_Tax changes for landlords are pushing rents higher in prime central London

Recent measures taken by the government to boost housing affordability are having unintended consequences in the prime central London lettings market, as David Mumby tells Tom Bill

Tom Bill August 29, 2018

A series of government interventions in the residential lettings market is restricting property supply and consequently pushing rents higher for existing homes in prime central London (PCL), according to David Mumby, a London regional lettings head at Knight Frank.

The introduction of tax changes was designed to dampen demand from buy-to-let investors and ease the problem of housing affordability, which remains a key political issue in the UK. However, the extra taxes on landlords have contributed to a reduction in the supply of lettings properties, which is now putting upwards pressure on rents.

Positive annual rental value growth returned to PCL in June this after a 28-month period of declines as supply levels began to reduce.

“The irony is that the tax changes are now making rents less affordable,” said David. “Although there hasn’t been a mass exodus of landlords, we are starting to see some landlords exiting the market and I would expect enough of a decline in supply over the next couple of years to keep pushing up rents.”

Knight Frank's David Mumby

The changes include the reduction of tax relief on mortgage interest, the loss of the wear-and-tear allowance and a 3% stamp duty levy for buy-to-let investors. A proposal for minimum three-year tenancies has also been floated by UK lawmakers.

As a result of the changes, the number of buy-to-let mortgages issued in the year to June 2018 was a third lower than the 12 months to June 2015. Meanwhile, there were 16% fewer lettings listings in prime central London the year to July 2018 compared to the previous 12-month period, LonRes data shows.

“Offering tenants the possibility of three-year tenancies will exacerbate the situation,” said David. “Buying something you can sell if you need to and buying something to lock away for three years are two completely different propositions. It will raise liquidity concerns for property owners.”

The reason more landlords have not sold is continued access to cheap finance, said David. “When you can get a five-year fixed rate at a loan-to-value of 75% of below 2% that’s attractive by historical standards,” he said.

“Those landlords in for the longer term are still there and I would expect them to remain. However, we are seeing fewer new landlords entering the sector and are already seeing higher numbers than previous years selling up."