Over the past year or so, the squeeze on the buy-to-let (BTL) sector has been well documented – from stamp duty surcharges, changes to tax relief and wear-and-tear allowance to the most recent updates to the underwriting requirements for portfolio landlords. However, one thing that has remained constant is the buy-to-let sector’s readiness to adapt and evolve to changing market conditions.
We cannot deny the effects of the Prudential Regulation Authority’s (PRA) recent regulatory and tax changes. Waves of new rules have hit the sector in the past few years with more on the horizon, including the cut in mortgage tax relief that is already being phased in.
The second tax change came when the level of stamp duty payable by landlords and others buying a second home was increased by three percentage points in April 2016. This has made it more expensive for landlords to expand their portfolios. HMRC statistics showed that the number of residential property transactions of £40,000 and more soared to 197,390 in March 2016 before the hike came into effect. April saw figures drop to 80,370.
The third significant change affecting the sector related to portfolio landlords, defined by the PRA as those with four properties or more – with changes being introduced on 30 September 2017. It will see greater affordability assessments applied to this group and specialist underwriting required.
Landlord churn
It is likely that some buy-to-let landlords will move on from the sector because of these tax and regulation changes. In fact, the PRA changes to portfolio landlords has led to 45 per cent of landlords in central London reviewing the size of their portfolios, compared to 40 per cent in outer London.
However, churn among investors is to be expected. Even if some are choosing to leave buy-to-let, others are deciding to remain and invest, perhaps by expanding their portfolio outside London. This is exemplified by the latest buy-to-let data from UK Finance, which shows that loans worth £3.2bn were completed during July 2017; up 7 per cent when compared to both the previous month and July 2016. This equated to 20,500 completions, an increase of 5 per cent month-on-month and 9 per cent higher than a year ago.
Although these figures are primarily made up of buy-to-let re-mortgage activity, these statistics are indicators that investors are looking to stay in the sector and take advantage of the record low rates we are currently seeing.
Historically low mortgage rates have made it cheaper to borrow and invest in property. Many consumers are deciding to remortgage on their portfolios and remain in the market because of this. With high street savings accounts generally continuing to offer poor returns, people are increasingly looking towards property to get the most out of their money.
Key points
- There have been several big changes affecting the buy-to-let sector.
- Northern areas are offering particular value to investors.
- Property remains a highly attractive place to invest.
Like any form of investment, buy-to-let should be judged over the medium to long term. Although there can be short-term losses, on the whole, there are long-term gains to be made.
Northern exposure
For those looking for short-term gains, yields are attractive in the north, with strong price growth and the average property in the north east returning 5.1 per cent to investors in August and the north west offering yields of 5 per cent. With lower initial purchase costs than in London and the south east, these areas have higher yields in percentage terms than anywhere else in the UK. The east of England and the north west have also seen a monthly average rent increase by 3.2 per cent over the past 12 months. Rising demand for rental properties and insufficient housing stock, however, are contributing to pushing up prices.
