Why the rental market is broken

«August 11, 2023»

It’s hard to imagine a worse scenario, rising demand for renting with falling housing supply. The UK renters are in serious trouble and that’s with most adults living with their parents longer than before. It’s a situation commonly seen on the Thanet local social media channels. The last time kids waited this long to fly the nest was in Georgian England, where young adults would not move in together until they were married and had means to provide for a family, which would have been well into their late twenties for the men. Today, we’re seeing millennials and Gen-z fly the nest much later than they have been, the situation could be far worse.

One in ten rental homes will be lost this year according to the Telegraph. We already knew that the supply of homes were down to 2015 levels, despite the population rising, but it looks like the situation will get dramatically worse.

Graph of UK Population.

Possible reasons landlords are exiting the market

The penalties for landlords who fail to check the immigration status of their tenants will increase from £80 to £5,000 for a first offense and from £1,000 to £10,000 for a repeat offense.

Landlords say the increase in fines will be ineffective in stopping illegal immigration and will only serve to drive them out of the rental market. They argue that the vast majority of landlords already carry out the necessary checks and that the new rules will unfairly punish those who are doing the right thing.

The government's plan has also been criticized for being unfair to poorer British nationals who may not have the necessary documentation to prove their citizenship.

As a result of the criticism, the government has softened its stance on the new rules. It has said that landlords will not be fined if they make a genuine mistake, and that there will be a grace period of six months before the new rules come into effect.

However, the government has defended its plan, saying that it is necessary to crack down on landlords who are complicit in illegal immigration.

It remains to be seen whether the new rules will have the desired effect. However, it is clear that the government's plan has met with significant opposition from landlords and property experts.

Graph of landlords profits.
The Telegraph

“But landlords without mortgages are still putting rents up and having even larger profits, it’s just pure greed”. If someone has a £300,000 house, and their annual profit after issues to deal with, maintenance, contracts to read, legislation changes, threat of arrears, fees, insurance = a profit of £5000. What does that make it? A bad investment. Why bother being a landlord when you can get 6% hands off from a REIT, or even 5%+ from your high street bank. Not to mention the social stigma and routine media abuse.

Rents in London are expected to hit a record high of £2,700 a month next year. Rising interest rates and tax changes are forcing squeezed landlords to pass on costs, according to City Hall analysis.

The average rent in London could hit £2,700 a month next year, up from £2,567 currently, City Hall said. This may be a shocking number, but in reality this is not even meeting the inflation number. Averaged out since 2016, rents have not kept up with inflation.

Landlords are being hit by rising costs, including higher interest rates and tax changes, which they are passing (some of) on to tenants.

The National Residential Landlords Association (NRLA) said demand for rental properties is far outstripping supply, which is also pushing up prices.

Mayor of London Sadiq Khan, who has campaigned for the government to introduce a two-year rent freeze, said the worsening outlook for rent prices was the "clearest picture yet" that controls are necessary.

He said: "Landlords are unable to offset these increased costs because tax relief on mortgage interest relief has been cut - they are essentially paying tax on these increased costs." Landlords used to be able to claim full tax relief on mortgage interest payments but this has been restricted since 2020, squeezing profits. Lenders also require landlords to have rents that cover between 125% and 145% of the interest on the loan.

But he also said this "doesn't address the lack of homes that allows landlords to charge so much on new tenancies", adding: "To tackle that we also need a big increase in the supply of social and affordable homes."

Mr Wood warned that rent controls would only push landlords to sell up and make it more difficult for people to find places to live.

Since 2016, Britain's rental sector has already lost an estimated 400,000 properties, with sales on course to lead to a 10% reduction in the number of rental properties by the end of 2023, according to real estate adviser CBRE.

One in ten rental homes could be lost this year as landlords flee market

The number of rental homes in the UK could fall by 10% by the end of the year, as landlords are forced to sell up in the face of rising costs and taxes.

