Buy-to-Let Purchases Fall to Record Low: What It Means for the Market

Image credits: Алекс Арцибашев / Unsplash

The latest residential research by Hamptons, points to a shrinking supply pushing up rents which are rising nearly three times faster than inflation, with landlord purchases hitting a record low. In the first half of 2024, only 10% of homes were bought by landlords, a significant drop from the 16% seen in 2015. This blog post delves into the factors behind this decline, the regional variations, and the impact on the rental market based on the latest research by Hamptons.

Factors Behind the Decline

Since 2016, a series of tax and regulatory changes have made buy-to-let investments less attractive. The introduction of a 3% stamp duty surcharge on second homes and restrictions on mortgage interest tax relief have increased the costs for landlords. Additionally, higher interest rates and ongoing political uncertainty regarding further rental reforms have compounded these challenges, discouraging new investments.

Regional Disparities

The impact of these changes is not uniform across the country. The North East remains a hotspot for buy-to-let investments, with landlords purchasing 25% of homes, slightly up from 24% in 2015. This region's higher yields provide a buffer against rising costs. Conversely, London has seen the steepest decline, with landlord purchases plummeting from 17% in 2015 to just 8% in 2024. The lower rental yields in London make it harder for landlords to cover increased expenses.

Rising Yields and Rental Growth

Despite the decline in purchases, rental yields are at an all-time high. The average gross yield for new buy-to-let investments in England and Wales has risen to 7.3%, up from 6.3% in 2015. This increase is driven by strong rental growth and stagnant property prices. However, higher mortgage rates and limited tax relief have reduced post-tax profits for many landlords, particularly those paying higher tax rates.

Rental prices are soaring, rising nearly three times faster than inflation. The average rent in Great Britain increased by 5.8% year-on-year, reaching £1,347 per month. Scotland saw the highest rent hikes, with a 11.1% year-on-year increase. Conversely, London's rental growth has slowed, with a 2.7% increase, influenced by falling rents in Inner London.

Impact on Rental Supply

The continuous decline in new buy-to-let purchases has led to a shrinking supply of rental properties. Despite a decrease in the number of landlords selling properties, the market is still losing more rental homes than it is gaining. Since 2016, private landlords have sold 328,750 more homes than they have bought. This reduction in rental supply is a significant factor driving the rapid increase in rental prices.

While institutional investments in large rental developments (Build-to-Rent) have partially filled the gap, the overall availability of rental homes remains below 2016 levels. Last month, there were 42% fewer rental properties on the market compared to June 2016.

Future Outlook

The current trends suggest that the number of new buy-to-let purchases will continue to decline. By the end of 2024, it is estimated that there will be 113,630 new buy-to-let purchases, a 40% drop from 2015. Meanwhile, private landlords are expected to sell 146,060 homes this year, further reducing the rental supply.

While rental yields are rising, the decline in new investments and the shrinking supply of rental properties are pushing rents up at an unsustainable rate.