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Whilst it certainly came with its challenges, 2021 provided a lot for landlords to be thankful for. Not least the fact that house prices increased by 9.8% over the course of the year, equivalent to an average increase of £24,500. It wasn’t just house prices which rose last year, rents have been rising at the fastest rate in over 13 years as prospective tenants bid up the few available rental properties.
“UK house prices climbed again in December for the sixth consecutive month in a row, up 1.1%. The average price for a property now stands at £276,091, an increase of more than £24,500 compared to December 2020, marking the strongest year-on-year cash rise since March 2003.”
– Russell Galley, Managing Director, Halifax
Hopefully, the majority of landlords were able to celebrate the new year, content that 2021 had been a profitable experience. However, the upcoming year may prove to be a more mixed experience, with the spectre of further regulation, slowing house prices and increasing mortgage rates. Although, that’s not to say that 2022 is set to be an entirely negative year. Whilst house price growth may slow, rents are set to continue their stellar 2021 performance as the availability of decent rentable accommodation continues to dwindle.
Thankfully, Landlord Vision is here to guide you through all the upcoming changes in 2022:
A World of Rising Rents
Starting with the positive, rents are set to continue the stellar performance that they experienced in 2021. Data from the HomeLet Rental Index suggests that average rental price for a new tenancy was up 8.3% year-on-year in December 2021, with areas such as Northern Ireland experiencing a meteoric increase of 11.2%.
Supply and Demand is Responsible for Increasing Rents
The single biggest factor driving rents is the sheer imbalance between supply and demand, with the UK experiencing a chronic shortage of lettable properties. Online property agent Zoopla, highlights that the number of homes available to rent is 43% below the five-year average, increasing the competition for each and every property.
Chris Norris, policy director for the National Residential Landlords Association said: ‘2021 showed some signs of recovery for the private rented sector, which tends to be counter-cyclical in nature, with economic uncertainty leading more people to rent rather than commit to large purchases.
‘Demand for rental accommodation increased across the UK, with some early indications that tenants are also returning to London after many left during lockdown.’
No Signs of Rental Demand Reducing in 2022
There doesn’t seem to be any evidence to suggest that the supply shortage of rental properties is set to ease any time soon. In fact, letting agents continue to warn of further landlords selling up, with some taking the opportunity to realise their lofty gains from rising house prices and others being driven from the market by wave after wave of government regulation. The continued shortage of rental properties will help to drive rents higher throughout 2022.
Inflation May Impact Rental Demand in 2022
Additionally, inflation is set to continue rising in 2022, with mixed effects for landlords. On one hand, inflation will eat away at real rent increases, lowering the value of potential gains. On the other hand, inflation in the cost of goods can often lead to wage inflation as employees seek to keep abreast of the cost of living. This could provide additional support to rising rents.
Increasing Mortgage Rates
The UK’s historically low interest rates have been one of the few silver linings for landlords over the past decade. Interest and mortgage rates have remained persistently low, with cheap borrowing helping to boost the returns of landlords. The low-rate environment culminated in the Bank of England lowering the base rate to a mere 0.1% in April 2020. Mortgage rates slowly followed, with The Mortgage Works, Nationwide’s buy-to-let arm, launching a loan with a record-low rate of 0.99 per cent.
Interest Rates Will Continue to Rise in 2022
However, 2022 may be the year of the great squeeze, as mortgage rates begin to rise. Inflation, which was once considered transitory, is beginning to look increasingly persistent. In response, the Bank of England raised the base rate to 0.25% in December. Yet, this may only be the start. Financial markets are pricing in the expectation that rates may rise as high as 1.00% before the end of 2022. If interest rates were to rise to 1.00%, it would be one of the most dramatic rates rises in over a decade.
Undoubtedly, rising interest rates have implications for landlords and the buy-to-let market. Rising interest rates will drive mortgage rates higher, increasing the cost to borrow and refinance properties. What is more, interest rates tend to perform inversely to house prices, with rising rates often dampening house price growth, as investors and homeowners find their affordability limited.
Slowing House Price Growth
House prices boomed throughout 2021, with the Halifax House Price Index indicating that average house prices increased by £24,500 in 2021, the largest annual cash rise since March 2003 and equivalent to a 9.8% increase. Quarterly growth at the end of the year was 3.5%, a level not seen since November 2006.
2021 Saw Record House Price Growth
A number of factors combined together to create last year’s buoyant housing market. Firstly, lockdown limited the spending opportunity of individuals, driving household savings to record levels and providing the ammunition needed to fuel house price growth. Secondly, the government’s stamp duty holiday helped to incentivise transactions, bringing forward people’s home purchase plans. Thirdly, historically low mortgage rates and a lack of available homes for sale combined to encourage excessive bidding and further drive-up house prices.
