By Matthew Lesh
Landlords are an easy target for our housing grievances, but fewer of them won’t help renters, writes Matthew Lesh
There have been reports recently about the buy-to-let bubble bursting. The sector is under pressure from higher interest rates, unfavourable tax changes and regulatory costs imposed by new rental rules and energy efficiency requirements. There has already been a decline in buy-to-let house prices and fewer properties going to landlords.
Last year just 11.2 per cent of properties were sold to landlords, down from 15.7 per cent in 2015, according to real estate agency Hamptons. The reduction has been pronounced in Scotland, where landlord purchases have declined to a record low of six per cent in the face of rent caps.
Buy-to-let apartments are often viewed as a speculative and destabilising force. There is an instinctive distrust of land being used for pokey apartments rather than family homes, along with those trying to make a quick buck in Britain’s broken housing market. Local communities also worry about the impact of gentrification and the loss of stable residents. Undoubtedly, some landlords treat their tenants poorly.
So many will welcome the news of fewer landlords. The reduction will undoubtedly provide some welcome downward pressure on house prices and more homeownership opportunities for those who can purchase. But, to borrow Newton’s Third Law of Motion, every action has an equal and opposite reaction.
The declining attractiveness of buy-to-let will also mean fewer properties available in the rental sector today and less investment in future development. A declining number of rental apartments will, by definition, push up rents. The Office for National Statistics found that private rental prices rose by another 6.2 per cent across the UK in the year to December 2023.
The buy-to-let sector makes up a relatively small part of Britain’s housing stock, about nine per cent according to the Bank of England. Yet one in five Brits are renters, rising to almost one third of Londoners. All these people need somewhere to live. For many who are not yet ready to put down roots, or know they are doing a temporary stint in a certain place, renting can make much more financial sense than buying. This is accentuated today in the context of higher borrowing costs.
The economic magic of London is what economists call agglomeration: the creativity and activity that comes from the meeting of millions of people, sparking immense innovation and attracting business investment and talent. This requires people to enter and exit freely, necessitating a strong and flexible rental market. The great British tragedy has never been that London is too big, but that many capable people are locked out because of ridiculously high housing costs.
An interesting recent Dutch study demonstrates the danger of demonising buy-to-let. Marc Francke and colleagues studied a 2022 rule change that allowed municipalities to ban local buy-to-let investment. This was meant to protect affordable owner-occupiers and the character of neighbourhoods. They look closely at the impact on Rotterdam, where the policy was applied to some neighbourhoods and not others.
The Dutch policy was found to not have rescued property prices, meaning the areas became no more affordable for families, while also moderately increasing rental costs (by four per cent). The biggest effect was to reduce those with low incomes (by two to three percentiles in the income distribution) and immigrants with non-Dutch nationality (by 25 percentage points) in the areas that banned buy-to-let.
In the immortal words of Talking Heads: watch out, you might get what you’re after. The only way to solve Britain’s housing catastrophe is to allow more homes to be built where people want to live. Anything else, including demonising landlords, could just make things worse.
