Buy-to-let exodus risks future house building

Shrinking rental sector has led to a dip in off-plan purchases that threatens to escalate property crisis

AN EXODUS of buy-to-let landlords is threatening the financial viability of future housing developments, after the number of investors buying off-plan properties slumped.

Plunging demand from landlords means under-construction house sales have overtaken flats for the first time since 2007. The fall in off-plan sales of flats risks causing a funding crunch for developers, experts warned, which could cut housing supply in the future.

One in three (34pc) new homes in England and Wales were sold before they were completed last year, down from a peak of 46pc in 2018 and the lowest share since 2013, according to analysis by Hamptons estate agents.

Traditionally, housebuilders have used advance, off-plan sales to investors as a key means of funding developments. But now the decline of the buy-to-let market means this model has crumbled. Just 21pc of off-plan purchases were made by investors in 2022. Back in 2015, the share was 70pc.

This comes as the Government unveiled a wave of new regulations for the private rental sector last week and follows repeated tax tightening.

Ben Beadle, chief executive of the National Residential Landlords Association, said: “By actively discouraging investment in the rental market, tax rises are leaving growing numbers of tenants struggling to find anywhere to live. Ministers need to reverse gear.”

David Fell, lead analyst at Hamptons, warned the slowdown in off-plan sales would mean “far fewer homes will be built in 2023”, as builders are also grappling with a drop in demand following the end of the Help to Buy scheme.

“Slowing sales rates mean that some developers are slowing the pace of work in order to reduce their risk,” he said.

For the first time since at least 2007, terraced houses were more likely to be bought off-plan than flats, typically more popular with landlords because they offer higher yields.

In 2016, 66pc of all new homes sold off-plan were flats. By 2022, the share was just 44pc. Over the same period, the share of off-plan sales that were terraced houses rose from 44pc to 46pc.

In London, which used to have a particularly high proportion of property investors, the share of new homes sold off-plan fell from 71pc in 2016 to 42pc.

The shift has come alongside a buyto-let tax crackdown by the Government. Since 2016, anyone purchasing a property in addition to their primary residence must pay a three percentage point stamp duty surcharge. On top of this, from 2021, foreign buyers have had to pay an extra two percentage point surcharge.

Between 2017 and 2020, tax relief on buy-to-let mortgages was also phased out, meaning that investors must continue to pay the same amount of tax even if high interest rates mean their properties become loss-making.

The combined blow of higher mortgage rates, high taxes and increased red tape under the Renters’ Reform Bill could further dampen investment in the sector.

Mr Beadle said: “Greater security for tenants will mean nothing if the homes to rent are not there in the first place.”

Writing in The Daily Telegraph last week, Michael Gove, the Housing Secretary, said the Government’s reforms were targeting the small section of landlords treating tenants poorly.

Stagnant house prices have also deterred investors from investing in off-plan properties, experts warned.

Mr Fell said: “A decade ago, investors buying well in advance of completion often saw the value of their new home rise by 20pc to 40pc between exchange and completion. But as price growth has slowed, buyers in general become less willing to commit to purchases years in advance of completion.”

Although house prices have flatlined in recent months, there are signs that lack of supply is starting to push prices up once again. According to Rightmove, the average price tag is now £372,894, up 1.8pc compared with April.

The Department for Levelling Up, Housing and Communities was contacted for comment.