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Guide to Buy-to-let
Buy-to-letJan 30 2020

Regulatory changes will affect Buy-to-Let market

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Regulatory changes will affect Buy-to-Let market

Regulatory changes and the erosion of tax relief are expected to pose problems for the buy-to-let market in 2020 and beyond, despite an anticipated reduction in the political uncertainty that has dominated the past few years.

As politicians argued over the UK’s exit from the European Union, and three different dates for Brexit went by without a withdrawal agreement being passed, financial markets wobbled.

Theresa May’s ignominious exit as prime minister added to the uncertainty.

However, some stability appeared to return when her successor Boris Johnson won a majority in the December general election: data from Rightmove indicated that enquiries to estate agents rose by 12 per cent in the four weeks immediately following the election, significantly higher than the same period a year earlier.

With interest rates rooted at 0.75 per cent as the Bank of England warned of the economic damage this uncertainty would cause, the housing market suffered.

We expect modest growth for the mortgage market over the next two years but Britain’s housing market is still far from perfect Kate Davies, IMLA

Estate agent Savills reported in August that fewer houses were sold in the first half of 2019 than in any six-month period since 2009 – although figures picked up through the second half of the year.

Where does this leave the market for mortgages and buy-to-let investors going into 2020?

In good health?

According to the Intermediary Mortgage Lenders Association (IMLA), the next two years should bring a “modest” mortgage market recovery as the political uncertainty that dominated 2019 subsides and the lending environment improves.

The association expects gross mortgage lending to reach £268bn this year and £275bn in 2021, compared to an estimated £264bn in 2019.

Healthy competition among lenders has led to attractive rates for landlords, while supply and demand dynamics and population growth remain in favour of investors.

However, the removal of tax relief for landlords – effective from April this year – is expected to have a weakening impact on the buy-to-let market, IMLA says.

Volumes are expected to fall to £40bn in 2020 and £39bn in 2021, from an estimated £41bn in 2019, as the tax relief rule change implemented in 2015 takes full effect.

Although the market should have adjusted to the tax changes by 2021, remortgage rates are expected to decline further, according to IMLA, as the take-up of five-year fixed rate loans rises.

However, other forecasts have argued that remortgage rates could stay flat or even improve as owners choose to stay put or target a cheaper deal.

Kate Davies, executive director of the IMLA, says: “Although we expect modest growth for the mortgage market over the next two years, Britain’s housing market is still far from perfect.

“The buy-to-let sector continues to be under pressure from a spate of tax and regulatory measures enacted over the last five years and IMLA continues to call for a moratorium on any further changes to the private rented sector.”

Regulatory changes

In its manifesto, the Conservative Party said it would abolish Section 21 of the Housing Act, which allows so-called “no fault evictions”.

Landlords have raised concerns that the change will make it more difficult for them to evict tenants who fail to pay rent or damage properties.

The IMLA has called for a streamlining of other types of eviction to offset the effect this might have – although it has also acknowledged that Scotland has already removed Section 21 “without a serious impact of supply”.

Scotland’s buy-to-let market continues to perform well, with credit broker Totally Money highlighting areas of Glasgow, Falkirk, Aberdeen and Kilmarnock as among the highest yielding in the UK for 2019-20.

David Alexander, joint managing director of property services company DJ Alexander, says the tax change could mean “many landlords feel the market is just no longer viable”, despite a recent uptick in rental growth.

“For many landlords their net income may be 50 per cent to 75 per cent less over the last three years with lower returns to come in the coming year and the prospect of a smaller capital return when they exit,” Mr Alexander says.

“For those landlords in Scotland the situation is slightly worse as taxation is higher. Over the last three to four years it has become more expensive to buy a rented property, more expensive to run it, and less profitable to sell it.”

Property investors should review their finances, property operations and the returns they are achieving to assess whether they can improve anything, Mr Alexander adds.

In its 2020-21 market outlook, IMLA says that the key issue for the buy-to-let market over the “medium to longer term” centres on “whether the tax and regulatory changes designed to limit the desirability of buy-to-let as an investment and shift power from landlord to tenant will reverse the growth of the PRS [private rented sector]”.

“With little indication that the social rented sector will be expanded sufficiently to meet the growth in demand for rented accommodation, it seems that the PRS should remain reasonably robust in the face of higher tax and regulation,” IMLA says.

2020 and beyond

Despite these headwinds, underlying strong demand from tenants is expected to support the buy-to-let lending market.

Growth in this type of lending has been running at roughly 4 per cent a year over the past few years, according to IMLA data – a trend the trade body expects to continue over the next couple of years as house prices rise.

Mr Alexander adds: “Rising house prices, a scaling up of social housing and growth in the PRS through buy-to-rent means that more people will find homes that they want to live in, in areas that they desire, at a price they can afford.

“Legislative changes that are coming into the English market will protect tenants through the removal of no-fault evictions, greater security of tenure, and open-ended leases and will create a fairer, more transparent private rented sector better adapted to the needs and requirements of people in 2020 and beyond.”

Nick Reeve is a freelance journalist