And that means more homes are now being lost from the rental market than can be replaced by the flow of new investment.
The sector faces legislative changes, particularly regulations related to Energy Performance Certificates (EPCs) mandating all privately rented properties to have an EPC rating of C or above by 2028. This will require landlords to invest heavily in improving energy efficiency. However, energy-efficient properties often command higher rents and lower vacancy rates, making them more attractive to tenants.
The current cost of living crisis could significantly impact the lettings market as inflation, energy price hikes, and wage stagnation make rental properties unaffordable for many and present a greater risk of bad debt for landlords through unpaid rent. Consequently, higher vacancy rates and lower returns may occur, requiring a delicate balancing act between landlords and tenants.
Changing tenant expectations, particularly among millennials, will influence the market. With a preference for web based viewing and booking experiences and better customer service. Landlords and letting agents may need to adapt to meet these demands or face reputational damage via poor user feedback that could be visible online for prospective tenants to read.
The future of the landlord
The future of the sector will likely involve a mix of short-term and long-term lets, catering to different tenant groups’ needs. The pandemic has increased the demand for short-term lets due to remote work and flexible living arrangements. However, long-term lets remain crucial for families and older renters.
In conclusion, landlords’ mass selling of properties is more complex than it seems. While there’s a gradual selling trend among some private landlords, others continue to invest, particularly corporate and institutional landlords. The market’s future will hinge on how well it adapts to many factors, including legislative changes, economic conditions, and technological innovations.