Is the Rental Bubble Going to Burst?
Property has long been the most reliable investment around… but could that cosy bubble be about to burst?!
We’re looking at the issues facing the rental industry, from rent arrears to lack of government support, we’re looking at it all and seeing what you can do to chart your way clear of these stormy waters.
Since the interest rates started to go up 2 years ago, we are seeing headlines about the rental bubble being about to burst. Some experts say the good days will be back once the interest rate stabilises, so you just have to ride out the current turbulence. But others say there are even worse days to come.
But first let’s look about what’s going on and what are the reasons behind this….
Rising Rents
It sounds like a good thing doesn’t it? Rents going up mean more money in your pocket after all… right?
Well, maybe not, for a number of reasons.
Firstly, mortgages are on the rise, due to the Bank of England base rate going up over the last few years. If you were lucky enough to remortgage a year or ago, BEFORE the 14 consecutive increases, especially if you secured a five-year fixed deal, you’re likely to miss out on a huge remortgage. But if you didn’t and your remortgage is due… whew, you might be in for a bit of shock.
And you are likely to have to pass that increase onto your tenants who, also like you, have rising energy and food bills to contend with. So if they are struggling to make ends meet, the rent could fall down their list of priorities – leaving you facing the prospect of rent arrears.
While you have options here – from organising a re-payment plan or a Section 8 eviction – the fact remains that your mortgage still needs to be paid every month. And if your tenant hasn’t paid… that’s coming out of your pocket. Most landlords don’t have a lot of ready cash to cover this.
Mortgage Increases
Thos mortgage increases are pretty scary. As mentioned – until the Bank of England held steady at 5.25%, there had been FOURTEEN consecutive increases in the base rate.
While this is pretty steep, it pales in comparison to ‘Black Wednesday’ – 16th September 1992. At 10.30am the government announced a 2% increase in interest rates, taking it up to 12%, but later that day it would be raised again to 15%.
Just a little reassurance there that it could be worse.
But as we’ve pointed out – mortgage increases are applying a lot of pressure to the rental market. They’re eating into landlord profits, with some even having to subsidise the increase because the tenants can’t afford it, leaving them out of pocket. For many landlords, this is the last straw, pushing them to exit the market.
Government Intervention
The government have been talking about updating the laws impacting the rental market for a while now. The Rental Reform Bill aims to level the playing field for tenants – but landlords aren’t too happy about it!
While it’s definitely fair to make things easier and safer for tenants, there is little to no protection for landlords against bad tenants. There was even talk of getting rid of Section 21, which would make reclaiming their property even more difficult for landlords. (Don’t worry though, this has been put on hiatus until the courts have been tidied up – and who knows how long that will take!)
But this is just another thing that makes landlords feel unwanted. After all – they’re a key part of the rental system. Without landlords and the PRS, where would tenants live? The social housing sector simply couldn’t cope with the demand. So the lack of support from government has left landlords feeling unwanted and undervalued. At a time when demand is already outstripping supply, it’s a shame that the government isn’t doing more to support them, as well as tenants.
However, pushing back the ban of Section 21 hopefully means the tide is turning in that regard.
Tax Burden
While we’re on the subject of government intervention, many landlords have stated that the tax burden is so heavy that they are leaving the sector.
Thanks to the 2015 Finance Act, landlords have been paying even more tax – coupled with the mortgage increases, that’s another heavy drain on their income.
But despite all of this, it seems unlikely to get much worse in the upcoming months – cross your fingers! – because interest rates have held steady the last couple of times the Monetary Policy Committee met and some of the more worrisome elements of the Rental Reform Bill, such as the banning of no fault evictions, have been kicked into the long grass.
Yes, some experts are still expressing concern about the rising rents and therefore the rising risk of rent arrears, but we can at least see that it isn’t ALL doom and gloom and the likelihood is that things will stabilise, even if the grass is never quite as green again.
So how can landlords protect themselves?
Well, it may seem counterintuitive, but investing is a really good way to protect yourself and help you ride out the storm.
- Rent Guarantee Insurance. This protects you in the event of any rent arrears – meaning you’ll be able to cover the mortgage repayments without dipping into your own savings. While we’re on the subject of insurance, now is also the time to make sure that you have a full suite of cover – from buildings to emergencies. After all, it’s better to be safe than sorry. And don’t forget to shop around for the best deals!
- Work with experts. Yes, they cost money – but it’s truly an investment! Speak with a mortgage advisor about your remortgage, rather than simply renewing with your lender. There might be a deal that suits you better out there. You should also consider working with an accountant, rather than doing your taxes yourself. Again, yes, you’ll have to pay for the privilege, but it’s less stress (after all, who WANTS to do their tax return?!) and you know it’s been done properly with no over or under payments
- Keep up-to-date. Don’t be caught out by missing changes to the law, either at local or national levels. Keep an eye out for your local council bringing in selective licensing, for example, and follow the news about the Rental Reform Bill so you know if and when you need to take action.
So there you go – it’s not all rainbows and butterflies for landlords. While property certainly is a great investment – there’s a lot of ways it can go very badly wrong for landlords.
Are these potential pitfalls something that keep you up at night? Have you ever found yourself on the receiving end of any of them? Are there any we’ve missed??
