The cost of renting privately is on the increase with the Royal Institute of Chartered Surveyors (RCIS) warning in August 2018 that UK rents are predicted to rise by 15% in the next 5 years. The July RCIS figures also showed a continued decrease in the number of private rental properties making this the eighth consecutive quarter of decline. This reduction in the number of properties to let will lead to an increase in rents of 2% by the end of 2018 and a predicted rise of 15% by 2023. What has prompted these increases and does that make now a good time to purchase a buy-to-let property?
Lack Of Supply
In recent years, there have been a number of changes introduced by the government which have led to a decrease in the number of rental properties available. The changes were designed to help first-time buyers get onto the housing ladder by discouraging landlords from buying properties which are affordable for first time buyers. Changes include a surcharge of 3% added to stamp duty for buy-to-let investors as well as landlords losing their tax relief by having to pay tax on rental income and not just the profit made after mortgage costs. Moreover, the Bank of England now requires mortgage lenders to ask landlords to earn a higher ratio of income from rent compared to mortgage payments. These changes have meant that landlords with smaller property portfolios have been selling as renting properties has become less lucrative.
Size Of UK Rental Market
Despite the changes to buy-to-let stamp duty, first time buyers are still struggling to afford their own homes and are looking to rent. In 2016-17, the private rented sector made up 20% of households with over £50bn paid in rents in 2017, over double that of 10 years earlier. This increase is due both to higher rents as well as higher numbers of tenants. Private rentals are often the only viable option with social housing being oversubscribed and buyers struggling to get on the housing ladder. Homeownership in the UK was at its peak at 71% of households in the early 2000s but has now stabilised at 63%.
Making Buy-To-Let Profitable In 2018 And Beyond
The increases in buy-to-let costs have meant that landlords with a small property portfolio have been selling their properties but landlords with more properties have been able to benefit from high rental demand and increased rental income. In fact, research indicates that rental yields are still healthy, rising to 5.2% in the second half of 2017 and with landlords in the north of England making 6.2%. The RCIS rise of 15% is also predicted to outstrip house price rises meaning favourable conditions for investment.When compared to investing in savings accounts, long term buy-to-let property purchases can still deliver worthwhile returns for landlords. Moreover, to combat increasing costs, the ownership of a rental property portfolio is becoming more professionalised with limited companies being created to take advantage of more favourable taxation for companies.
Faced with a lack of affordable rental properties, the build-to-rent sector is forecast to grow in coming years. Build-to-rent comprises of purpose built blocks of rental homes being built following the lead of countries such as Germany or France. This sector is predicted to expand with over 80,000 homes planned or completed at the end of 2017. Seen as a solution to the housing crisis, build-to-rent can provide a long term income stream for investors as well as providing long term tenancies and stability for tenants.
Government changes aimed at helping first time buyers have reduced the number of private rental properties that are available which is driving up rents. Despite increased taxation, buy-to-let is still a viable investment opportunity when coupled with effective long term planning and larger property portfolios. Moreover, the build-to-rent sector is predicted to grow and is also seen as a worthwhile investment.
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