Buy-to-Let Expectations 2023

Written on 15 December 2022 by Nicholas Mendes

The property market has been extremely buoyant since the pandemic with yearly property prices increasing 8% year on year and rents increasing by 12.3% according to Zoopla. 2022 has been something of a reality check as we move away from historic low rates and return to normality; reality at least for those that owned a property pre-2005.

Property Market

We are starting to see the pressures of rates rises, increases in household inflation and wage stagnation taking its toll, with homeowners holding back from moving, albeit for the next few months. The market has started to show early signs of a slowdown in demand and a drop in property prices. In Q4 data from the Nationwide housing index there was evidence of a drop in November of 1.4% following a 0.9% month-on-month fall in October. The average house price in October was £268,282 but this fell by nearly £4,500, down to £263,788 in November.

Expectations for the housing market in 2023 will be a property price reduction in the region of 7% to 10%.

Rental Market

The rental market though paints a different picture. Data from Rightmove showed there were 26% fewer homes available to rent in Q3 2022 than the pre-pandemic average. With the RICS (Royal Institute of Chartered Surveyors) monthly survey showing that demand from prospective tenants nationally has increased in every month since May 2020.

A recent Hamptons report in November highlighted the average rent in Britain has soared to more than £1,200 a month for the first time on record - typical values reached £1,204 a month, according to Hamptons Estate Agent's figures for October. It is a rise of £80 a month or 7.1% higher than a year ago, adding expectation that rents are likely to rise 5% in 2023 as landlords look to pass on increasing costs onto tenants.

The lack of housing stock and continuing growth in demand for rental properties will mean an increase in rentals continue into 2023.

The Kwasi Effect

The Mini Budget had left its mark on the property market.

Market conditions and uncertainty surrounding government fiscal policy and how the Bank of England would need to overcome the prospect of higher inflation because of the Mini Budget meant markets had forecasted a base rate closer to 6% in 2023.

This resulted in increased SWAP rates and lenders trying to price products in a growing uncertain market, leading to fixed rates rising above 6%. The impact this had on mortgage ICRs (Interest Cover Ratio), resulted in landlords not being able to raise funds to either remortgage on a like-for-like basis or raise anything at all as lenders introduced minimum income requirements as part of their criteria to make lending more stringent.

The good news is that following the Government's reshuffle, with Rishi and Hunt at the helm, markets have reacted well, resulting in SWAP rates coming down, and lenders slowly reducing rates from the highs of September and October. Coinciding with this timeline of rate reductions, we have also seen lenders come back onto the market and ease their lending restrictions.

Despite the uncertainty, some may have expected that landlords would look to modify their risk appetite and sell, considering the increase in rates and ICR limitations – not to mention other considerations in legislation: Capital Gains Tax, EPC requirements and the Renters' Reform Bill. After speaking with many professional landlords during this period it becomes clear this was never likely to be the case.

Growing Rental Demographic

So, with rents increasing and landlords continuing to play a key part in social housing, we are starting to see a wider demographic of tenants.

Recent government data highlighted the number of households aged 65+ privately renting increased by 38%, while those aged between 35 - 44 increased by 21%. The 16 - 34 year old group increased by just 3%.

The increase in older generation renting is partly due to deposits not being able to keep up with the pace of property price increases; also incomes are not achieving the income multiples required by lenders. Paragon added as part of the report: "Just 14% of those in the 45 - 64 age bracket have an annual income over £50,000, with a quarter earning less than £10,000 per year and a similar proportion earning between £30,000 and £50,000."

Buy-to-Let Expectations 2023

We expect mortgage rates will continue to be in a state of flux, while fixed rates reduce slightly. This will most likely be the case into early 2023. Currently, tracker and discounted products remain cheaper than many fixed rate mortgage products. The privilege to choose between a fixed or variable rate product may be out of their hands for some landlords as lenders tend to stress over a 5 year fixed more favourably.

With a recession around the corner and a base rate expected to peak at 4.5% before decreasing around mid to late 2023, for those with multiple properties coming out of a fixed in 2023 it may be prudent to diversify your portfolio product mix.

Likewise, as we have seen earlier this year with ICR complications reducing your mortgage liability through mortgage overpayments resulting in a reduced portfolio LTV will allow you to access lower rates and minimise what you would pay back in the long term.

Rentals will continue to increase in 2023 and demand is showing no signs of slowing down.

Which leads me on to my last point: I believe the UK property market will continue to be a resilient, long term sound investment. With a potential dip in values between 7% - 10% and monthly rentals expected to increase, this will be the perfect time for landlords to invest while supply is short, and demand grows.

One thing is for certain: 2023 will bring plenty of opportunities.

Category: Nicholas Mendes