Attention has been firmly fixed on the private rental market in recent weeks, though perhaps not for all the right reasons. Generating huge noise in the national press, the Renters Rights Act came into force at the beginning of the month. It marks the biggest legislative change to the market in decades, and has dominated the headlines as a result. But the Act comes at a sensitive period for the buy-to-let market: its timing could prove to be its undoing.
The immediate effects of the Act are tangible - it puts significantly more power into the hands of the tenant, at the expense of the landlord. Where before landlords were able to simply serve Section 21 notices to evict tenants and regain control of their properties, now they must present a valid reason for eviction in court - primarily limited to an intention to sell up or move in. The Act also removes the ability for landlords to make unreasonable rent increases. These are positive steps for the market in terms of tenant rights, but the change in the power dynamic won’t come without repercussions.
At its foundation, the rental market is supported by a large cohort of private landlords with smaller portfolio sizes - indeed as many as 45% of individual landlords rent out just one property. The new requirements of the Act may prove especially difficult to manage for this group. Existing and new contracts moving to rolling tenancies will increase the administrative burden for landlords should it lead - as expected - to a greater degree of tenant mobility. This change also makes it more difficult to make concrete financial plans as it removes income guarantees.
These, together with the increased difficulty in regaining properties and reduced safeguards over unreliable tenants, may well prompt landlords to take the easy option and sell. In ordinary times, a number of smaller landlords being pushed out of the market would have been manageable, but the Renters Rights Act has come into force at a time when pressures on landlords are numerous.
Due to the events in the Middle East, the current mortgage market for buy-to-let landlords is tightening. And with the Bank of England likely to raise interest rates in the near future, the outlook is far from rosy. The many landlords who will currently be looking to remortgage will be faced not only with the challenge of much higher mortgage rates, but also the tighter margins for error considering interest cover ratios as a result.
An additional result of the changed global economic outlook is coming to light: within political circles there are now louder calls to address the resurging cost-of-living crisis with rental controls. Beyond being a key manifesto policy of the Green Party - which gained many seats at the Council Elections - the Chancellor has not ruled out considering the policy. It is also strongly supported by the Mayors of London, Manchester and Liverpool.
This would be in extension to the new rule included in the Renter’s Rights Act restricting landlords to one yearly increase in rent in line with market rates, which already threatens landlords’ ability to maintain profitability should they move onto significantly higher mortgage rates.
While they might be manageable individually, the confluence of these factors is creating a perfect storm for the private rental sector. The Renters’ Rights Act achieves its goal of bolstering tenant security, but it does so by dismantling the flexibility that previously made small-scale renting a viable pursuit for small-portfolio landlords. The economy only adds to this problem. With more reasons to exit the market, the primary concern now is a future scarcity crisis in rental stock - a situation which will punish landlords and renters both.
