Over the last few years, the buy to let market has been facing some very strong headwinds that are pushing many so-called ‘hobby’ landlords out of the market, as their ability to raise finance on these projects becomes increasingly difficult. Add to that the introduction of a 3% stamp duty levy on second homes, and the phasing out of mortgage relief over the next 3 years, then the buy to let market is becoming ever more challenging and not the easy money maker it once was. At present, there are some 2 million private landlords representing 15% of the housing market, therefore any impact on this group will clearly have an influence on the market as a whole. With this in mind, one has to ask the question, should we still look at the buy to let rental market in the UK?
Helping First-Time Buyers
All of these aforementioned measures were designed to slow the market and put a check on prices, helping first-time buyers get onto the property ladder – or at least that was the intention. In reality, what we have seen is landlords (that no longer wish to partake in the market) selling their portfolios, not to first time buyers, but typically to other landlords that have a handle on their costs and are happy to pick up the slack from others exiting. So why have first time buyers been slow to jump in? Well, the key reason is affordability. First-time buyers are struggling to raise large enough deposits despite a slowing in house price growth, and in certain areas like London, the market has actually dropped. Thus, the intended objective to allow new buyers to enter the market and get on the property ladder has in some part been achieved, but not to the level intended, as affordability remains a key issue limiting new buyers participation in the market.
A Split in the Buy to Let Market?
So where does this leave the buy to let market? Well, as we have mentioned in some of our previous articles, there is an ever-growing generation of people that are now happy to rent, some for the rest of their lives. Furthermore, as the rental market matures and the policies implemented by the government help to regulate that market, the rewards for everyone involved will still be attractive. The difference now though is that the quality of landlords (and the quality of tenants), will gradually improve over time, and the usual race to the bottom will not evolve, as the quality within the rental market continues in a positive direction. So, demand for good rental property in key cities throughout the UK will remain, in part because the new generation of potential owners are happy to rent, and in part due to the transitory nature of the modern workforce, the putting down of roots and owning a property looks less appealing, add to that affordability and you have a perfect recipe for the continuation of a buoyant rental market.
This means that the property sector still remains a positive investment, one where the rewards are still to be gained by any investor that does their homework, treating this as a business and not as a ‘hobby.’ However, this is a gradual process and not one that will move quickly. As a result, the property market is becoming less about instant and fast capital gain to compensate for the lower yields and more about a sensible yield from purchase, with a projected modest capital gain. This is far more in-line with why property as an asset class has historically been viewed as a desirable investment instument, and one that means it will remain so for the foreseeable future.