Is now the right time for new landlords?

With interest rates on the rise, rampant inflation and a possible recession looming, can now really be a good time to invest in buy to let property?

Image credit Nick Youngson CC BY-SA 3.0 Pix4free.org

Buy to let investment peaked in 2016. Since then, the number of landlords has declined by around 10%, largely driven by changes in income tax and stamp duty. Last year there was an uptick, attributed to the stamp duty holiday. However, the trend continued into 2022, with Q1 showing the highest number of buy to let purchases in the last six years.

It seems that this may continue into Q2, with "first time landlord" being the most searched term on Knowledge Bank, a tool used by brokers to find suitable mortgages.

​The income tax change is still with us, as is the second home stamp duty surcharge and the premium levied on overseas purchasers. So why the renewed interest?

Strong rental market

The pandemic surge in house prices has been matched by the strength of the rental market. The national average annual increase in the price of new tenancies is above 10%, in many places much more. Even in London, where yields are historically low, properties are once again becoming viable on a cash flow basis.

House prices rarely go down

Over the last sixty years, house prices have gone down in just eight. The number of ten year periods is exactly zero. Only twice have there been consecutive years of falls - 1991/2/3 (Sterling exit from the ERM) and 2008/9 (Global Financial Crisis). Each time, recovery was fairly swift and prices went on to new highs.

Property as an inflation hedge

No, inflation and household inflation do not move in lockstep. However, over time, they move in the same direction. Historically, the rise in property prices exceeds RPI/CPI by one to two percent per annum, contributing to UK property's save haven status.

Declining relevance of the 2016 tax changes

Although the maximum tax relief on mortgage interest was cut from 40% to 20%, this only affected higher rate taxpayers. 52% of buy to let properties have no mortgage, so are unaffected. Half of the remainder are lower rate taxpayers, again, unaffected. Of the higher rate taxpayers, some have left the market, others have restructured as limited companies to reduce their tax liabilities. Income tax is less of a factor today than it was when it was introduced.

Stamp duty surcharges remain more of a frustration. However, with the recent surge in rental prices, many investors are taking the view that the stamp duty cost will be recovered through rental income within an acceptable period of time.

Looking forward - Rental Reform

Industry commentators suggest that many prospective investors were taking a wait and see position until details of the government's much promised rental reforms.  Among the major concerns were -

1. That landlords might only be able to regain possession of their properties in very limited circumstances, and
2. A system of rent controls might be introduced 

With the White Paper now published, those fears have been allayed, suggesting that the resurgent interest in property investment could continue for some time to come.