What does the buy-to-let market look like in 2022?

What does the buy-to-let market look like in 2022?

It’s no secret that house prices have rocketed since the dust settled on the first lockdown in 2021. In fact, prices in the Liverpool area had been rising prior to that – some of the wards in the City Region were the slowest in the county to recover from the 2008 crash and were finally beginning to catch up, and some of that was being driven by investors being drawn to the city by dreams of low prices and high yields.

Let’s narrow that down and have a look at one of the markets we focus on at North Wall – Maghull & Lydiate. Here’s what happened last year.

• Rents up by 8.9% in the last 12 months
• House prices up 9.1% in the last 12 months
• Landlords helped by ultra-low mortgage rates and a stamp duty holiday
• But - some landlords in Maghull anxious about a possible end to no fault evictions
• New EPC rules could cost landlords £10,000+ per property

On a positive note, house prices have rocketed in the area, rents have risen faster than inflation, in 2021 we had the benefit of a stamp duty holiday and ultra-low mortgage rates, meaning Maghull landlords had lots to be happy about in 2021.

On a more cautious note, the laws regarding renting are currently being debated in Parliament which will see the end of no-fault tenant evictions and changes in regulations which may require landlords to make their buy-to-let rental properties more eco-friendly at a cost of up to £10,000+ each.

Rental prices will continue to rise in 2022

Buy-to-let landlords have seen the average rent of a rental property in Maghull rise by 8.9% in the last 12 months.

The number of properties available to rent on the property portals (e.g. Rightmove etc) at any one time is roughly 35% to 40% below the last decade’s average, meaning there is greater competition for each rental property, driving that increase.

Demand has increased for several reasons.

Firstly, some homeowners cashed in on the high prices, sold up and moved into rented property.

Secondly, some Maghull buy-to-let landlords have also cashed in on the buoyant property market and sold their rental property when their existing tenant handed in their notice.

Finally, the rental sector has an inverse relationship to the state of the general British economy, meaning with the uncertainty in the British economy in the early part of 2021, this meant more people decided to rent rather than tie themselves into a mortgage.

Looking at the supply side of the Maghull rental market - in the short term, rents will continue to grow as some Maghull landlords are abandoning the rental market - some because of the impending regulation changes and others with the natural flow of people cashing in their investments on retirement.

With increased demand and restricted supply, this will only lead to competition becoming more severe between renters, so it’s likely that rents will continue to rise in the Maghull area.

House price growth

The way house prices grew in 2021 surprised most people.

According to the Land Registry, house prices in Maghull grew by 9.1% in 2021, with the typical home averaging £240,700.

Many local landlords have been helped by this increase and will be in a position to cash in on those capital gains by either selling their buy-to-let property or releasing some equity by re-mortgaging.

Whether Maghull house price rises carry on at such a rate in 2022 will depend on a few things and we’ve talked about them in other posts, but one of the core factors is basic supply & demand.

Most commentators believe that house prices will be between 3% and 5% higher across the country by the end of 2022, and the North West is tipped to outperform most of the rest of the UK in terms of forecasted growth.

Mortgage rates will rise

The reduction in tax relief on mortages for buy-to-let landlords hit some landlords hard, but this has been tempered by the inexpensive ultra-low mortgages available to buy-to-let landlords.

Yet even with the Bank of England increase in base rates, landlords with big deposits of 40% or more can benefit from low rates. Those with only a 25% deposit must pay slightly more, but only at a mortgage rate of 1.64% - who can remember mortgage rates of 14% to 15% in 1992?

With inflation rising, the Bank of England has already indicated further interest rate rises are on the cards. I expect that they will be around the 1% mark by Christmas 2022. So if you are one of the one in five landlords on a variable rate mortgage, your margins will be squeezed as your variable rate mortgage will rise in line with the Bank of England interest rate rise.

Maybe it’s time to consider fixing your mortgage?

The end of no-fault evictions?

The Renters' Reform Bill in England and The Renting Homes Act in Wales are both set to abolish Section 21 (no fault eviction). Section 21 laws allow landlords to take back possession of their rental properties without having to prove fault by the tenant.

Westminster will issue plans for a change of this law which will probably incorporate the eradication of Section 21, which would signify a major change in the balance of power between the landlord and tenant.

Some are worried that the abolition of Section 21 will encourage some landlords to sell up and leave the rental sector altogether. Those people said the same when tax relief for landlords was changed five years ago.

The Scottish equivalent of Section 21 was abolished at the end of 2017.

At the time, there was some anxiety about how this would affect the Scottish rental market as anxious landlords and letting agents felt that they could lose control of their rental properties under this new law. Nonetheless, just over four years later, the rental sector has not collapsed in Scotland. The buy-to-let market remains upbeat, and there are signs that a Scottish landlords’ right to evict their tenant has been reinforced by these changes in the law.

The reason the Scottish changes worked was the new grounds for repossessing rental properties was clear and wide-ranging. The Scots sped up the slow and unwieldy eviction process where the landlord had a legal and genuine reason to re-claim their property.

All I hope is the same changes are made south of the border to the court procedure.

New EPC rules could cost landlords £10,000+ per property

The law currently stands that landlords need an Energy Performance Certificate (EPC) with at least a rating of E.

Westminster is anticipated to increase the EPC requirement for private rental properties in England and Wales to an EPC rating of C for all new rental tenancies by 2025/6, and for all existing tenancies by 2028, whilst Scottish landlords are also expected to see energy efficiency measures in their new proposed Housing Bill.

The problem is 1,959,045 of the 2,965,455 registered rental properties on the EPC database have an energy rating of D or below.

To take a property from an EPC D rating to a C rating might only cost a few hundred pounds, yet the average for all rental D and E rated properties has been calculated at just over £10,000 per property.

My advice to every landlord is to look at the full EPC report of their rental property (and if you haven’t got it, contact me and I will send it to you - whether you are a client or not) as that will indicate whether this will be a big or small job.

Renovating the UK’s rental stock to meet the Government's carbon neutral targets will be a big trial for landlords. There is talk of exemptions, as there currently is for the existing minimum EPC E rating – yet only time will tell on that front.

Maybe those landlords currently buying properties to add to their rental portfolio should reconsider their buying strategy? In the past, it has been normal for Maghull buy-to-let investors to be attracted to the inexpensive older properties that need an overhaul. However, with the potential energy efficiency laws coming into the game, it's rational to suggest that buy-to-let landlords will be more predisposed to buying slightly newer properties rather than have the cost for the upgrades to meet the potential energy targets.

Conclusion

Roll the clock back 20 years and making money from buy-to-let in Maghull was as easy as falling off a log. Yet with increased legislation and regulation, together with the changing dynamics of the British economy and the requirements tenants want in a rental property, it won’t be as easy over the next 20 years.

It amazes me that 11 out of 20 landlords do not use a letting agent to help them with their rental portfolio, considering the cost can be offset against your tax.

Moving forward, the savvy Maghull landlords will utilise their professional agents more and more, not only to collect the rent and manage the property but also build up their portfolio to withstand the regulatory and demographic changes on the horizon, and to ensure that their investment is fit for purpose in the medium to long-term.

Craig.