Managing Director of Mortgages Richard Rowntree comments that the issues facing the London rental market can be traced back to 2016 when the Government introduced a 3% Stamp Duty surcharge for buy-to-let property. 

A version of this comment piece first appeared in City AM.

It comes down to simple supply and demand economics. When a good or service becomes scarce and demand is in the ascendency, the price will go up. That is exactly the issue facing tenants in the London rental market.

There is a critical shortage of rental property stock in the capital at the same time as surging tenant demand. The result is rental inflation, but the warning signs have been flashing in the London rental market for some time and shouldn’t come as a surprise to policymakers.

April Fool’s Day 2016 may seem an innocuous date for many, but the issues tenants are facing in the London rental market can be traced back to that day.

This was the date that the Government introduced a 3% Stamp Duty surcharge on buy-to-let property and second homes in a bid to boost homeownership.

Whilst it’s laudable to encourage growth in first-time buyer numbers, the initiative has contributed to the tightening of availability of rental stock in the capital and the pressures tenants are enduring today.

Transient city

London has always relied heavily on rental property. It’s a transient city, it pulses each year and people move in and out for a number of reasons – work, study or simply to live in one of the world’s greatest capitals. It needs a healthy private rented sector.

London remains a popular region for landlords to buy property, but the introduction of the surcharge has impacted this market more than any other.

Between 2015 – the last year before the surcharge was introduced – and 2019, buy-to-let purchases fell 55% in London. This decrease was more pronounced than any other market in the country and there were more buy-to-let house purchases in the North West than there were in the capital in 2019.

The Stamp Duty holiday partially and temporarily reversed that trend last year, but purchases in London were still 30% below that 2015 high in 2021, resulting in fewer new rental properties coming into the market.

And what about existing landlords? Well, the evidence suggests that many have sold up in London or have transitioned across to short-term lets, such as Airbnb, where the tax treatment for owners is far more favourable and returns higher.

Figures from Zoopla show that the average lettings inventory of London lettings agents has more than halved since 2016. Propertymark agents’ data showed the availability of rental stock in London has fallen by 71% in 12 months, with an average of just four rental properties available per agent.

Surging demand

All this at a time of surging tenant demand. Our data shows that 85% of landlords in Greater London have seen increasing levels of tenant demand in the last three months.

As a result, rents are rising – up 21% during the second quarter of this year according to Rightmove’s latest numbers.

Being a landlord in London isn’t easy. The yields – rental income as a proportion of the property’s value - achieved in central London are the lowest in the country due to the high cost of property. Landlords looking for a greater return could generate better yields buying in other parts of the country or moving in the short-term lets market.

Landlords have an unfair reputation issue, which isn’t helped by negative rhetoric stoked up by policymakers and politicians. We have heard Sadiq Khan talk of rent controls, but this fails to grasp the underlying issue of why rents are rising in the first place. Rent controls will only exacerbate this issue and contribute to more landlords selling up.

Policy has consequences and disincentivising landlords to buy in the capital means tenants are facing challenges to find a place to call home.