Emma Cox, sales director at buy-to-let lender Shawbrook Bank, said: ‘Despite the hurdles caused by the pandemic, the market has stood firm and house prices have continued to soar in price.
‘This has created attractive opportunities for investors, whose confidence in the market has grown over the last 12 months. Their buying activity and trends show that the market is likely to remain strong over the short term.’
Housing Prices in 2022 Will Likely See Slower Growth
That being said, the outlook for the whole of 2022 looks more cloudy. Firstly, there is only so far that property prices can increase beyond average incomes before the market well and truly enter bubble territory. Beyond a certain point, houses simply become unaffordable, with borrowing constrained to a multiple of income and deposits fixed as a percentage of house values. Secondly, as already mentioned, inflation looks set to drive an increase in interest rates. It could well be that the base rate hits 1% or higher before the year is out. Rising interest rates usually have an inverse relationship with house prices, as higher borrowing costs limit the affordability of properties.
Limited Supply Might Reduce Demand from Buyers
Finally, the imbalance between demand and supply looks set to continue into the early part of 2022. The average number of buyers registered per estate agent branch was 447 in 2021, according to Propertymark, which is the highest number recorded since 2004. However, the average branch had 52 properties for sale in 2004 to meet the demand, whereas in October this year the average branch had only 21 available properties on average. Whilst in theory this could help to drive house prices higher, a lack of supply and pipeline may mean that buyers start to step away from the market as they become bored of searching a limited selection of properties.
A Property Tax Rise for Overseas Buyers
A less published change for landlords in 2022 is the additional surcharge for overseas buyers, which will come into effect in Spring. As of April, overseas buyers will be required to pay an additional 2% stamp duty surcharge when purchasing property in England or Northern Ireland. This would be on top of the current 3% surcharge applied to landlords and second homeowners. Therefore, overseas investors will be required to pay the standard stamp duty rate, plus a further 5% surcharge when purchasing additional properties. This could mean that overseas landlords purchasing an average London property could pay over £32,000 in additional fees above the standard stamp duty rate.
Despite this, it is thought that the additional surcharge will only have a modest effect. In relative terms, the overseas surcharge is modest when compared to international standards and has the benefit of being capital gains tax deductible. In practice, whilst some overseas buyers may be put off, the majority of affluent international investors are likely to continue purchasing property in the UK.
The Threat of Build-To-Rent
The past few years have brought a trend of institutionalisation to the private rental sector. Large corporations, pension funds and investment trusts have begun to enter the market, using their size and scale to leverage greater returns. Often, this in the form of build-to-rent, where investors finance new, high-end developments with the intention of letting them out into the future.
The British Property Federation estimates that there were around 64,000 build-to-rent homes in the UK at the end of last year, with a further 141,500 currently under construction or in planning. Whilst this remains a relatively small component of the UK’s 4.4 million rental homes, it continues to be a growing and well financed one. Build-to-rent, which tends to be focused in specific city-centre and high value areas may add additional competition for landlords, with small-scale individual landlords pitted against multi-national institutions.
Thankfully, even though it is growing in scale, build-to-rent has remained focused on a particular area of the private rental sector, high-end flats. The developments tend to charge premium rents and provide additional services beyond those which any normal landlord may be able to provide. This still leaves plenty of room for individual landlords to operate in the mid-value and affordable ends of the market.
A Renters Renaissance in Cities
Perhaps understandably, the coronavirus pandemic caused a mass exodus of city centre locations. With the advent of work from home (WFH), thousands of well-to-do households in city centre locations began to cast their property nets wider. People opted to forsake convenient, but small city-centre flats for larger commuter and country homes, with gardens and home offices. As a result, rents in many city centres collapsed, with locations in London seeing rents fall as much as 25%.
It may well be that 2022 sees a reversal of the ‘flight to the country’, with homeowners and tenants returning to city centre locations. Already there is evidence of a revival. Northern Powerhouse cities like York, Leeds and Manchester have seen rents and prices surpass their pre-pandemic levels. Should the reversal continue, it may lead to house prices cooling in certain commuter belt and coastal locations as demand begins to ease.
Propertymark’s Emerson says: ‘In the first half of 2021 there was a mass exodus from cities as tenants turned to rural and coastal areas in search of a more relaxed and spacious lifestyle.
‘In the second half of 2021 we have seen the return of students and some work forces back into cities, however, many returned to find landlords had sold and the availability of homes was far less than usual.’
The Spectre of EPC Regulations
Paperwork and constantly rising costs. Such is the life of a landlord.
As each new year passes, the government unfailingly seems to find another area of the housing market in need of more regulation. Regulation, that is, which honest and compliant landlords bear the burden of, whilst rogue landlords avoid due to poor enforcement. Already, landlords are required to ensure that all properties meet a minimum EPC rating of E, have annual landlord/homeowner gas safety checks and have valid electrical installation condition reports (EICR’s) ahead of new tenancies or every five years.
