David Alexander comment: Cocktail of higher costs is squeezing landlords

The first week of June saw two breaking property stories which, though apparently separate, do have an inter-connecting link. In one, think tank the Resolution Foundation, blamed “high rentals” for discouraging millennials from moving from low-paying to higher-paying job locations. The other predicted that buy-to-let investors “will be lucky” to achieve net annual returns of 2.5 per cent at least until 2021.

The effective tax rate for landlords has ratcheted up to 47 per cent of rental income, says Alexander. Picture: Contributed
The effective tax rate for landlords has ratcheted up to 47 per cent of rental income, says Alexander. Picture: Contributed

On the face of it both are bad news for landlords, even those whose investments are in areas still achieving high rents, because this implies shortages in the level of stock. This inevitably encourages interference from politicians who are ignorant of how our market works and hope that grandstanding against “greedy landlords” will pull in extra votes.

According to the Resolution Foundation, the number of 25 to 34-year-olds starting a new job and moving home in the last year has fallen from 30,000 in 1997 to 18,000 in 2018, despite the fact that these are the type of people far more likely to live in private rented accommodation, the tenure traditionally seen as enabling mobility. That a greater share of private renters today have children, which can make relocating harder, only explains a tiny part of the fall in job mobility for young private renters.

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It says that once housing costs are deducted, the average private renter moving from a low-paying area such as East Devon to a mid-paying area such as Bristol would have seen a financial gain of 16 per cent in 1997, compared to just 1 per cent last year. Moving from a low-paying area to a high-paying area such as Croydon would have seen a financial gain of 26 per cent in 1997, compared to a 3 per cent fall last year.

This situation is unlikely to be as severe in Scotland. With around four-fifths of the population concentrated tightly in the central belt, most towns outside Glasgow or Edinburgh are within a reasonable commute of either city. Therefore the option, for Scottish millennials, to stay in the parental home (saving themselves a small fortune in accommodation costs) or continuing to rent in a low-cost area, is much more appealing. The situation will be more similar to England for anyone moving, say, from Dumfries to a higher-paid job in Glasgow or from Jedburgh to Edinburgh, as both are likely to face the prospect of substantially higher rental costs.

From a UK perspective, however, I can see a definite link between the Resolution Foundation report and the analysis predicting investors will be lucky to achieve a net return of 2.5 per cent.

The author, property investment specialist Bond Mason, said the issue is down to the “familiar cocktail” of higher costs and restricted fiscal benefits. It reminds us that the effective tax rate facing landlords has ratcheted up from 8 per cent of rental income at the start of 2015 to 47 per cent today, and will rise to an effective rate as high as 56 per cent next year, when counting the non-deductibility of mortgage interest. Thus, with subdued house price growth this year and the next “the typical buy-to-let landlord will be lucky to generate a return of more than 2.5 per cent this year or next from their investment and all the work involved”.

From my experience, diligent landlords in Scotland’s most popular rental areas are likely to secure somewhat north of this figure but for those affected 2.5 per cent becomes close to a “borderline” figure. By comparison some building society savings account offer 1.8 per cent fixed for two years; true, this no more than matches the current rate of inflation but it means sitting back for the next 24 months with no physical or mental effort.

I do hope politicians will take note of this. A rental return of 1 per cent above the current inflation rate seems reasonable enough, especially as investors are providing an essential product – housing – which government is unable to, at least not on the same scale. Squeeze landlords any further and Britain’s “housing crisis” can only get worse.

- David Alexander is MD of DJ Alexander