Landlords are set to suffer

The rental market has rarely looked so rosy. But there may be trouble ahead...

Landlords are brimming with confidence, with almost two-thirds (65%) describing their business prospects for the next quarter as ‘good’ or ‘very good’, according to a new survey by the National Landlords Association.

Indeed, landlord optimism is at its highest levels since 2007 overall, with 54% of landlords rating the current state of the private rented sector in these positive terms.

So why are the majority of landlords so happy and optimistic? And are there not a few potential curves in the road that threaten to scupper the golden goose that is the British private rented sector?

Swarming with tenants

One of the big reasons behind such significant landlord optimism is the sheer number of potential tenants at landlords’ fingertips.

The latest residential lettings survey by the Royal Institution of Chartered Surveyors (RICS) found that, yet again, demand for rental property had significantly outstripped supply, with 25% more surveyors reporting a rise in demand than a fall over the three months to July.

Having so many would-be tenants is a huge boost for landlords for a couple of reasons. Firstly, it means they can be more selective when picking a tenant – they are likely to have a number of applicants to choose from for any property to let, so can cherry pick the quality tenants.

What’s more, having a rich supply of tenants also makes it far less likely that the landlord will have to suffer void periods, where the property is empty. The fewer void periods you have, the less money you are missing out on in rent.

Rising rents

Of course, whenever demand outstrips supply to this extent, the result is almost inevitable – price rises.

And in the case of rents, the last year has not been a bountiful time for landlords looking to increase their rental income. According to the RICS report, a whopping 34% more surveyors reported a rise than a fall in rents. Indeed, every single region of the UK saw rents rise, with the most significant rises taking place in London, the South West and the South East, with Scotland seeing the slowest rental growth.

Cheaper to buy than to rent

Indeed rent has risen so sharply that according to Halifax research, it’s now more than £100 a month cheaper for first-time buyers to buy rather than rent. The lender reckons that the average monthly cost of buying a two-bedroom flat in the UK totalled £567 in July, £110 cheaper than the typical rent paid on such a property.

What’s more, in some areas the difference is even more pronounced, as the table below demonstrates

Sources: Halifax, Birmingham Midshires and ONS

Of course, many of those renting would actually prefer to be taking that first step onto the housing ladder themselves, but are simply not able to access mortgage funding. Until that changes, landlords will likely continue to find themselves swamped with wannabe tenants, irrespective of further rent rises.

Problems on the horizon

That’s not to say there aren’t a few issues that many landlords will have to deal with in the coming years.

First off, there are the changes to Local Housing Allowance payments from the Government, which include capping the maximum rates and reducing the maximum property size allowance. As a result, many landlords are now reconsidering whether they even want to be in that sector – according to research by BDRC Continental 15% of landlords have decided to drop offering such tenancies altogether, while one in four is already looking at how to reduce the number of LHA tenancies in their portfolios.

And then there’s the cost of mortgages. Everything is great while base rate stays at its current record low, but another BDRC study has found legitimate fear among landlords about the impact of a rise in Bank Base Rate. Around a third of landlords surveyed confessed to being worried about their ability to repay their buy-to-let mortgages should rates begin to rise.

Indeed, while a 1% rise would have a ‘significant negative impact’ for 29% of landlords, that jumps to a whopping 53% should Base Rate move to the fairly modest level of 2.5%.

Clearly, current and prospective landlords need to do some serious financial planning before considering expanding their portfolio, no matter how attractive the market’s prospects may be.

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