Market tectonics: will activity shift from sales to lettings?

The stamp duty holiday came and went with much fanfare. For many buyers it represented a rare opportunity to make some savings on the purchase of a new home, but the phasing out of the stamp duty holiday will also likely mean that activity in the residential buy market will start to cool off over the coming months.

For many buyers, it may be that purchasing a property is becoming increasingly untenable as house prices have soared significantly over the past year (with the stamp duty holiday quite likely a chief architect of that).

House prices have gone up 10% year-on-year since May of last year, according to the ONS, with sellers able to ask for more due to the knowledge that buyers have a little more cash to spare. But the real elephant in the room may simply be that there aren’t enough properties on the market to go around, be they resells or new-builds.

Indeed, the RICS UK Residential Market Survey for June, released earlier this month, further emphasises the imbalance of demand over supply with new instructions falling for the third successive month. The survey highlighted a -34% net balance for new instructions in June, which represents a further decline from the -24% registered in May.

It’s still a little early to make guesswork of the how much the market may cool in the coming months. The latest transaction statistics from HMRC covering June provisionally put the estimated number of transactions in June 2021 at 198,240, 219.1% higher than June 2020 and 74.1% higher than May 2021.

How quickly we descend the peak remains to be seen - a cooler July is pretty much a sure thing - but it will be interesting to see how rapidly the cooldown tails off. Zoopla forecasts in its June UK House Price Index that there will be roughly 1.5 million completed transactions this year, an increase from the 1 million registered in its data last year, and the highest level since 2007. However, these transactions may not all be from owner-occupiers.

Landlord activity heating up?

Whereas activity from first-time buyers, upsizers, downsizers and all of the rest in the private home ownership market might slow down in the coming months, there may be an uptake in interest from Buy-to-Let (BTL) landlords looking to expand their portfolios, or even from homeowners looking to create a new revenue stream with the purchase of a second home to rent out.

The BTL market has very much lived under a shadow over the past year with landlord confidence at all-time lows (albeit a trend that started before Covid even kicked off). But landlords do appear to be finding their feet as the market stabilises, with the most recent NRLA Landlord Confidence Index for Q1 2021 showing that the proportion of landlords planning to buy in the next 12 months is now 50% higher than in Q1 2020.

Now there’s certainly demand in the lettings market. With house prices on the up, the demand for properties available to rent is also going to have a corresponding incline. Private rental prices have also increased over the past year, though not with the same energy as house prices – according to the June release of the Index of Private Housing Rental Prices released by the ONS, private rental prices paid by tenants in the UK rose by 1.2% in the 12 months to June 2021, which was unchanged since April 2021.

Demand in lettings market is certainly being acknowledged in the BTL sector. Paragon Bank research suggests that around 53% of mortgage intermediaries anticipate a rise in BTL business over the next 12 months. The figure cited covers Q2 2021 and represents an increase over the 50% recorded in Q1.

Moray Hulme, the Director of Sales at Paragon Mortgages, remarked that: “These figures suggest that the strong levels of buy-to-let business witnessed over the last six to nine months wasn’t just as a result of the stamp duty stimulus, but down to more fundamental shifts in where and how people want to live.”

BTL remortgaging is also on the up, with Paul Brett, Managing Director of Intermediaries at Landbay, noting that 39,700 loans were issued in Q1 2021, an increase over the previous quarter. The Intermediary Mortgage Lenders Association (IMLA) also anticipates that 2021 will to be the strongest year for BTL since 2016, with around £13 billion of purchase lending. 

Opportunities and costs

Potential rental yields are likely to be increasingly attractive to landlords looking to expand their revenue opportunities. The rising investment in BTL purchases and mortgages suggests an uptick in portfolio expansion that could help to ease stock shortages in the lettings market.

Of course, this is a double-edged sword, with a shift of properties moving from the sales market to lettings, house prices are likely to continue their trend of rapid growth. Whichever side of the coin you’re looking at, we need to build more quality stock in order to alleviate the strain on both markets for the most important stakeholders – first-time buyers and tenants.

*Mark Armstrong is the Chief Executive Officer of Reapit