What is the impact of low stock on the lettings market? - Vouch

What is the impact of low stock on the lettings market?

Professionals in the Lettings Industry will be very aware that the demand for rental properties is at an all-time high. However, the amount of available stock is dwindling, especially in the North of England. But why is this happening and what impact is it having on the market?

Why is there no stock?

The Nottingham Building Society ran a study that estimates 36% of Buy-to-Let landlords are looking to review their portfolios with 20% looking to sell all or some of their properties. Just 16% are planning to buy more over the next two years.

One of the factors for this is that a large group of ‘baby boomer’ landlords are selling up with fewer younger landlords to replace them at the rate they’re leaving, primarily due to ‘diminished returns and more stringent regulations’.

Stamp Duty Holiday

The Stamp Duty holiday has also helped many first-time buyers get on the property ladder – snapping up the properties landlords are selling as quickly as they come onto the market. Current homeowners looking to upsize/downsize have also benefited from the increased value of their properties as well as the tax break. Rightmove recorded the first half of 2021 was the busiest it had ever seen for property sales with 140,000 more sales being agreed compared to the long-term average. 

Eviction Ban

The extension of the eviction ban to 30th September 2021 is also creating a delay in getting properties back onto the market. Not only is more notice required, but the backlog of cases in the courts means that, unless the situation is severe, landlords could be waiting months to regain possession of their properties. There’s also no guarantee that the property will be in a lettable condition when the landlord does regain possession, further adding to the delay. 

Regulation Challenges

Since the Tenant Fee Ban was introduced in 2019, it has become more costly to be a landlord. Over the course of about a year, letting agencies had no choice but to gradually increase their management fees and add additional landlord charges, to make up for the loss of revenue from tenants.

Then, with the changes in regulations, landlords are finding they are spending more on their properties than they are bringing in. Larger multi-property landlords or those who have formed a limited company are benefiting from higher profit margins as they can rapidly increase their portfolios and offset the interest of their mortgage against the profits they have coming in.

Results from the Nottingham Building Society’s study showed that the biggest reason for landlords wanting to sell was down to regulatory issues.  

Recent changes include;

  • Electrical Safety Standards require landlords to provide a copy of the satisfactory report at the start of all new tenancies. This will prove that any electrical installations have been tested by a qualified electrician. Landlords also need to ensure an inspection is completed at least every five years, with a copy of the satisfactory report provided to the tenant within 28 days of the inspection being carried out. 
  • Minimum energy efficiency standards require all private rented properties to have an EPC rating of at least E. If a landlord’s property has a rating of F or G, repairs and improvements need to be made to bring the property’s rating to E, before entering into a new tenancy agreement, or immediately if it’s already let. 
  • Mortgage Interest Tax Relief has been replaced with a 20% tax credit. Previously, landlords were able to deduct the interest from their buy-to-let mortgages from the amount of tax paid. As most landlords had interest-only mortgages, they were able to claim back all mortgage repayments. Now landlords receive a tax credit equivalent to 20% of mortgage interest payments. This change is less generous to those landlords who now fall into the higher tax band after the change, and any costs incurred will be offset against their final tax bill rather than being deducted from their income.

These are just some of the recent changes that have been implemented, with more on the way.

The pandemic has also thrown the traditional letting trends out the window. Where summer periods used to be the busiest time for letting agents, they’re now looking for more properties to add to portfolios, as existing properties have already been let in the first quarter of 2021.

Looking at our own data, the number of references processed in February & March this year are up 45% compared to 2020, whereas references for June & July have only increased 3%. Normally these stats would be the other way around with the summer months seeing students on the move to their new digs for the coming academic year, and renters looking to be in their new homes before Christmas. This buck in the long-term trends can also be seen in Goodlord’s Lettings Activity Tracker.

This dramatic change could be put down to the lifting of lockdown restrictions. Increased working from home, break-ups & job losses meant renters reevaluated what they want from their homes, and jumped at the chance to move whilst they could. Demand for properties with gardens, that were bigger and pet friendly all saw a markedly big increase when restrictions were lifted. Again, looking at our data, the areas with the most noticeable spike in reference numbers included the South & East Coasts, Liverpool, Birmingham and Leeds.

What can letting agents do to combat this 

Show landlords the benefit of investing in the lettings market 

A study by Sequre Property Investment has shown that out of the approximately 4.7 million private rented properties across England, only 3.6% (around 168,634 homes) are actively looking for tenants. 

For regions with the lowest available stock levels, this is the perfect time for landlords to invest as they will benefit from a higher return on their investment and are more likely to secure long term, reliable tenancies for those looking for homes.

Key regions include the North of England, South West and East Midlands which have the lowest available stock levels. Utilising these types of studies can help guide potential and existing landlords of where it’s best to invest.

Tenant Income is increasing

Goodlord’s Rental Index also saw a record-breaking rise in tenant’s incomes in July – up 5% month on month. With rental prices also on the up, landlords and agents alike should capitalise on this increase in demand for rental properties with more space/features that are now a possibility.

Encourage landlords to invest in energy-efficient homes

As previously mentioned the government is looking to increase the minimum EPC ratings for private rented homes. Instead of continuously making improvements to current properties, encouraging landlords to invest in energy-efficient homes. In a recent survey, 82% of landlords, investors and brokers said that they’d prioritise “environmental friendliness and energy efficiency” when buying properties.

These properties can also have a cost-benefit in terms of green mortgages with lower interest rates and attracting environmentally conscious tenants. For those clients with properties already, you can suggest some low-cost ways of improving energy efficiencies, such as low energy lighting, insulation and draught-proofing windows. Short term costs for longer-term gains.

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