For many landlords, 2014 has been a year of ‘relief’. Unless you have been lucky enough to find a bargain in an area which has recovered its value, landlords’ earnings have had a pretty rough time over the last six years.
A landlord makes their money from capital growth and rental income and neither has performed well since 2007, until this year.
Landlords’ earnings have fallen in real terms - just as tenants take home pay has
For landlords to earn what they need from rental income, especially if they are looking for an income from property, rents ideally need to grow in line with inflation.
Interestingly, in the social sector they do. Council and housing association tenants, as well as the rent paid on shared ownership homes always increases every year - irrespective of the affordability to tenants. Since 2007, social rents, according to the ONS, have increased by 28%.
Private landlords can only charge rents which people can pay and have no ‘rights’ to an increase every year as social landlords do.
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Indices show rents move in line with wages
Having studied rents now for six years, it is quite apparent that data from the likes of the Belvoir Index, LSL and Hometrack show rents move in line more with wages than they do with inflation.
Even in areas where there are more tenants looking for property to rent than available, it doesn’t mean prices automatically go up, they only do if tenants can afford it.
For landlords that have owned property prior to 2003 this isn’t necessarily such a problem. They bought when prices were low enough to cope with the 15-50% wiped off house prices in 2007. As such, they can still earn a reasonable income from rents and the value of their property won’t have necessarily been affected by the crash.
However, imagine you had bought a property in 2005 for £125,000, over the last 10 years, if your rental income had been £500 per month, to buy the same amount of goods and services in today’s market, the landlord would need to be charging £650. However, according to the ONS rental index, rents, not including London have gone up by 7% while including London at around 9%.
That means the landlords’ actual rents have increased to £535 per month, so their real income has fallen by 21% since 2005. So a landlord’s income, on average, has fallen more than tenants.
Download Kate's full rental report here
What impact will higher interest rates have on landlords?
Some have coped with lower earnings due to the lower mortgage rates which have kicked in since the credit crunch. For those on quite competitive rates, it’s meant they have very much been able to hold their head above water as their costs have fallen.
However, when rates start to rise, this will potentially impact quite badly on a landlord’s ability to make sure their property is cash flowing positively.
Capital growth is negative for most regions
And for many, it’s not just rental income which has fallen. LSL did some fascinating research showing that most regions since 2005 had seen a fall ‘in real terms’ of property prices in all regions, bar London and the South East.
Although we are bombarded daily about prices rising, this is really focused on London and few other markets. London, according to LSL has increased over these 10 years, in real terms by over 40% and the South East has maintained its value. Most other areas are seeing prices 10-15% LOWER though. So any buy to let owners buying with cash have really seen both their income and asset value fall.
What analysis is done by groups looking into landlord returns is also extremely flawed as it doesn’t include any costs to buy and sell, and more importantly, it doesn’t include the cost of maintenance either.
Download Kate's full rental report here
Conclusion
Although private landlords who bought before 2003 are seeing great returns on buy to let, this isn’t necessarily the case for those who have bought after.
It doesn’t mean that buy to let isn’t a good investment - done well it is - but you need to beware that it’s important to leverage a property via a mortgage to negate the impact of inflation, control your costs and make sure if you are hoping for property to deliver income in retirement, that’s it’s not income you have to rely on to buy your necessities such as utility bills, household running costs and food.
As opposed to landlords ‘cashing in’ and ‘raking in’ the money, most of them are doing the ‘right thing’ by the tenant by keeping their own costs down, retaining a good tenant and keeping their rent down too.
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