Landlords plan to increase rents to offset government tax changes

by | Mar 6, 2018 | Blog post, Finance & Taxation Reform, Housing Supply & Rents

Yesterday the Prime Minister launched the revised National Planning Policy Framework, and in her speech, she claimed that “private landlords play an important role in the housing market” and that the new planning rules would encourage new homes for rent to be built. The current Government’s taxation policy for the private rented sector contradicts this. The Government has introduced a 3% levy for stamp duty on additional residential properties and is currently phasing out finance relief or as it is more widely known as mortgage interest relief. Our previous research highlighted that the changes would reduce profitability and lead to higher rents in the longer-term, while recent research from academics at the University of Liverpool has found that changes to mortgage interest relief in Ireland acted as a psychological barrier to further investment in the sector.

Our latest research report explores the current taxation policy towards the private rented sector and the impact on landlords. We received responses from almost 3,300 landlords, and you can find our full report here.

Overall, the findings do not show a good outlook for the long-term future of the sector. The proportion of landlords who have sold properties in the past 12 months has continued to increase and is now up four percentage points in comparison to the previous year. At the same, the proportion of landlords who are planning to sell properties has increased by two percentage points to 22% of landlords (just over 1-in-5 landlords). We believe that this increase is due to the tax changes and specifically the changes to mortgage interest relief (MIR), as 70% of respondents reported that the changes to MIR would reduce their profitability. 62% then went on to say that these changes would reduce their profitability by at least 20%.

We then asked landlords how they would mitigate any negative impact of these changes, and most landlords reported they were planning on increasing rents (67%). Other strategies also included selling properties to reduce the size of their mortgages (25%), leaving the sector as a landlord (25%), and reducing investment in their portfolio (24%).

These findings illustrate that these tax changes will have a negative impact on the majority of landlords. Landlords are planning to increase rents and to sell properties. This will have a negative impact on tenants, through higher housing costs and more competition between properties. In the next 12 months, 50% of landlords reported they planned on increasing rent, with the most common reason due to the changes to MIR (41% of landlords), indicating some tenants will be facing rent increases in the short-term. Previous research from Professor Miles at the Imperial College London identified that rents would need to increase between 20-30% to offset the impact of these changes.

If Theresa May and this government want private landlords to continue to play an important role in the housing market, based on these findings, the government will need to change their policy towards private landlords to not only keep private landlords in the sector but to prevent unnecessary rent increases due to the restriction of mortgage interest relief.