Rising interest rates, falling house prices and the runaway cost of living are squeezing landlord finances to the limit – and the year ahead looks just as bleak.
Worryingly, the property market could worsen as experts forecast buy-to-let landlords will have to put up rents by at least 10 per cent when many tenants are already struggling to pay their bills.
Investors will suffer, too, as the same experts expect the value of an average home will slump by £23,000.
If inflation keeps rising, the Bank of England will have no choice but to hike interest rates to drag the wider economy from recession.
Table of contents
Landlords Must Raise Rents
Economists at Aldermore Bank expect almost two-thirds of landlords (62 per cent) to raise rents by as much as 10 per cent if adverse market conditions persist, despite concerns that tenants have no spare cash due to the rising cost of living.
The bank’s report explains spiralling mortgage costs and double-digit house price increases stopped 48 per cent of landlords from adding to property portfolios.
The study says that the same economic factors have led to 42 per cent of landlords considering downsizing.
However, despite 49 per cent of landlords struggling financially, just over half (54 per cent) are confident their property investments will improve, and 66 per cent trust property investment will make money, adds the report.
The bank asked landlords about upgrading privately rented homes to meet government energy performance rules.
Letting Ban For Homes That Miss Energy Saving Targets
The lowest energy performance rating required to let a home jump from E to C from April 1, 2025, for new tenancies and from April 1, 2028, for existing tenancies. Landlords are banned from letting homes that fail to meet the ratings.
Meeting energy performance demands is a priority for 58 per cent of landlords, with many planning to improve their letting properties during the next 12 months.
Jon Cooper, Aldermore’s head of mortgages, said: “Troubling economic developments marked 2022, and the property market has faced some significant challenges.
“With the cost-of-living crisis already impacting tenants, homeowners and landlords alike, the outlook for 2023 seems tricky to predict.
“However, there remain healthy and positive opportunities for landlords in the UK.”
House Prices Already Cooling
House prices are already cooling but will only lose the value put on since the end of the coronavirus pandemic., a host of experts predict.
They forecast values will collapse by 8 to 15 per cent over the next 12 months.
Buy-to-let lender Finanze expects prices to plunge up to 15 per cent – eclipsing last year’s rise of 12.6 per cent, which added £23,000 to the price of an average home.
Higher mortgage rates will add to the money worries of borrowers. The lender expects the Bank of England to increase rates to about five per cent to control inflation. The current rate of 3.5 per cent is due for review on February 2.
Joshua Ellard, the lender’s head of specialist finance and research, said: “This time last year, many would have been expecting a period of recovery in which the economy could thrive and recover from the global pandemic.
“In reality, 2022 has thrown everything at us from both economic and political perspectives.”
One of Britain’s largest mortgage lenders, the Halifax, explained reversing last year’s house price growth would put property values back to the level of April 2021.
Mortgage lender trade body UK Finance expects home sales to decline by at least 200,000 to fall from 1.2 million to 1 million.
Pay Down A Mortgage Or Invest?
What to do with surplus cash is a dilemma for most homeowners who can choose between paying down a mortgage or investing.
The answer depends on the individual circumstances of each borrower.
Many factors come into play, like the borrower’s age and job, loan terms, interest rates and how much financial risk they are ready to shoulder.
Next, ask yourself if the money you want to pay off could earn more than the mortgage interest you save if invested elsewhere.
Buy-To-Let Property Market 2023 FAQ
Economists declare a recession when a market, or the broader economy, slows for six months in a row and economic activity drops.
It’s difficult to say if the housing market is in recession because the data is up to three months out of date. Certainly, the latest data shows the market is slowing, but only for a month or two, which is not enough of a trend to call a recession.
House prices can change quickly in a rising or falling market. The major problem is if a buyer and seller agree on a price, the lender’s surveyor can estimate a lower value.
Most buyers will reduce their offer to match the valuation to leave the seller with the choice of accepting a lower price or withdrawing from the deal.
Valuation rules are the same regardless of the state of the economy. Surveyors take several factors into account before declaring a property’s price. They include:
– Prices of similar properties sold in the immediate area
– The state of repair and property size
– Property location and local amenities
Sellers can ask whatever price they like, but no one is likely to pay more unless they have exceptional reasons to complete the deal.
Once a valuer has set a price, asking for a second opinion is unlikely to change the result as surveyors should work to guidelines laid down by the Royal Institution of Chartered Surveyors that should see them similarly calculate the property’s value.
The biggest danger for landlords is that tenants will lose their jobs and fall into rent arrears. As long as unemployment remains steady, rents and house prices should not suffer too much, although they are bound to lose some value.
The answer depends on your circumstances, but the general rule is to buy rather than sell – especially if you have surplus cash in the bank. Home prices are more affordable with less demand in a recession.
Investments tend to lose value in a recession, so a canny investor can buy cheap – look for good value assets like gold or stocks and shares.
Below is a list of related articles you may find of interest.