Is buy to let still a good investment?
Despite a wave of measures that have hit buy-to-let investors, there’s still money to be made in the market. A recent study conducted by Savills and UK Finance has revealed that contrary to the negative headlines foreseeing the end of the buy-to-let era, the predicted mass exodus away from this type of investment simply hasn’t occurred.
The study shows that growth has declined, particularly in areas where private rented homes are in short supply. In the past two years, new loans for buy-to-let purposes have halved in the Capital (-54%) and in the South East (-48%). However, rising prices mean that a deposit of £90,000 or £50,000 is required for these areas respectively; and consequently, they are not popular areas to invest. Further, the higher prices have meant that investors in these areas have been hit harder by the stamp duty changes, and comparatively low rents do not cover the new lending ratios demanded by the Bank of England.
In the South West and the East, buy-to-let lending has also dropped by around 40% and the overall reduction across the UK has been 36%.
The cuts in tax relief for mortgage interest are one of the reasons investors are moving away. The way that taxable profits are now calculated on buy-to-let properties can push landlords into a higher tax bracket and reduce their profits. By 2020 when the changes come into effect fully, many landlords will find themselves in the red.
Other measures that have hit buy-to-let investors hard include the hike in stamp duty for second properties which increased SDLT rates by 3%. Further, the Bank of England tightened their lending criteria for buy-to-let mortgages twice last year with the majority of banks now requiring that rent must cover 145% of the mortgage payments.
Despite the raft of measures squeezing landlords’ pockets, the demand for rental properties is still healthy. Over 2016/17, the number of households renting privately grew by 164,000, commensurate with the sector’s five-year average. Whilst pushing buy-to-let investors away, the Government has failed to compensate for the consequent 101,000 home gap in the private rental market: just 5,800 homes were completed last year, with a further 29,000 under construction and 59,000 planned. There is still very much a need for the buy-to-let investors and still profits to be made for those choosing the right areas.
Investors who have stayed in the sector are investing outside the Capital with some areas showing better resilience than others. Liverpool has delivered average gross yields of 7.5% and surprisingly, buy-to-let loans in this area are up by 14%, despite the huge drops elsewhere. Perhaps one reason for this is the availability of affordable property with prices averaging just £129,000, even where substantial regeneration is planned. Experts like the once-neglected northern docks, marked for a now-approved £5.5b billion regeneration project and with a proposed new stadium for Everton in the pipeline. Modern one or two bed flats in the Baltic Triangle are also popular amongst investors; or for those looking for more traditional options, the elegant houses or flats in the Georgian Quarter may appeal.
Wigan has seen a decline in the buy-to-let market, but only by 9% since 2015 – substantially less than elsewhere in the country. The town lies 20 miles from Liverpool or Manchester and has been flagged for a HS2 station which could increase its popularity in the future. If plans go ahead, the town will benefit from high speed links to Birmingham and London. Wigan’s property prices are still cheap – with a two bedroom terrace going for around £80,000. Such properties let for about £450/month and a 7.1% rental yield is typical.
Aside from Liverpool and Wigan, Stoke-on-Trent, Sandwell and Peterborough are all seeing growth.
Thinking of buying to let? Wondering how the recent wave of legislative changes will affect your profits? Speak to our property team for advice…
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Southport 01704 532 890