There has been a surge of investors selling their properties at auction in the wake of rising mortgage interest rates.
Auctions play a small but important role in the market, accounting for around 2% of transactions. They allow homes to change hands quickly and are often used to sell properties that wouldn’t be bought by owner occupiers – often but not always those which are difficult to borrow against.
Landlords and investors have always been over-represented at auctions. However, in October, immediately after the mini-budget caused mortgage rates to spike, a record one in four homes advertised in auction catalogues was being sold by an investor. The proportion of previously let homes going to auction has risen steadily since then, hitting a new high of almost 29% of all lots in January and with the majority (over 60%) of these homes advertised with the tenant still in place. This suggests that some leveraged landlords whose cheap mortgage deals are expiring are seeking to sell up relatively quickly.
Auction catalogues in higher-yielding northern areas typically hold the highest proportion of rental or ex-rental homes – in the northeast of England, for instance, rental homes currently make up 29% of all properties advertised at auction. However, over the past three months, Scotland has shot to the top of the list for investor sales, with rental homes accounting for 41% of auction lots. This is likely a reflection of the eviction ban, coupled with landlords being unable to raise rents at a time when many of their costs are increasing substantially. Under current plans, private landlords will be allowed to raise rents by a maximum of 3% from April – though can apply to increase this to 6% – and evictions will continue to be suspended.
From 2019 to 2021, flats accounted for more auction sales by investors than houses, representing 58% of sales in 2019 and 51% in 2021. However, last year this trend reversed dramatically and houses – which typically achieve a lower rental yield, reflecting both the market and the condition of the property – accounted for 76% of properties sold by investors at auction.
Ex-rental homes sold at auction will typically be bought by another investor. Given that the gap between exchange and completion is usually four to six weeks, these landlord purchasers will be relying on cash rather than mortgage finance. It is highly likely that the sale of rental stock at auction will lead to further consolidation of the sector, skewing it even further towards larger landlords with deeper pockets.
Indeed, landlord sales increased slightly across the board in 2022, not only at auction. Last year, 16% of all homes that changed hands in Great Britain were sold by an investor, up from 14% the preceding year and 13% in 2020.
The 2022 uptick was led by London, with investors accounting for 19% of all sales in the capital, up from 15% in 2021. Next came lower yielding areas of southern England, where the sums don’t necessarily stack up any more if a landlord is highly or even moderately leveraged. We think we will see a similar trend this year as fixed mortgage rates expire and landlords face up to some fairly hefty increases in their finance costs forcing them to make some tough decisions.
