The Intermediary Mortgage Lenders Association (IMLA) has today released its latest research report, examining the Private Rented Sector (PRS).

Private landlords have for years been faced with a growing burden of regulatory and tax changes, which have increased their operating costs.  Until recently, these additional costs have been offset by falling mortgage rates – but the current sharp rises in buy-to-let mortgage rates risk making large numbers of private landlords’ business models uneconomic.  While there is still no evidence of a mass exodus from the PRS, the loss of any rented properties will affect supply and almost certainly cause rents to rise in the long-term – to the detriment of tenants,

Tough regulatory environment

The drip effect of increased regulation and adverse tax changes have gradually discouraged investment in the PRS. The report highlights the changes that have, or might result in, increased operating costs, including:

+ The restriction of mortgage interest tax deduction for landlords to the basic rate of income in 2015

+ The reduction of capital gains tax for other assets but not for residential property in 2016

+ Lack of clarity around proposals (first consulted on in September 2020) to require enhanced energy efficiency standards

+ Provisions in The Renters (Reform) Bill (currently before Parliament)

+ Calls in some quarters for a temporary rent freeze and eviction ban

The report notes that the costs of the increased regulatory burden will – ultimately – fall on tenants.

Rising costs

The IMLA report found that the cost of servicing a buy-to-let mortgage has increased significantly. It cites a report from Octane Capital which claims  that landlords needing new deals have, on average, seen the cost of their monthly interest payments jump by 75.7% over the last year.

While the majority of landlords remain on low fixed-rate loans for now, their interest rate payments will rise over the coming months as they reach the end of their current fixed deals. This will place additional and unwelcome upward pressure on rents – which have not kept pace with inflation over recent months.

In the year to April existing private rents (as measured by the ONS) were up 4.8%³ and newly agreed rents (as measured by Homelet) were up 9.9% – both under consumer price inflation, which was 8.7% (April).

Between 2013 and mid-2022, estimated net yields for landlords exceeded buy-to-let mortgage rates, meaning that landlords could achieve positive gearing, increasing their return on the equity they put into the property by increasing their debt.  This provided a favourable economic environment for further investment.  Today, however, 2-year fixed-rate mortgage rates are above average net yields, producing negative gearing.

The relatively sudden increase in funding costs is causing a significant proportion of buy-to-let landlords to fail affordability assessments when seeking to refinance loans.  Some may seek to exit the market altogether, while others may be obliged to sell some properties and re-balance the debt on their portfolios.

Kate Davies, executive director at IMLA, said: “The PRS serves some some 4.6 million households – the equivalent of 11 million people – and represents approximately 19% of the housing market. Maintaining the health of the sector is therefore essential if we are to manage the UK’s chronic housing shortage. Our report highlights the tough environment that landlords currently find themselves in and, more concerningly, the outlook for the PRS and tenants if policymakers’ approach to the sector doesn’t change.

“Demand for rented housing is clearly high, and measures to increase tenant protections are important. However, the focus now needs to be on prompting increased investment in the sector and supporting landlords, whose operating costs risk  becoming unaffordable. If we don’t get the balance right, the result will be higher rents, and lower availability of properties – both of which are bad news for tenants and landlords.”