Entering the buy-to-let housing market as an individual investor can be daunting and difficult, even with some experience. In recent years, widespread fluctuations in house prices and market stability caused by events like the COVID-19 pandemic and the 2023 mortgage crisis have called the reliability of buy-to-let property investment into question. 2024 could be a pivotal year for the UK housing market.

The reality is that the buy-to-let market is rife with challenges and opportunities. Although recent social, economic and political trends have reshaped its trajectory relatively unexpectedly, buy-to-let homes remain a highly lucrative and sound real asset investment. To maximise your returns and minimise risk, however, identifying the core challenges and opportunities that will continue to present themselves throughout 2024.

At Concept Capital Group, we specialise in real asset investment opportunities in buy-to-let property. This blog will share some insights our team of property professions has gleaned through their research and analysis for a quick breakdown of the emerging challenges facing the buy-to-let market this year.

3 Challenges Facing the Buy-to-Let Market

The turbulence of the UK housing market in 2023 has led to heavy speculation on the stability of property investment in 2024. For the most part, financial and market experts have adopted a cautious approach. Global property firm CBRE, for example, noted that 2023 was a particularly challenging year for real estate in its outlook for 2024, with persistent inflation and 15-year high interest rates negatively impacting the market’s potential for economic growth. With a rising number of landlords ‘selling up’ and exiting the private rented sector last year to avoid inflated mortgage repayments and regulatory pressures, there were 43% fewer homes available for tenants to rent in 2023 than in the same period in 2015.

A Rightmove survey of landlord sentiments towards the housing market in 2024 further revealed that enquiries from tenants on private rented homes had fallen over the year, reaching 11 per home in Q4 2023 compared to 23 in August 2023. Certainly, 2024’s buy-to-let market started on shaky foundations, and many of the challenges facing investors this year are a holdover from last year’s record instability.

Challenge #1: Mortgage Rate Pressures

According to an extensive report on the financial stability of the buy-to-let sector by the Bank of England, approximately 19% of UK households are private renters, with about 45% of these households living in a property where the landlord has a buy-to-let mortgage.  This overrepresentation of landlords who purchased their buy-to-let homes through still-open mortgages amounted to approximately £300 billion in outstanding mortgage debt for the UK, representing 18% of the overall mortgage market.

The spike in outstanding buy-to-let mortgage debt has been a long-standing issue in lean economic climates. Between 2000 and 2008, the outstanding buy-to-let mortgage stock in the UK increased from £9 billion to £140 billion and has only continued to climb since then. At the same time, the arrears rate on these mortgages also steadily increased, largely due to a history of strong lending at high loan-to-value ratios and a lack of extensive income verification on behalf of lenders. This carefree approach to buy-to-let lending is largely responsible for the global financial crisis of 2008, which led to increased scrutiny on lending for a time. For many investors, though, the mortgage rate woes of 2023 are eerily reminiscent of 2008 and represent a red flag for investing in the buy-to-let market this year.

So far, most stakeholders have been on tenterhooks waiting for the Bank of England to lower its interest rate and bring some stability to a housing market creeping ever closer to a new crisis. Uneasy speculation on how long interest rates will retain their 16-year high has been unabated by the bank’s current ‘wait-and-see’ approach. One thing that remains certain, however, is that the risk of increasing mortgage rate instability will continue to serve as a major obstacle for most investors throughout 2024.

Challenge #2: New Buy-to-Let Regulation

With a general election due on the 4th of July, 2024 could prove a pivotal moment for the buy-to-let market. Readers of last week’s blog may be familiar with the implications a Labour Party win could have on the housing market, with a sizeable housebuilding target of 1.5 million homes taking centre stage in its plans for 2024 and beyond. Besides Labour’s proposed regulatory changes, 2024 could see the legal framework around buy-to-let property shift in any number of ways.

Firstly, the record levels of homelessness and rough sleeping seen this year have pulled the validity of Section 21 ‘no-fault’ evictions into question. Though the Renters’ Reform Bill promised a no-fault eviction ban as part of its designs to reshape the private rented sector into a fairer system for landlords and tenants, months of opposition from Conservative MPs has delayed its passing significantly enough that many speculate it will not pass at all. Still, with the surge in no-fault evictions continuing to make headlines this year, the Labour Party may progress a ban in ways the Conservatives could not.

Another regulatory change that could have a widespread impact on buy-to-let property investment is the upcoming introduction of the global Basel 3.1 reforms to the UK in January 2025. Though the reforms present a sophisticated set of new financial guidelines, perhaps one of its most impactful features is its proposed changes to the use of regulatory capital for credit risk. Intended to reinforce the internal models of banks by improving the quality and consistency of their capital measures, these changes are expected to more heavily regulate mortgage lending and lower the UK’s dependency on high loan-to-value mortgages. For landlords and property investors, this could mean a harder time procuring buy-to-let mortgages, as many lenders are expected to raise their rates and vet their applicants more stringently.

Challenge #3: Higher Costs, Slimmer Margins

Perhaps partially as a result of the pressures above, the buy-to-let property market has been subject to increasing costs while netting slighter returns in recent years. The average British house price reached a record high of £375,131 this year, according to an article from The Guardian. And, while sales also increased by 17% in the first few months of 2024, the increased length of time it takes to complete a sale in the current market is expected to slow the speed and rate of returns for property investors and landlords. Meanwhile, rents have also risen sharply this year, largely due to landlords attempting to pass the burden of increasing costs to their renters. 

The economic headwinds appear to be blowing towards a bit of a downturn for property investment, with residential property investment falling to £7.5 billion in Q1 2024, representing a 20% drop in Q1 2023 and a 61% fall in the five-year average from 2019-2023. On a global scale, house prices in the world’s ten major economies have risen by 70% since 2023, while incomes have risen by just 23% over the same period. This signals that, while there is a persistent need for buy-to-let property investment in 2024, ongoing issues of affordability and the cost of living crisis could see a market slowdown in the next few years. Indeed, UK Finance suggests that the buy-to-let market will continue to contract by 13% in 2024 to mirror 2023’s 53% contraction.

For many property investors, this financial pressure will serve as an impetus for a mass market exit as it becomes increasingly challenging to hold onto unprofitable assets in a downturned market.

An Alternative to Buy-to-Let with Concept Capital Group

Buy-to-let property investment may be in a precarious state in 2024, but the majority of the regulatory, financial and social concerns keeping investors out of the market are largely confined to traditional residential property.

Because our buy-to-let modular homes are classified as non-financial real assets, they serve as a unique investment opportunity through which our clients can generate passive income through rental property without having to worry about mortgage repayments, reform or falling beneath minimum EPC standards.

For more information on the value of alternative buy-to-let property investment, book a call with our team today. And don’t forget to read next week’s blog for a look at three major opportunities within the buy-to-let market in 2024.

Concept Capital Group

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