David Alexander: Rental stormclouds likely to clear – Brexit or not

More than two-thirds of the way through, 2019 hasn’t been the best of years for private residential landlords. The threat of rent controls by some local authorities in Scotland along with creeping taxation (in the form of a reduction in breaks) by Westminster have brought gloom north of the Border.

In times of economic uncertainty folks tend to rent rather than commit to a mortgage, says Alexander. Picture: Laurence Winram

The latter has partly been responsible for a UK-wide exodus of landlords from the buy to let market – by about 120,000 in the past three years, according to research published by Hamptons International. Encouragingly, however, the research also points to a slowdown in the numbers deciding to get out. In 2019 there are likely to be 18,060 more landlords selling than buying so far this year, compared with almost 35,000 in the same period last year.

So why is this happening? Well, somewhat ironically, Brexit is playing its part. While some, correctly, refer to the uncertainty caused to the market by the present goings on in Parliament, the threat of a no deal departure from the EU is also largely responsible for a drop in mortgage rates by banks and building societies, which undoubtedly reduces the monthly outlays paid by new-entrant landlords or existing landlords seeking a new mortgage deal with their existing or an alternative lender.

At the beginning of the year all the signs were pointing to rising savers rates which I suppose must have encouraged some landlords (especially those who originally entered the market with some reluctance) to cash in their investments in stone and mortar and plump for the “simplicity” of savings.

Instead the trend has been in the opposite direction. Most two-year fixed rate bonds offered by lenders covered by the Financial Services Compensation Scheme pay less than 2 per cent while it is now below 1.5 per cent for notice savings accounts over the same period. By contrast, according to Moneyfacts, the average two-year fixed interest rate on a buy to let mortgage at loan to value of 60 per cent has gone down to 1.97 per cent from 2.1 per cent a year ago.

Should the UK leave the EU without a deal then many believe that the Bank of England will reduce the base rate from the present 0.75 per cent in an effort to hold back the prospects of recession. This will further increase the gap between interest earned from savings and net returns from buy to let – even allowing for greater levels of taxation via the latter.

To those who fear that Brexit discord will have a negative impact on demand for rented property, and therefore rental income, I would say that people will still need a roof over their heads. Indeed during a period of economic uncertainty folks tend to rent rather than commit themselves to a mortgage. More existing landlords selling up than buying rental property could also lead to a drop in supply which would help sustain rental levels.

Research undertaken by Zoopla in June found that an average first-time buyer – or couple buying – needs a household income of £54,400 to secure a mortgage on their first property. This is some £4,500 more than in 2016, with the national average deposit required currently standing at £38,418.

These, of course, are UK statistics on which house prices and incomes in London and the south-east of England have a major influence. In Scotland people required just a 3 per cent increase in income over the same period to secure that first-time buy which also implies a lower average deposit. Nevertheless, it is easy to see why renting has its attractions, with its comparable “move in” costs (a month’s rent in advance and a month’s rental equivalent as a deposit).

In a nutshell, therefore, 2019 is likely to end in much the same way as it began for landlords but I remain confident that – Brexit or no Brexit – demand will remain steady and any clouds currently hovering over the buy to let market will recede in time.

- David Alexander is managing director of DJ Alexander