For decades, investing in buy-to-let was seen as an attractive and relatively secure way to make money. The size of the private rented sector in England alone more than doubled in less than 20 years. Low interest rates on savings accounts and a trend towards diversifying pension pots all helped fuel the sector. This came at a time of increased demand for rental properties and rising house prices which when combined, effectively pushed up returns for millions of non-professional landlords.
However, property price inflation was increasingly locking more people out of homeownership so, in 2016, the government introduced a series of tax and regulatory changes to dampen buy-tolet demand. In this report, we look in detail at the effect of these changes on the rental market in Great Britain and suggest where the sector goes from here.
Fast-forwarding to today and the sector has been buffeted by the Coronavirus pandemic and lockdowns, which affected all areas of the economy in 2020, serving to reduce the number of homes to let and depressing rents. While rental growth started to recover at the end of last year, the recovery has not been felt in all areas. We examine these factors and look at how the stamp duty holiday has encouraged more investors to enter the buy-to-let sector in recent months.
In an era of relatively low house price growth, rental yields have become increasingly important for landlords. And we believe they will become more crucial over the next five years due to continued lower price inflation and the tapering out of tax relief on mortgage interest completing in 2020-21 which has tightened lender’s purse strings. While investors in the North East of England currently enjoy the highest yields, this report explains how and where investors in other areas can maximise their returns.
This flux in the buy-to-let sector begs the question: do the sums still stack up for investors? We look at the implications for net yields, capital growth and total returns, as well as analysing the potential threat of the build-to-rent model on small investors. Finally, we present our forecasts for buy-to-let, explaining why we believe the private rented sector will shrink, albeit slightly, over the next five years and why we expect to see small increases in gross yields.
Despite everything, buy-to-let remains profitable for most landlords. While some investors have left the sector in the last five years, there are millions of private landlords who have adapted well to the new lettings landscape. Others have chosen to enter the sector for the very first time. For some, this is because property investment runs in the family, while for others, they can make the sums stack up and the returns beat what banks are offering in savings accounts.