The most recent monthly housing market survey from the Royal Institution of Chartered Surveyors (RICS) was a little different than usual. Instead of focusing on the sales market, the survey opened with details of the residential rental market, showing that while demand for rental property remains robust, new supply of rental homes was weak, once again.
The switch around in presentation of the regular RICS survey, was made to highlight the situation as rents are anticipated to rise by 15% in the next five years. But, just why is demand outpacing supply by so much in the rental sector. And, why are RICS members expecting such a notable rise in rents?
Government policy changes
Over the last two or three years, the UK’s buy-to-let landlords have faced a number of significant changes to the way taxes related to purchasing and managing rental properties are calculated.
First of all, the Government introduced the additional 3% stamp duty tax for those purchasing a second home or one that isn’t their main residence. While this can be side-stepped with the creation of limited company, that’s not financially effective for everyone and is considered one of the major reasons behind the slowdown in the number of BTL landlords with small portfolios, or even one property as a pension top-up.
Following on from that, the Government is now in the process of phasing out mortgage interest tax relief. This is another incentive to private BTL landlords whereby they can claim back the tax paid on mortgage interest of a rental property.
“The impact of recent and ongoing tax changes is clearly having a material impact on the Buy to Let sector as intended,” said the RICS chief economist, Simon Rubinsohn.
“The risk, as we have highlighted previously, is that a reduced pipeline of supply will gradually feed through into higher rents in the absence of either a significant uplift in the Build to Rent programme or government funded social housing. At the present time, there is little evidence that either is likely to make up the shortfall,” he added.
What about the growing build-to-rent sector?
Of course, there’s been a lot of reports and news on the UK’s growing build-to-rent sector. Institutional investors are increasingly considering the residential market as a potential option and there are some new Funds that are supporting the emergence of more build-to-rent properties in the UK.
While it’s a relatively new development in this country, its one that should have an increasingly positive impact on the rental market – provided it proves financially successful for the Funds and investors involved.
But, that’s not the only positive change with regards to the UK’s new build situation. Growing interest and investment in pre-fabrication is another potential plus. Pre-fab homes can be built much more quickly than with traditional construction methods and if the few factories that are supporting this sector prove successful, its likely more could spring up.
Of course, the RICS will have included both these developments in their outlook and they still expect rental price growth of 15% in just 5 years. There’s always the possibility that one or both of these newer rental-related building sectors will accelerate at a faster pace than currently expected.
But, right now, the UK’s renters could be in a situation where they’re struggling to save any money towards a deposit to buy a home and remain tenants throughout their lives. For some, that’s not the future they hoped for.