UK Buy-To-Let Investment and Rent Controls

The buy-to-let investment has been a prudent way of safeguarding savings, generating retirement income, particularly with dismal performance of pensions, measly returns on a saving’s accounts and the current uncertainties in equities and bonds.

Investing in bricks and mortar is considered the least risky investment although, like everything in life, it’s not entirely risk free. The real estate market is just that, a market. It’s an environment where the price can rise but also fall. Buying property isn't a one way street, those people who bought at the top of the market price and were unfortunately trapped in negative equity (where the current property price is worth less than the mortgage on the property) know more than well that property prices can move downwards. Back in October 2012 the Council of Mortgage Lenders estimated that around 719,000 households had some negative equity.

Another risk associated with real-estate as an asset class is that the investment is more susceptible to political risks. One extreme risk might be a political revolution, whereby property is confiscated from private owners and handed to the State, as was the case during the 1917 Russian Revolution. But the UK is a constitutional monarchy with a parliamentary system of governance, so a political revolt on such a scale would be surreal.

Nevertheless, there is another real risk lurking for the UK buy-to-let investor that might turn this market into a loss making investment.

A new political party instigating a change in property law, such as rent controls, could tip the property market downwards.

With the UK General elections scheduled for May 7, campaigning has already kicked off.

Currently, the south east of England, particularly London, is experiencing a chronic lack of affordable housing for young people and families. Compounding the problem is the fact that real wages have remained stagnant or, in some cases for the young, are even falling. So many young people and families are being forced out of London because they cannot find affordable accommodation. The rents are just too high.

Rent controls might sound like music to the ears of the young UK electorate and might just be a vote winner for a political party that promises to implement such a policy if they were to get elected to power.

Basically, rent control is a transfer of wealth from the older to the young generation and those with limited means. It is a policy that sits well with political parties on the left of the political spectrum. So it wouldn't be too far-fetched to have rent controls in place with a labour party win in the Spring General elections.

Currently, there are no laws in the UK dictating the amount of rent a landlord can charge a tenant.

The relaxed laws and low interest rates have resulted in a boom in the buy-to-let business. Buy-to-let landlords now number over 1.2 million in the UK.

But what would happen once the tax advantages for landlords are gone, and perhaps interest rate rises and rent controls are put in place? All of which is not beyond the realms of possibility by a newly elected Labour government.

Not being able to pass on the extra mortgage costs is going to eat into the returns for the buy-to-let landlord and could trigger cash-flow nightmares for many private landlords. The reason being, that landlords are currently borrowing at exceptionally low rates of interest.

However, it’s not only the ultra low interest rates that many landlords have benefited from. "Tracker rates", which were issued before the financial crisis, which rise and fall in line with Bank Rates, have also been taken out by landlords. During economic downturns the rates fall, helping to keep mortgage costs low for buy-to-let investors. This might explain why the buy-to-let repossession rate was relatively low during 2009 and 2010.

The average buy-to-let property in London has a value of £291,500. The typical a buy-to-let investor has approximately 70 percent of that value mortgages (£204,050), which cost £633 per month at a rate of 3.9 percent. Assuming the property is rented out at £1,121 per month, it would leave a monthly income for the owner of £488. 

But if the mortgage rate increased to 6.4 percent, the monthly cost of servicing the debt would increase to £1,088 leaving a return of just £33 per month for the landlord, which is hardly worth the risk. 

If rent controls were enforced, the landlord would probably cut and run. Multiply that many times and it could trigger a property market crash in the buy-to-let market. 

Young and first time buyers trying to get on the property market would more than welcome falling property prices. Buy-to-let investors have been blamed for forcing up prices and preventing younger generations from being able to buy. Moreover, there is also growing resentment amongst the UK electorate toward the £9bn tax relief landlords claim on their mortgage interest - a form of tax relief not available to home owners.

So there’s political profit to be made by tackling the chronic housing shortage for young and first time buyers. In view of this, I would not be surprised to see the buy-to-let regulations playing a role in the election campaign. Furthermore, if Labour were to win the pending General elections we might even see rent controls in large cities, like London. That would sit well with labour voters, but it would also put the buy-to-let market on ice.

Buy-to-let investors are likely to have all eyes on the May 7 UK General elections.