What is causing the shortage of rental properties in London?

Rental listings are down 45 per cent on the five-year average, according to Zoopla. The first three months of 2022 have seen a global rental shortage, with the UK, in particular, experiencing a stock issue. Here, we look at why this is happening and what it means for the lettings market in the UK.?

Is it the pandemic?

Certainly, London hasn’t reached pre-pandemic levels in terms of footfall. Work-from-home measures remain, with fewer people needing rental accommodation in the capital as they stick to more rural areas.?

Yet, the issue isn’t one of demand. Indeed, rents increased by 8.3% in the final three months of 2021. It was the steepest rise in 13 years,? so the problem doesn’t rest with fewer people wanting homes to rent. Instead, it’s the number of landlords listing properties on the market where the issue lies.?

Why the shortage in rental listings?

Stamp duty surcharge

The additional 3% stamp duty for second-home owners (including landlords) was introduced in 2016, some six years ago. Yet, its effect is far-reaching and still impacts the rental market in the UK today.?

The government has been urged to scrap the scheme by the National Residential Landlords Association (NRLA) to boost supply in the housing market. NRLA argues that removing the surcharge would encourage investors to return to the market. So far, thousands of landlords have left the buy-to-let market since the new stamp duty criteria came into effect in 2016.?

Tax relief changes

If one change wasn’t enough, landlords were hit with a double blow during the infamous buy-to-let shake-up announced in 2015. Along with a stamp duty surcharge, all tax relief from mortgage interest payments was scrapped.

Previously, investors could claim against the interest paid on their buy-to-let mortgage. As of 2022, that relief has been phased out and replaced with a standard 20%. It makes buy-to-let investing seem less attractive as landlord costs rack up, and it’s still arguably one of the primary contributing factors to the shortage of rental listings we see at the moment.?

No new buildings

In the last few years, the number of rental properties built in the capital has fallen. The city is dense, and available space to build new homes is scarce. It has even reached the point where some developers are looking at the possibility of extending upwards due to the lack of available land.?

On top of that, the impact of the pandemic has been felt across the capital. Fewer homes built means the number of available properties to sell and let decreases, with a growing number of tenants vying for a smaller amount of homes.?

Changes to HMO

HMO (houses of multiple occupation) has long played an important role in London’s rental housing market. Now, changes to HMO licensing have to come into effect with homes housing sharers of more than two.?

Many councils are also making amendments to their HMO licensing, including Westminster. The borough has the largest private rental market in London and now requires licensing for all HMO properties. Previously, it wasn’t mandatory for landlords of HMO until five or more people shared a home.?

Compliance

Many landlords are put off by the requirements needed to run a buy-to-let property. New compliance measures, such as the extension to smoke alarm regulations and electrical safety tests, have essentially made being a landlord a part-time job rather than one where they earn passive income.?

The number of documents and certificates you’re required to keep track of is rising. Plus, the added costs of having compliance tests undertaken have led to smaller profit margins for many landlords. Consequently, there is a growing number leaving the market.??

Lack of help-to-buy policies

Housing is only becoming more expensive, and there’s a lack of schemes designed to help renters and landlords buy homes. This is an issue for renters, in particular, as it drives up the demand for rental homes.

If, however, it was easier to get on the property ladder, demand would lower, and more properties would be available on the market. Landlords should also be incentivised to invest in bricks and mortar, as they have an important role in the housing market and provide high-quality homes for people.?

What’s the answer?

Those in charge of housing need to make some bold decisions, giving both renters and landlords reason to be cheerful about the property market. From a landlord’s perspective, removing stamp duty surcharges and offering tax relief would go a long way to bring confidence back to the market.?

While renters need more incentives to buy homes, thus freeing up the number of properties available. Right now, it’s the perfect storm contributing to high demand and low supply. But the right initiatives could change that, providing the right balance between stock and demand, so everyone wins.