In our last blog we looked at a post budget assessment, part of which highlighted how house prices are set to soar over the coming years however this is set against a backdrop of increased taxation, a surge in regulation and significantly increased costs.
This started in around a decade ago when the 3% duty surcharge was introduced, shortly followed by the changes around section 24, mandatory electrical inspections (which we think is a good thing, but does add cost), the Renters Rights Act with the removal of section 21, capital gains tax allowance reductions and proposed EPC requirement changes.
With the most recent shock change to stamp duty now shooting up to an additional 5%, you could be forgiven for thinking it’s pretty much game over for the private rental sector.
Of these changes, we recently read how a RICS survey outlined that the number of new properties coming onto the rental market is at the weakest it has been since 2021. In fact, if you look closely, it’s the weakest it’s been in a decade if you assume the drop in 2021 was COVID related. Check the graph below that we came across in the Financial Times!
These points have been supported by worrying media headlines around the rental market and supply dwindling, but for landlords it’s crucial to take a step back and focus on the long term.
What do we mean by this? Well, you might have read in our previous article how Medway investors could benefit from appreciation of around £47,520 per property over the next five years.
If we look at Medway house prices, we see how properties have increased in value by 124% over the past decade. That’s capital growth of £163,360 or around £1,360 per month!
You must also consider how rents have steadily increased by 8-10%, supporting increased costs but for the savvy investor, also driving an increase in profits (we recall how, just five years ago, a single let terraced house in Medway was going for £850 per month and now we’re at around £1,350 per month!).
With the supply/demand imbalance we have had for the past few years we don’t see rent increases slowing all that much for a while yet.
Looking back at the changes which have come in over the past decade, we haven’t seen much of a loss in appetite from investors. What we have seen however, is a change in approach and we think that’s what we will see over the coming years.
Looking at stamp duty, we can see it basically a “cost of doing business” and investors will simply need to factor that in when assessing whether deals stack up (or they may just take longer to turn to profit). It might mean offers will need to drop, rents will need to increase or, as is our assessment, a combination of the two.
With the increase to rents, we do agree that it’s going to hit tenants but if the government wishes to add these additional costs they do need to be covered. Neil Foster from Hadrian Property Partners hit the nail on the head when he said to the FT:
“Rental stock continues to dwindle, applying further upward pressure to rent levels… Quite where the ‘ivory tower’ dwellers in Westminster expect most private tenants to live is a mystery!”
Property has been proven time and time again to be a reliable, effective way of building wealth and with things such as changes to pension inheritance tax it could also be an excellent way of passing something onto the next generation (time will tell on that one).
Is the rental market dead? No, far from it!
Taking a long-term view, it’s still an effective way of building wealth. One where change is inevitable but investors and the market will simply adjust to the changes.
