Rental market crisis as landords sell-up

Private landlords are leaving the rental sector
Private landlords are leaving the rental sector
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A crisis is looming as landlords abandon the private rental sector amid tax rises and higher costs. Sharon Dale reports.

Tax changes and a proposed ban on tenant fees have created a perfect storm that looks set to batter landlords, reduce the number of homes to let and push up rents.

The government’s decision to gradually withdraw mortgage interest tax relief on private rental properties, starting this year, along with the extra three per cent stamp duty on buy-to-lets, have already had an impact.

There are also fears about the proposed ban on letting agent fees paid by tenants, which could see the cost of tenant checks and inventory charges made by landlords.

According to Chris Town, a Leeds landlord and vice chair of the Residential Landlords Association, the private rented sector has slowed by 20 per cent this year.

He says: “New rental property purchases are down by a fifth and some landlords are leaving the sector, especially those who have a high loan to value mortgage. The numbers just don’t add up when you take into account the cost of running and maintaining a property. The other major issue with the loss of mortgage interest relief is it can push landlords into a higher tax bracket.”

Chris adds that higher costs are inevitably being passed on to tenants in the form of increased rents. “Landlords are also being much stricter about who they let to as they can’t afford rent arrears. That means they won’t take on higher risk tenants, such as those on benefits so it is the poor that suffer.”

After 60 years of building a rental property portfolio in Leeds, the Halliday family has stopped buying thanks to recent tax changes.

Landlords were allowed to deduct mortgage interest from their rental income before calculating their tax liability but from April this year until 2020 the relief is being gradually phased out in favour of a “tax credit” worth 20 per cent of the mortgage interest. It means that some landlords could see their tax bill more than double and their profits plummet.

Richard Halliday says: “It’s becoming increasingly difficult to be a landlord, which is why we have stopped buying properties. The extra three per cent stamp duty alone takes 12 to 24 months to recoup and then there’s the withdrawal of mortgage interest relief, the 28 per cent capital gains tax when you sell and the prospect of paying fees for lettings checks. Tenants are also going to be hit as landlords increase rents to cover overheads. Everyone is a loser.”

The Residential Landlords Association is calling for the government to avert a crisis by reversing the tax changes, which is what happened in Ireland in the 1990s.

“The lesson from Ireland is that punitive taxes don’t help and tenants are the victims. Sadly, the Treasury doesn’t seem interested as it simply wants the tax receipts. We have even suggested meeting them halfway by offering longer, fixed-term tenancies and agreeing to take benefit claimants as tenants in return for being able to claim mortgage interest tax relief,” says Chris Town.

Will Linley is director of Linley and Simpson, an independent sales and letting agency with a network of 11 branches across North and West Yorkshire. He says that tenants may be gifted an unwanted Christmas present if Yorkshire’s buy-to- let market is stifled by tax increases for investors.

“At a time when we now need this private investment more than ever, there is a real risk of shutting the door on a rich source of extra rental properties that the region craves. The risk is that any shortfall will further limit choice and supply for tenants, and trigger more upward pressure on monthly rents.”

Instead of dampening this enthusiasm for buy-to-let, he believes that the government should be incentivising it. “We are significantly adrift of the buy-to-let peak witnessed a decade ago and there is a noticeable absence of first-time investors who have that appetite for buying-to-let.”

He adds that the impact of mortgage interest relief withdrawal has yet to fully register with some landlords.

“One of the litmus tests will be in the next few weeks when investors file their tax returns and see the impact on their bottom line for the first time. It remains to be seen whether it will prompt them to think twice this year, or next year, or the year after when the full force of the increases takes hold,” says Will, who dismisses the government’s attempt to trumpet build-to-rent as a solution for many of the pressures facing the lettings sector.

“There is a disproportionate importance placed on it, especially as it does not offer the choice that the market is seeking and which the private rented market can meet. The concern is that these high-rise, one or two-bedroom apartments, usually in city centres, are a niche product with the premium rents attached to them when the demand is for family homes in the suburbs. If it fails, the government faces a crisis of its own making.”