Is the UK’s future buy-to-let?

Simon Rubinsohn

Chief Economist (RICS)

Whether it's the government’s consultation on a higher rate of stamp duty, the Bank of England’s deliberations around extending its macroprudential armoury or attempts to assess viability against the prospect of rising interest rates at some point in the future, it's hard to escape the endless speculation about the future of buy to let.

It is, of course, not just developments in the real estate sector that will have a bearing on how this particular story plays out. In light of recent volatility in financial markets, the relative attractions of different asset classes such as shares or commodities will never be far away from the minds of most investors.

That said, with the stamp duty surcharge about to take effect, we will shortly get a first glimpse as to how the change in the tax landscape for real estate will impact on landlord behavior. For what it is worth, a recent YouGov survey found around two-thirds of landlords indicating that they would stick with their investments at least for the time being but let’s remember that the more penal adjustment regarding the treatment of interest charges only begins to kick-in from 2017.

A more nuanced picture

Our own attempt to gauge the impact on the market through the closely watched RICS Residential Market Survey paints a more nuanced picture.

There certainly has been considerable momentum in the sector as investors try and beat the April tax uplift. Some three-quarters of respondents have reported an increase in purchase activity ahead on the introduction of the surcharge. But it is noticeable that sales expectations are beginning to moderate in anticipation of a flatter market as one key driver of demand for property dissipates; indeed, the headline London number regarding anticipated transaction volumes over the next three months actually turned negative in the February results.

That said, the picture appears a little more mixed when we probed members as to how they envisage the buy to let market developing over subsequent years. Around half of respondents take the view that the tougher fiscal environment will lead to an exit of landlords, or at least a scaling back in portfolio size as it proves increasing challenging to deliver a return from the investment.

Interestingly, a broadly similar proportion is less than convinced about such an outcome, with an unusually large number of contributors being candid enough to tick the "don’t know" box.

One significant aspect to this is how the increased cost of owning a buy  to let property plays out with respect to the medium-term trend in rents. Put another way, will landlords simply try and pass as much of the additional tax burden as possible on to tenants?

The mood turns

As part of our regular monthly survey, we attempt to track how five-year rent expectations are shifting. While recognising the difficulty that this question in particular  presents contributors, it does help give a feel as to the shift in the "mood music" in the sector and, in all honesty, I can’t think of a better group of people to give both us and policymakers a sense of where the market may be heading.

Interestingly, the projections for this time horizon are consistent with rents rising by more than a fifth from current levels with firm expectations being reported in most parts of the country.

Less additional (buy to let) supply into the sector, as a result of recent policy initiatives, may be one part of the story. A lack of the conviction that the government will come close to meeting its (broader) ambitious target of one million new homes by the end of this parliament might be another element.  On top of this, the potential for an uplift in demand (for market rent housing) due to a likely the squeeze in the delivery of sub-market rental properties may also be a factor.

To put this is some context, recent analysis by PwC suggests that there will be more than one million new households looking to find a market rent property in ten year’s time despite the government’s attempt to  reverse the downward trend in owner occupation.

Could institutional investment bridge the gap?

Recent announcements from the likes of L&G and Grainger certainly provide some encouragement as does the increasing focus of some housing associations on this product, but we have been here before. The market, for the time being, continues to be dominated by the individual rather than the institution and it will take many more, similar sized announcements to materially change this.

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