By the end of 2015, housing stock in the private rented sector was worth a staggering £1.29 trillion. This sum is £535 billion higher than in 2007. Over the same period, the value of mortgaged owner-occupier housing stock has fallen by £273 billion.

The political response has been a combination of first-time buyer incentives to help get people on the housing ladder, and increasing the tax burden on buy-to-let investors to reduce the competition they face. This raises the question of whether the golden age of buy-to-let investment is over.

Q What will happen to tenant demand given government first-time buyer incentives?

A The English Housing Survey suggests the private rented sector has been growing by 260,000 households per annum post credit crunch. The Government has sought to address this through Help to Buy, together with the promise of 200,000 Starter Homes and 135,000 shared ownership properties.

Even if the Government were to deliver its target of 400,000 new “affordable homes for sale” over the next five years, it would only amount to 80,000 per annum. Given the risk that some households committed to buying will simply use the schemes to increase their budget, we only expect half of these to come out of the private rented sector.

Therefore, however beneficial the schemes are in helping people on the housing ladder and supporting house building, we still expect the number of new households looking to live in the private rented sector to be in the order of 220,000 per year over five years.

Q What underpins the growth in renting?

A First-time buyers and second steppers face substantial difficulties in accumulating a sufficient deposit to get on or move up the housing ladder. The average deposit for a first-time buyer in the UK was over £25,000 in 2015. In London it was over £75,000. However, this is only part of the issue. Mortgage regulation means homeownership among younger households is increasingly the domain of the wealthy.

Our recent analysis suggests that across the boroughs of London, two individuals would each need to be in the top 25% of earners to be able to buy the median priced property on a 3.5 x loan-to-income mortgage (even where they can raise a deposit of 20% of the purchase price). On average across the South East they would both need to be in the top 38% of earners, though in locations such as Brighton, Guildford, Sevenoaks and Winchester they would need to be in the top 28%.

Accordingly, even where Government schemes address the deposit hurdle, they are likely to be economically accessible to only relatively affluent households, particularly in the south of the country.

^{▲ First-time buyers continue to struggle to get onto the housing ladder}

Q How many rental/investment properties will be affected by the restriction on tax relief?

A The first Government tax offensive will progressively restrict tax relief available to buy-to-let investors to the basic rate.

Data from the Council of Mortgage Lenders suggests there are around 1.75 million outstanding buy-to-let mortgages, which carry £210 billion of debt. This suggests only 31% of stock in the private rented sector carries a mortgage. It also indicates the average loan is equivalent to 53% of the value of those rental properties subject to a mortgage.

Q How will their owners’ finances be affected?

A Low interest rates mean mortgaged landlords have generally been able to run a relatively healthy cash surplus.

Despite a benign short-term outlook for interest rates, the cost of that mortgage debt is expected to have risen by 2020. Meanwhile, tax relief on those payments will fall for higher rate tax payers, squeezing their finances.

Our calculations indicate the net cash surplus on the average buy-to-let property will fall from £2,900 to £1,100 over this period. This assumes a property worth £227,400 with a mortgage of £119,700 and generating a gross income yield of 5%. Those with greater levels of debt or invested in lower yielding markets will be more affected.

Q How will landlords respond and how will this be affected by the stamp duty change?

A Some investors will have to rationalise their portfolios by disposing of poor performing stock and reducing their debt in order to maintain sustainable cash surplus. Some who have borrowed against their properties for tax purposes will revisit their mortgage arrangements.

However, we believe the greatest impact will be in private landlords’ ability to expand their portfolios, as the economics of buy-to-let change and lenders adjust their lending criteria.

From 1 april the additional 3% stamp duty liability (the second major Government initiative impacting this market) is likely to further temper the expansion of buy-to-let.

Q Are there still opportunities in the sector?

A Critically, none of the measures aimed at buy-to-let investors will directly help the prospective first-time buyer overcome the underlying deposit hurdle. Neither will Government schemes eliminate this issue for the bulk of younger households. Therefore, the underlying demand for private rented accommodation is likely to continue to rise. This will present ongoing opportunities for cash rich investors, including both those caught by limits on their future pension contributions and those no longer obliged to take an annuity at retirement.

For those requiring debt, we believe these measures will mean that future investment will be more targeted at lower-value higher-yielding stock, albeit avoiding markets heavily reliant on welfare payments, given the Government’s ongoing austerity agenda.

_{Please see our report Rental Britain for more information}