While some investors have focussed their strategy on rental returns, others have pinned their hopes on capital growth. The average landlord in England & Wales who cashed in so far this year sold their buy-to-let for £94,800 more than they initially paid for the property, having owned it for an average of 11 years. This 49.2% uplift (before tax and costs) equates to an average annual gain of 3.7% over the ownership period, boosting any profit made from rental returns.
However, as house price growth grinds to a halt, there are signs that the landlords looking to sell today may have missed the top of the market. Rather, investors selling in 2023 are making smaller gross gains than those who sold last year. The average gross gain has fallen 10.1% year-on-year from a record £105,300 and is almost identical to what landlords selling in 2016 achieved.
Lower house prices and higher rents might combine to shore up the rental market as more landlords hold off on the decision to sell. On the flip side, this will also weigh down on the government’s capital gains receipts handed over by landlords selling up over the next few years.
Average gains on the sale of a property by a landlord fell year-on-year in every region for the first time since 2020. In percentage terms, northern regions recorded the largest annual falls. This reflects both slowing price growth and a shift in the type of home being sold. Smaller terraced houses and flats, which have seen weaker price growth in recent years, made up a higher share of all buy-to-let sales so far this year, further reducing the average gain.
However, in comparison to 2016, investor profits have risen fastest and furthest in the north of the country. Investors in the North East recorded a 176% increase in the average capital gain on the sale of a buy-to-let between 2016 and 2023, with all three northern regions boasting a 50%+ increase in gains since 2016. House prices in Northern England have risen the most over the last seven years, while in parts of London and the South East prices have remained static.
Even so, higher average prices mean that in cash terms London landlords who sold up still saw the largest gross capital gains. So far this year this figure stood at £308,500. However, this number has also fallen by 3.4% from £319,300 last year and is 15% down from a peak of £365,000 in 2016.
There are just three regions where the average investor profit is still at six figures (London, South East and East). The South West fell off that list this year when the average capital gain shrank from £105,000 in 2022 to £95,700 today.
It is likely that the amount made by landlords selling up will fall further on the back of both lower prices being achieved and a rising proportion of sellers having bought later in the house price cycle. The average landlord selling in 2023 bought 11 years ago. This means 65% of landlord sales this year were homes that had been bought since 2009, after the point where prices bottomed out. This figure rises to 70% for flat sellers, who typically have shorter holding periods and therefore tend to see lower capital growth.
RENTAL GROWTH
New homes coming onto the market continue to achieve record rents and in the short term it’s hard to see what would put concerted downward pressure on the pace of growth. With around 35,000 landlords coming off fixed- rate mortgages each month, the upward pressure on landlords’ costs marches on. In the run-up to remortgaging landlords are fighting to balance the books by paying down debt and hiking rents that have dropped below market rate.
The average cost of a new tenancy in Great Britain rose 9.9% year-on-year to a record £1,282 pcm. On an annual basis, rents have risen more than 5% for 27 consecutive months and above 7% for the last 10 months. This prolonged period of growth leaves the average rent 28% higher than in February 2020, on - the eve of the pandemic.
Over the last year rents in London have continued to rise faster than anywhere else in the country, with the average price of a new let up 13.9%. Annually, rents here have been growing at a double-digit pace for 15 of the last 17 months. However, the rate of Inner London rental growth has slowed as rents surpassed pre-Covid levels, with growth now broadly on par with Outer London.
Looking back to the onset of Covid, rents have grown faster in the North than in the South. Average rents in London and the South East are up 26% and 24% respectively since February 2020. Meanwhile in the Midlands they are up 31% and in Northern England they are up 33%. Here, rents have risen on the back of higher house price growth as yields have held steady.
