Landlords are responsible for a significant portion of homes for sale in London, with punitive taxes and skyrocketing mortgage rates forcing buy-to-let investors to exit the market. As the fastest-selling demographic in the country, buy-to-let investors need help with diminishing profitability due to increasing mortgage costs and low rental yields.
The Rising Trend of Landlord Home Sales in London
During the first quarter of the year, 26% of homes listed for sale in London had been previously rented out, according to the property website Zoopla. That is more than double the 11% average seen across the rest of the UK. In comparison, Scotland experienced a much lower rate, with only 5% of listed homes being let out previously.
Lee Karasavvas, managing director at Prolific Mortgage Finance, believes low interest rates initially offset the government’s tax crackdown on the buy-to-let sector. However, rising costs have now exposed the true impact of these measures. As reported by data company Moneyfacts, buy-to-let fixed rates are now nearly twice what they were just a year ago.
Karasavvas explains that more landlords are questioning their profit margins and placing lower-yielding properties on the market. Additionally, properties with poor energy efficiency are sold ahead of the government’s planned implementation of minimum Energy Performance Certificate requirements for the private rental sector.
The Shift in Tax Relief and its Effect on London Landlord Profits
Before 2017, landlords who owned properties under their names could deduct all mortgage interest costs when calculating profits for income tax purposes. This tax relief has since been phased out.
Since April 2020, landlords can only deduct 20% of their interest costs unless they own properties within a limited company. This change means landlords continue to pay the same amount of tax even as high mortgage rates diminish their profit margins.
Landlords in London face particular challenges due to high house prices, resulting in much lower rental yields compared to the rest of the country. In the South East, where rental yields are also low, landlords accounted for 10% of all properties listed for sale, making it the second-highest rate in Britain.
Though the share of landlord sellers in London has dropped from a peak of 30% during the pandemic property boom, it has increased by nearly a fifth compared to early 2019. Many landlords are selling properties because they can no longer afford them rather than capitalizing on an opportune time to sell.
The Struggling Landlord Market and the Future of Buy-to-Let Properties
Imran Khan, CEO of Property Loop, a London lettings agency, warns that many landlords struggle to make ends meet, resulting in a concerning departure from the market. Craig Fish, director of Lodestone Mortgages and Protection, agrees that high rates have caused some buy-to-let properties in London to become loss-making.
Rent growth reached a new record high for the eleventh consecutive month in March, as the Office for National Statistics reported.
However, a senior analyst at Moody’s, Brian Snow, states that the benefits of higher rents are negated by a combination of government policy, inflation, and high rates, causing private landlords to struggle to maintain profit margins.
As lenders’ affordability stress tests become increasingly stringent, landlords may find it difficult to remortgage when fixed-rate deals expire. In addition, if landlords cannot raise rents enough to meet these requirements may face higher product transfer or standard variable rates, further incentivizing them to sell.
The buy-to-let exodus in London signifies a growing concern among landlords as they face mounting challenges in the property market. Punitive taxes, soaring mortgage rates, and diminishing profitability have forced many investors to reconsider their position in the buy-to-let sector. As government policies and market conditions evolve, landlords must adapt to the changing landscape or risk exiting the market altogether.
The current state of the London property market highlights the importance of considering the long-term implications of government regulations and market trends on landlords and the buy-to-let sector.
It remains to be seen whether the exodus of landlords will lead to a significant shift in the property market or if new opportunities will emerge for investors seeking better returns.