What can buy to let investors expect in 2023?

After a tumultuous 2022, we look at four areas to watch in the coming year - house prices, the rental market, rental reform and energy efficiency.

The first half of 2022 was good to buy to let investors. Property prices continued to rise and the rental market was unusually strong. However, underlying pressures were building and came to a head in September with an interest rate spike, soaring energy costs and rising inflation combining to put the brakes on the housing market. Transactions and prices have been in decline since, although lower home sales are fueling an already hot rental market. Will 2023 be any different?

Property prices

The property market is expected to cool next year, with soaring inflation, rising interest rates and recession all taking a toll on prices. Predictions vary widely - Rightmove are suggesting just a 2% fall and Capital Economics are sticking with their forecast of 12%. Both look like outliers. The broader consensus puts price falls in the 4% to 8% range, with Nationwide at 5%, JLL 6% and Halifax 8%.

The biggest driver will likely be interest rates. These have been rising since early 2022 with a big spike following the September mini-budget. Long term interest rates have since fallen back to August levels, but mortgage rates have been slower to respond. When they do adjust and stabilise, buyer confidence will improve, though the number of transactions is expected to be well below historic norms.

Rental market

The last twelve months have seen a boom in rental prices. Homelet's latest monthly index reports average rental prices for new tenancies up by 11% nationally. In particular, urban locations are seeing a surge. In London the figure is 16%, in central Manchester 20%.

There continues to be a strong supply and demand imbalance, with both under increasing pressure. Younger renters are staying in rented accommodation for longer and the number of older tenants continues to grow. Supply is likely to be constrained by the number of landlords exiting the market, particularly those who are highly mortgaged or are facing large energy upgrade costs. These may in part be offset by the high proportion of experienced investors who intend to increase their holdings.

Industry commentators expect the rental market is to perform well in 2023. Estimates vary, but suggest an increase of around 5% over the course of the year.

Legislation

In June last year, the Government published its long awaited White Paper on the reform of the private rental sector. If passed into legislation, this will have significant effects on landlords.

Principal among these is the abolition of Section 21, the so-called 'no fault evictions'. Under the current system, a property owner can evict a tenant with two months notice and without having to give a reason. Under the proposed rules, tenancies will be 'periodic', where the initial contract term has ended, but the tenancy is continued. The landlord will only be able to reclaim the property in defined circumstances, for example, non-payment of rent, anti-social behaviour or the sale of the property.

During the government leadership changes there was some doubt if the reforms would continue, but with Michael Gove returning as the minister in charge, legislation is expected to be passed in 2023-24.

Rental reform white paper - a Summary   Pcom blog, June 22

Energy efficiency

Improving energy efficiency remains high on the government's agenda. Under current law, privately rented properties must have an Energy Performance Certificate of level E or above. It is proposed that this is raised for new tenancies to level C by 2025 and for existing tenancies by 2028. 

Over 60% of the UK's rental stock does not meet the new standard, presenting the landlords with the choice of paying substantial upgrade costs or selling the property. Inevitably, there will be a mix of both.