Landlords across the country are grappling with their worst financial returns in 16 years, according to estate agency Savills, as interest rates continue to rise. The surge in the Bank of England’s base rate, coupled with escalating mortgage costs, is placing immense strain on landlords’ income, warns the agency.
This financial squeeze is particularly affecting smaller buy-to-let investors, many of whom are approaching retirement age. Savills cautions that if these landlords decide to sell their properties, the already limited housing stock will dwindle further, leading to increased rental prices.
Lucian Cook, the head of residential research at Savills, explains, “After experiencing a booming period, 2023 is proving to be a turning point for the private rented sector in Britain. There is a genuine risk that landlords, especially those burdened with high levels of borrowing, will exit the sector, exacerbating the existing pressure in locations where demand far outweighs supply.”
Interest rates have been steadily climbing since the beginning of 2021, with recent indications pointing to further hikes. As market expectations of inflation and sustained high interest rates loom, government borrowing costs – which directly impact mortgage rates – have reached their highest level since last year’s mini-budget. Consequently, landlords are particularly vulnerable as mortgage rates are projected to continue their ascent.
Savills’ research reveals that buy-to-let investors experienced a squeeze in the first quarter of this year, with net profits plunging below 4% – the lowest recorded since 2007. In stark contrast, when interest rates were at historically low levels during the previous decade, profits soared to as much as 23%.
While larger landlords may weather the storm, Savills predicts that the sector will witness an exodus of landlords. The agency’s data highlights that 620,000 landlords aged over 65 own approximately 1.9 million properties, while an additional 1.9 million homes are owned by landlords aged between 55 and 64. Should these property owners choose to exit the market, tenants will face reduced options. Mr Cook notes that higher-earning renters in secure employment may jump to the front of the queue for the remaining properties.
With interest rates soaring and landlords contemplating departure, the private rented sector in Britain is bracing for a period of significant change. The potential ramifications include reduced housing choices and heightened rental prices, leaving tenants and the property market at the mercy of these turbulent times.