The buy-to-let (BTL) sector hasn’t been the most positive space over the past six or so months: rising mortgage interest rates, the mini-Budget, considerable speculation about a housing market crash, and the will-they-won’t-they around abolishing Section 21 evictions and minimum energy performance certificate requirements.
It’s not surprising, therefore, that many landlords I’ve spoken to have seemed a little downbeat or, honestly, a bit fed up.
But a significant number continue to take these challenges in their stride, their gaze firmly on the investment long game (and hopefully a comfortable retirement).
We shouldn’t see as many forced sales, which dilute pricing
With that long game in mind I’d like to turn your attention to 2023 and the relentless chatter around the property market. Like me, I’m sure many of you vividly remember the 2008 crash; some of you even the 1990s. Both were awful, undoubtedly. But the situation we’re in now is different and, for landlords focused on the long-term investment journey, opportunity is afoot.
Although the latest news (as I write) is that inflation has edged down for the second month, 10.5% remains unsustainably high for anyone to relax. The cost-of-living crisis continues, with food and energy prices rising or volatile, and consumer spending power will decrease as wages struggle to keep pace.
You don’t need me to tell you that lower property prices plus rising rents equals better yields. But let’s remind our despondent landlords!
We know all too well that the cost of borrowing is significantly higher than it was 12 months ago — almost twice as high for BTL. Our data guru recently crunched the average BTL rates for five-year fixes at 75% LTV: in January 2022, the averages were 3.23% and 3.58% for individuals and limited company mortgages respectively; for January 2023 we’re looking at 6.24% and 6.56%.
Note the decrease in the difference between the two, however. More on that later.
Defying expectations
I digress. The point is that the signs point towards recession. And, with less money sloshing around for people to spend, property purchase demand will likely fall, reducing the heat that’s sustained pricing for so long.
Softening property prices are ripe for investment, especially good when the banks want to lend
However, average property prices are not yet falling, and this is what I’ve been careful to make clear to those clients who, understandably, get a bit lost in all the housing market reports. Despite expectations, the speed at which prices increase is slowing but property value is still growing; 2.8% in December, according to Nationwide’s latest index.
What’s more, Rightmove’s January House Price Index found that prospective buyers were up 4% compared to January 2019 (arguably the last ‘normal’ market), and we’ve had the biggest New Year bounce since 2016, despite the significant downturn at the end of 2022. Now, I’m not getting too excited over one month’s report, but it’s certainly a positive start considering we’re (probably) on the brink of recession.
The difference between individual and limited company rates has decreased significantly
Turning to the expert economic predictions on house prices, they do vary. Nevertheless, the consensus is a decrease of between 5% and 10%. Considering average prices have increased by nearly 28% since March 2020, it’s not ideal but it’s not a catastrophe.
The chief economist at the Royal Institution of Chartered Surveyors, Simon Robinson, believes the “job-rich recession suggests the downturn in the housing market this time could be shallower compared to past experiences”.
Savills’ adjusted predictions reflect this, showing prices starting to recover in 2024, with 6.2% growth to 2027. Unlike previous recessions,we shouldn’t see as many forced sales flooding the market and diluting pricing.
We’ve had the biggest New Year bounce since 2016, despite the significant downturn at the end of 2022
So where are the opportunities for landlord clients? Softening property prices are ripe for investment, especially good when the banks want to lend (unlike in 2008), and capital growth should quickly resume.
Due to higher interest rates, steeper affordability calculations and fewer 95% loan-to-value mortgages, many first-time buyers will delay purchase plans and continue to save. But they still need somewhere to live. Therefore, we expect rental demand to grow throughout 2023, leading me to my next point: increasing rents.
Rents continue to rise at an extraordinary rate (7.9% for new lets in the year to November 2022) and, while they’re likely to slow this year, they won’t decrease. You don’t need me to tell you that lower property prices plus rising rents equals better yields. But let’s remind our despondent landlords!
I’m sure many of you vividly remember the 2008 crash; even the 1990s. Both were awful. But the situation we’re in now is different
Finally, incorporation. As I mentioned, the difference between individual and limited company rates has decreased significantly, meaning this is less of a barrier for those looking to reap the potential tax benefits. Indeed, it’s something for landlords to mull over — and discuss with their accountants.
It’s not all doom and gloom. Landlords have opportunities if they know where to look.
Jeni Browne is sales director at Mortgages for Business
This article featured in the February 2023 edition of MS.
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