Regulations Increase Landlord Costs
Whilst landlord/homeowner gas safety checks can be conducted for as little as £45 to £65, EICR’s typically cost between £100 and £300 for a standard property. What is more, failure to comply can result in landlords being fined up to £5,000 for a first offence.
Energy Efficiency is the Next Hot Topic for Landlords
The next item on the agenda for the government is a revisit to Energy Performance Certificate requirements. It is expected that the government will announce an increase in EPC requirements for landlords over the next 12 months, with rental properties in England and Wales requiring a C rating or better for all new tenancies by 2025. Landlords in Scotland are also likely to see energy efficiency measures in the proposed Housing Bill, whilst in Northern Ireland, the Private Tenancies Bill, due to be passed by May 2022, is also set to introduce energy efficiency obligations.
EPC Requirements Set to Further Increase Costs for Landlords
The requirement for properties to meet a minimum EPC rating of C may prove to be an especially costly one for landlords. Currently, two-thirds of homes in England and Wales have an energy rating of D or below, suggesting that up to 3.2 million properties in the private rental sector may require remedial works. What is more striking is how costs begin to scale as the EPC ratings rise. It can be possible to improve the marginal EPC rating of properties by simply changing to energy efficient light bulbs and making smaller refinements to a property. However, jumping from an EPC rating of E to C might require a new boiler, replacement windows or cavity wall insulation. All of which could cost landlords thousands of pounds.
Estate agent Savills suggest that the cost of improving an average D-rated property up to the minimum C rating would incur costs of £12,746, whilst upgrading an E-rated property could see costs exceed £17,000. Finally, the cost of improving a G-rate property to a C could be as much as £27,000, equivalent to over six times the average net annual income of landlords according to the NRLA.
Further Regulatory Changes
Alongside the headline changes, 2022 will also bring along a collection of smaller refinements and regulatory changes which will affect landlords. Included below is a list of further amendments and requirements that may be placed on landlords throughout 2022:
Renters Reform Bill (England)
The government has committed to abolishing Section 21 ‘no fault evictions’ as part of a raft of changes brought about by the Renters Reform Bill, scheduled to be put before parliament in the later part of 2022. There are fears that the abolition of the current Section 21 notice may make it more difficult for landlords to evict problem tenants, further discouraging landlords from remaining in the market.
The Private Tenancies Bill (Northern Ireland)
It is expected that the Private Tenancies Bill will gain Royal Assent in 2022, bringing about wholesale changes to private rental sector regulations in Northern Ireland. Once written into law, landlords will be required to conduct electrical safety tests on their properties and will see deposits capped to just one month’s rent. Landlords will also face restrictions on their ability to raise rents and face longer notice periods of six months when giving tenants notice to quit.
The Renting Homes Act (Wales)
An update on the Renting Homes Act of 2016, the Welsh government intends to replace Assured Shorthold Tenancies (ASTs), extend notice periods to a minimum of six months and abolish the Section 21 notice.
The Housing Bill (Scotland)
In a further bid to strengthen tenant rights, the Scottish government is set to introduce The Housing Bill in 2022. It is thought that the bill will introduce both possible rent controls and an independent housing regulator. This would introduce stricter regulatory controls on individual landlords than many letting agents face throughout the rest of the UK.
Short-Term Lets in Scotland
It is understood that the Scottish government is seeking to clamp down on short-term lets, such as Airbnb’s. New proposals will require that local councils draw up licensing schemes by October 2022, with existing landlords being required to obtain a license by April 2023.
The Local Licensing Bonanza Continues
Don’t expect a new year to hinder the ever-expansion of local licensing schemes throughout the UK. Traditionally limited to landlords operating Houses in Multiple occupation (HMOs), local licensing schemes are increasingly being applied to landlords more generally. It is likely that more councils will continue to adopt such schemes as 2022 progresses.
Tenants And Their Pets
As of January 2022, the government launched their new model tenancy agreement, restricting the ability of landlords to issue wholesale bans on tenants having pets in English rental properties. Should a landlord receive a request from a tenant wanting to bring a pet into the property, they are now required to object in writing and state a sufficient reason for their rejection – such as the pet being too large for a small property.
Disclaimer: This ‘Landlord Vision’ blog post is produced for general guidance only, and professional advice should be sought before any decision is made. Nothing in this post should be construed as the giving of advice. Individual circumstances can vary and therefore no responsibility can be accepted by the contributors or the publisher, Landlord Vision Ltd, for any action taken, or any decision made to refrain from action, by any readers of this post. All rights reserved. No part of this post may be reproduced or transmitted in any form or by any means. To the fullest extent permitted by law, the contributors and Landlord Vision do not accept liability for any direct, indirect, special, consequential or other losses or damages of whatsoever kind arising from using this post.
