In Focus (2022, Qtr 4): The PRS, property markets and the economy

Introduction

The final quarterly consultation for 2022 attracted responses from almost 1,100 landlords. Responses are summarised in this report, and also in the Landlord Confidence Index.

The consultations provide an insight into how the supply side of the PRS may be affected by macro-economic forces and policy change. This specific consultation focused heavily on key macro-economic factors and their influence on landlord behaviour. 
The report looks in turn at:

• Landlord confidence across England and Wales.
• Insights into how landlords buy and sell property.
• Patterns and determinants of rent increases.
• A detailed analysis of the impact on the sector of rising interest rates.
• Landlord views on some alternative proposals for the PRS, based on practice elsewhere.  

Landlord confidence

More detailed analysis of landlord confidence in this quarter can be found here. 

Landlord confidence is continuing to slide. It is now at levels last seen at the outbreak of Covid-19. Despite a slight stabilisation, confidence in Wales this quarter is the lowest yet recorded across the membership area. 
The reasons confidence is so low can be put down to the following factors:

1. Regulation change in Wales and the looming changes in England.
2. The impact of tax changes – the abolition of Mortgage Interest Relief – which ratchets up the impact of interest rate increases on landlords with Buy-to-Let mortgages.
3. Landlord costs including property maintenance and rising overheads. 

This helps to explain why record levels of landlords have now sold and are planning to sell property.

Landlords buying and selling

This quarter the analysis of buying and selling was extended to better understand the overall “footprint” of landlord activity on the property market.  Our research here presents evidence which suggests that: 

1. Around half of landlord purchases are from other landlords.
2. Around one-third of landlords selling during 2022 have sold to another landlord.

Landlords appear to be willing to buy property from other landlords, often with tenants in situ. However, when landlords sell, they prefer to do so with no tenants and into the open market. It is chance whether the property then remains in the PRS or not. 

Patterns of rent increases

Just one-landlord-in-five raise rents annually. More landlords have a policy of not increasing rents at all during a tenancy than those who do so annually.

This approach is threatened by some of the possible rent control models which can bake in a need to raise rents annually. This fact makes it more difficult to predict the outcome of any rent control regime.  

The irony of rent control could be to bake-in annual rent increases for far more tenants than at present.

The impact on the sector of rising interest rates

Landlords provided data in this consultation which formed the basis of a report produced by economists from Capital Economics. The results are summarised in this report.

Their forecast is that, in the event of the Bank of England’s Base Rate peaking at 5.0% and remaining above 2.5% until the end 2027, then there would be:  

1. A reduction of 735,000 properties – effectively “lost” from the UK private rented sector directly because of higher interest rates. 
2. Average annual rent growth in the UK would be 4.7 percentage points higher than if mortgage rates were to remain at their 2017-2019 average of 1.9%.

Their results are even more worrying were interest rates to rise further still. Note that reintroducing Mortgage Interest Relief (MIR) could offset (but not cancel out) some of these negative effects. 

Alternative proposals

The NRLA used the quarterly survey to consult with members on possible innovations and policy shifts. Landlords were generally positive about the approach taken in Scotland in the following areas: 

1. Resolving landlord access issues.
2. Avoiding costly dispute resolution.
3. Extending the period of notice landlords give tenants for rent increases.

There was also evidence of support for the idea of adopting a California-type approach of extending notice periods for tenants who could be called “long term”.