Landlord confidence falls as tax burden rises

Tax hikes are destroying landlord confidence

Kent Reliance have issued a new report indicating that government changes are destroying landlord confidence.  As the tax burden rises and house price growth slows, only 41% of landlords hold a positive outlook for their portfolios.  Political and economic uncertainty will only add to landlords’ concerns.

Although the value of the property sector increased by £68bn over the last year, the annual rate of increase, 5.5%, was just half the level recorded in 2016.  Slower growth in the value of the private rented sector, mirrors the lack of confidence amongst landlords.  This was a key driver in the decline in house price inflation, with the annual average increase falling to 3.2% in the last year.  During the last two quarters, house prices have actually fallen.

With 5.5 million households in the sector, annual growth is only a third of the level recorded three years ago.  Tenant demand is rising however at a slower rate, down 39% from a year ago due to a recovery in first-time-buyer numbers.

Supply within the sector has also recorded some noticeable change.  The number of landlords expanding their portfolios in the first three months of the year only slighted outnumbered those reducing them.  However only 13% of landlords are now expected to increase their portfolios as amateur landlords begin to leave the market due to the new tax rules.

Additional pressure on supply has come from the Bank of England’s Prudential Regulation Authority’s new underwriting standards, introduced in January.  24% of landlords who applied for mortgage finance this year have found it more difficult, with a further 6% having their application rejected.

While there is likely to be consolidation in the market as tax costs rise, many investors are responding through rent rises and incorporation. Setting up a limited company will allow landlords to be taxed as a company and offset all their financial costs against rental profits.

Andy Golding, Chief Executive of OneSavings Bank, which trades under the Kent Reliance and InterBay brands in buy to let, comments: “A perfect storm of weakening house prices, higher taxes and lending restrictions have knocked investors’ confidence. On top of this, investors are now being buffeted by the winds of political uncertainty following the election, and its impact on the economy.

Uncertainty will pass, but the impact of changes to mortgage tax relief and underwriting standards will leave a more indelible mark on the sector. We believe these changes will alter the mix of landlords, creating a more professional and stable sector in the long-term. There are already some signs of consolidation, with highly geared amateur landlords most likely to leave, and we are also seeing investors take action to protect their margins.”

Golding added: “The fundamentals supporting the PRS have not drastically changed. Yes, first-time buyer numbers have been recovering, but there is still an underlying supply and demand gap across the country. Given the inability of any party to win a clear majority in the election, the implementation of a strategy to create a necessary housing boom seems unlikely. Affordability issues will therefore remain, and rental accommodation will retain its importance to those unable to take their first step onto the property ladder.”

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