There is a “very real risk” of landlords quitting, a property firm is warning, as it said 2023 marks a turning point following a boom period for those investing in the buy-to-let sector.
Savills’ research indicated that average net profits for landlords are at their lowest since 2007.
Investors’ average net profits fell below 4% on average in the first quarter of 2023, marking a dramatic shift in finances for mortgaged buy-to-let buyers, it said.
Lucian Cook, head of residential research at Savills said: “Following a boom period for buy-to-let landlords, 2023 marks a turning point for Britain’s private rented sector.
“Between 2014 and 2021, landlords on average were making ‘year one’ cash profits of 23% of rental income, but successive interest rate hikes have seen this figure plummet to under 4% this year.”
Future investment is now likely to be dominated by cash buyers and those with low borrowing requirements— Lucian Cook, Savills
He added: “There is a very real risk that landlords will exit the sector, particularly those with high levels of borrowing, putting increased pressure on a sector where demand significantly outweighs supply in many locations.”
Mr Cook continued: “Future investment is now likely to be dominated by cash buyers and those with low borrowing requirements.”
Many landlords who have been active since buy-to-let took off in the early 2000s are now nearing or in retirement, which also risks limiting the future supply of rental stock, Savills said.
Hikes in the Bank of England base rate have been pushing up borrowing costs generally and expectations over inflation are also having an impact on mortgage rates.
Figures released on Tuesday showed that average regular wages, not including bonuses, jumped 7.2% higher in the three months to April, up from 6.8% in the three months to March and higher than expected.
Experts have said the figures would raise the chances of another base rate hike next week. They also said the renewed pick-up in wage growth in April will add fuel to a recent rise in gilt yields.
Mortgage lenders have already been temporarily restricting the availability of mortgage deals and hiking rates as financial markets now believe interest rates may need to rise from 4.5% currently to 5.5% or even higher.
This isn't just about homeowners, it's about renters too because the landlords that they rent from are also facing increased borrowing costs and that in turn is forcing up rents— Shadow Treasury minister Pat McFadden
On Tuesday, shadow Treasury minister Pat McFadden warned the UK’s homeowners “are under increasing financial stress”.
He said: “This isn’t just about homeowners, it’s about renters too because the landlords that they rent from are also facing increased borrowing costs and that in turn is forcing up rents.”
Answering an urgent question from Labour on recent developments in the mortgage market, Economic Secretary to the Treasury Andrew Griffith told MPs: “Given inflation is the number-one enemy, we’re focused on delivering the Prime Minister’s pledge to halve it this year, nevertheless I know mortgage rates and the availability of mortgages are a concern right now.
“Mortgage arrears and repossessions remain below pre-pandemic levels and if a borrower falls into financial difficulty guidance from the FCA (Financial Conduct Authority) requires firms to offer tailored support and to deal with customers fairly.”
On Monday, Santander announced a temporary pause on some mortgage applications, amid “changing market conditions”.
The bank plans to relaunch a full range of mortgage products on Wednesday and said that from Monday evening it would not be accepting new applications via intermediary and online channels.
On Thursday last week, HSBC UK made the decision to temporarily withdraw mortgage rates available via broker services, to help to ensure the bank could stay within its operational capacity.
Its mortgages are now back on sale through brokers, although its rates have increased by between 0.10 percentage points and 0.45 percentage points.
Across the mortgage market, average fixed-rate mortgage rates have been moving close to 6%.
According to financial information website Moneyfacts, the average two-year fixed-rate mortgage on the market was 5.90% on Tuesday, while the average five-year fixed-rate was 5.55%.
