SUPPLY AND DEMAND MISMATCH MEANS BUY-TO-LET STILL AN ATTRACTIVE INVESTMENT PROSPECT
Published 15 August 2018
As interest rates start to creep up, attention will increasingly be focussed on the returns to be made from various types of investment – and some commentators have questioned whether the relative attractiveness of buy-to-let may start to lose its shine, particularly given the various measures the government has taken over the past three years to dampen down the market.
Ironically, it is those very same measures – designed to put the brakes on the buy-to-let sector – which have indirectly created a situation where becoming a residential landlord is as appealing as ever.
When the amount of mortgage interest landlords could set against tax was reduced, when the three per cent stamp duty levy was imposed, and when the rate of capital gains tax payable on investment properties was raised, some landlords inevitably decided to abandon the sector and seek better returns elsewhere.
In general this was a decision made more with the heart than the head, but the net result has been a drop in the supply of private residential rental property. As well as those exiting the market, in the past 12 months the number of buy-to-let mortgages approved for new purchases fell by nearly a fifth across the UK.
With demand still very buoyant, this has created an imbalance which is working in favour of landlords. The fact of the matter is that yields on buy-to-let property remain far higher than the average investor can achieve more or less anywhere else.
The latest figures from Rightmove show that the average rental yield in the NR postcode area is 4.61 per cent. Add to that the capital gain (property prices rose in Norfolk by 5.7 per cent in the past year, according to the latest ONS survey), and landlords can achieve a potential combined double digit yield.
Even if you are a higher rate taxpayer, this represents a far higher net return than the best performing cash ISA, which currently offers a measly 1.3 per cent.
We can’t know what interest rates are going to do in coming years, but no credible commentators are suggesting that investment yields elsewhere are going to start matching those available right now in buy-to-let in the foreseeable future.
Meanwhile, with great swathes of the population unable to afford to buy their own home, and a continuing housing shortage, we can be confident that demand for rented property will remain high. We still get at least three applicants for every property we market, and it is that mismatch between supply and demand which will sustain buy-to-let as an attractive prospect for many years to come.
Whilst some landlords thinking with their hearts have exited the sector, those thinking with their heads see that it is still a great place to invest. And with interest rates still at a historic low, there are still attractive mortgage deals to be had. Whatever the Treasury might say or do, buy-to-let doesn’t look like losing its allure anytime soon.
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