Thursday 5 January 2023

What’s in store for Chichester’s landlords in 2023?

There were mixed fortunes for Chichester’s landlords last year. There was strong rental demand alongside rising house prices and increasing rents, despite the cost-of-living crisis that came about due to soaring inflation. Interest rates, however, rose far more rapidly than anyone had predicted, which has already caused concern and financial stress for many landlords with buy-to-let mortgages. The financial landscape is likely to be the main ‘thing to watch’ for landlords in 2023, with a sprinkling of legislative announcements due as well:

Delay to Making Tax Digital - confirmed

HMRC’s Making Tax Digital scheme was due to be introduced in April 2023, but has now been delayed until 2026. The proposal is for landlords with an income in excess of £50,000 to use software to keep digital records and submit these on a quarterly basis, rather than once a year via their self-assessment.

Tax increases - confirmed

The personal tax allowance bands have been frozen until 2028, meaning as incomes increase (due to inflation) more of it will be taxed at a higher rate. From April 2023, the top rate of income tax (45%) will come into effect from £125,140, rather than £150,000.

There have also been reductions in dividend allowances (from £2,000 tax-free currently, to £1,000 from April 2023 and then £500 in April 2024) as well as a cut in the Capital Gains Tax allowance (from £12,300 tax-free annually now, to £6,000 from April 2023 and £3,000 from April 2024).

The unfairness of how Section 24 changed mortgage relief for landlords will also become more notable as incomes rise, the bandings are frozen and mortgage payments increase (without being able to fully offset them, whilst first paying tax on income rather than profit). 

Rental reforms to be formalised - highly likely

The long-awaited white paper was finally published in June 2022, outlining the governments 12-point plan for ‘a fairer private rental sector’. It was subsequently announced that the Renters Reform Bill will be introduced during the current parliamentary session (which should mean Spring 2023). It will likely take another year to come into effect, but it should mean we have greater clarity this year on the proposals, some of which are likely to include: 

- scrapping Section 21.

- scrapping Assured Shorthold Tenancies and bringing in universal ‘periodic’ tenancies, which will enable tenants to leave with two months’ notice at any time.

- extending the ‘Decent Homes Standard’ from the social rented sector to private tenancies.

- introducing a compulsory digital platform for landlords (effectively a landlord register).

- introducing an ombudsman scheme for the private rental sector to resolve disputes.

- requiring landlords to accept tenants with pets, unless there is a good reason to refuse.

Interest rates to rise - highly likely

This time last year the interest rate set by the Bank of England was 0.25%, with the financial markets pricing in an increase to 0.75% by the end of the year. Instead, the base rate now sits at 3.5%. It is expected this will continue to rise early in 2023 in an attempt to stave off the persistently high level of inflation.


Mortgage rates to settle - likely

It seems illogical to suggest mortgage rates will settle (or even fall) this year, alongside a forecast of higher interest rates. However, the financial markets got so spooked by the ‘mini-budget’ back in October that the kneejerk reaction was to increase rates sharply ‘just in case’. The average two-year fixed rate buy-to-let mortgage has fallen from highs of 6.9% in October to 6.3% now, despite the base rate continuing to rise during that period. Mortgage rates are typically between 1 and 1.5 percentage points higher than base rates, so if the base rate does not exceed 5% it is likely mortgage rates will settle, or even lower fractionally. 

Despite this, mortgage rates compared to a year ago are far greater now and are unlikely to revert back to those levels (the average two-year fixed rate buy-to-let mortgage a year ago was 2.9%). Those on tracker mortgages will already have started to see the impact of this, whilst those whose fixed-rate mortgages are set to expire will soon see a sharp rise in their monthly interest payments (typically more than doubling).

House prices to drop - likely

The general consensus amongst market commentators is that house prices will drop between 5% and 15% in 2023, due to the aforementioned cost of living crisis and increase in mortgage rates. The Government’s official forecaster (the Office for Budget Responsibility) predict a 9% fall in house prices.

Whilst this could lead to some ‘bargains’ for those looking to buy, it will decrease the paper value of landlords’ current portfolio, which may impact the availability of mortgages if the level of equity falls too much.

Rents to rise - likely

Since 2016, almost 250,000 more homes have been sold by landlords than have been purchased by them. Demand from tenants for rental property is, however, stronger than ever and is only likely to continue to grow as would-be homeowners simply cannot afford to get onto the property ladder due to increased mortgage rates. Reduced supply and increased demand has caused a continual increase in rents, with particularly sharp rises last year as matters started to come to a head (rents were up 11% nationally in 2022). 

Whilst forecasters do not expect rents to continue to increase as strongly as they have been (as they would ultimately become unaffordable to tenants) they do expect a further rise in rents of between 4% and 6.5% in 2023.


More tenants will struggle to pay the rent - likely

It is reported that 6.4% of tenants missed a rental payment last month. With budgets squeezed further by pay cheques that do not keep up with inflation, tenants may struggle to meet their rental payments in 2023. With many landlords also increasing the rent to offset the additional mortgage costs and tax liabilities, this situation is likely to be exacerbated further. 

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