The exodus of landlords is being driven by a number of factors, including:

  • Rising mortgage rates: The Bank of England has raised interest rates five times in the past year, pushing up the cost of borrowing for landlords.
  • Tax changes: The government has introduced a number of tax changes that have made it less attractive to invest in buy-to-let properties, including a reduction in mortgage interest relief.
  • Increased regulation: The government has also introduced a number of new regulations for landlords, such as the requirement to carry out energy efficiency improvements.

The impact of the exodus of landlords is likely to be felt most acutely by tenants, who are already facing rising rents. The average rent on a newly let property has risen by 9.3% in the past year, according to Hamptons estate agents.

The government has said that it is committed to helping people afford to rent, but it is unclear what measures it will take to address the current crisis. In the meantime, tenants are likely to face further rent rises and a more difficult time finding homes.

Environmental controls to bring EPC’s up, while delayed until later in the decade (it keeps changing), is still and overhead threat putting off tired landlords. The refurbishment cost would be 10’s of thousands of pounds and a general hassle, especially when tenants currently live there. Eating into an already wafer thin profit margin for many.

The impending removal of section 21, will prevent landlords from evicting their tenants because they feel like it. Some may have good reason to want to evict their tenants, such as smashing the place up or rent arrears, and some may have a poor reason like rent rises. Either way, it’s an active deterrent for many landlords.

The classic section 24 from 2015, fully integrated into the tax system by 2020, is making the profits even smaller.

All of the regulations have one thing in common. They deter small landlords/investors and a build to rent scheme or corporation can absorb the costs and manage the admin with their team. It reduces competition in the market for them, thus increasing the rents and future rents.

There are over 200 pieces of legislation involved in renting out your property. A free market or the wild west, it is not. This is a highly regulated service sector and you can understand why the voters would want it that way, it is their home after all, so it’s a complicated business. It’s a conundrum for the government, they need to protect tenants from slum landlords and deal with a homelessness problem at the same time.

Graph of housing builds completed.

The councils are incapable of providing housing, we can blame that lady who sold the council houses off 40 years ago, or we can accept that no government in the past 40 years has wanted to increase the council house stock. In fact, council houses were dropping off in the 1970s before Thatcher reached office so this is a half century policy from the government which is unlikely to change.

House builders in Thanet are building thousands of places on the outskirts of Ramsgate, Broadstairs and Margate at a rapid pace. Whether you like them or not, housing is desperately needed across the UK.

What tools does the government have to solve these problems?

Increase supply - incentivise landlords to enter the market.I just can’t see that happening, it’s not popular with voting nor their donor built to rent mates.

Cut demand - reduce the amount of renters. Unlikely again, with an aging population, we’re already short of new workers coming to the UK so the government will be bringing in all the people they can give working visas to.

Increase minimum wage or housing benefit - all inflationary tools that create a bigger problem in the end. See 2020/21 case example of what happens when you give out excess money.

Price controls - Ahhh now this looks like something the government would like. Popular with voters, we can see that already in the news. Obviously the consequences are drastically worse, with even fewer properties available to rent but at least the rents are lower… oh no wait. Scotland tried this for the past 18 months and the rents for new tenants are actually much higher. Any further disincentive to landlords would just make the problem worse, it’s noticeable in Thanet.

Another historical example of price controls is shortly after WW2, when the supply chains were not in great shape and the population had lots of saved money after not spending much during the war, price controls were introduced for food to prevent a food price spiral. The same situation played out where supply became strained to meet demand and there was little incentive for suppliers to increase their productivity. By the late 1940s, the price controls were removed and inflation rocketed to 18.5%.

The only real solution is to increase home supply, but that is quite a challenge to keep up.

The struggle continues for everyone and seemingly for a long time to come.

Profile picture

Written by The Team Since 2015 we have been habitual property researchers, listening and reading the work of experts in the field. Read our letter from the editor.


We also buy property. If you have a property you would like to sell in East Kent, please get in touch with us.

Find Out More