Is Buy-to-Let in Southampton Still Worth the Risk?

Over the last five years, life has become a little trickier for Southampton landlords, with changes to their taxation status, mortgage interest relief and an additional 3% stamp duty for a buy-to-let property, and has made lots of Southampton landlords ask themselves:

‘Is buy-to-let in Southampton still worth the risk?’

Regarding taxation, in 2016, the Government added a 3% supplement in stamp duty on all buy-to-let properties. Then, in 2017, the Government started to reduce mortgage interest by stopping landlords from deducting the interest they paid on their mortgage before paying tax on the rental profits and replacing it with a flat rate tax credit based on 20% of the interest they spent on their mortgage.

There would be no effect if a Southampton landlord were a basic rate 20% taxpayer. Yet Southampton landlords who were higher-rate (40%) or top-rate taxpayers (45%) saw an effect as their tax relief was cut in half.

So, is buy-to-let in Southampton still an advisable investment?

The response to this question is much more significant than the issue of taxation.

To a large degree, as with all investments, it depends on why you are investing and what your final objective is. Let me expand.

The rewards of Southampton buy-to-let.

You can earn money two ways with buy-to-let. The first is the rental income from the property.

The average rent achieved in Southampton is £1,294 pcm,

a rise of 9.8% in the last 12 months.

 

This rent is expressed as a yield and is described as a percentage figure that's calculated using the annual rental income and dividing it by the value of the buy-to-let property.

 

Landlords and buy-to-let investors use rental yield to judge and measure the value of their rental investments and portfolios. E.g. rent is £1,000 per calendar month (pcm), which means the annual rent is 12 x £1,000 = £12,000. If the property is worth £180,000, the rental yield is £12,000 divided by £180,000, which, when expressed as a yield percentage, is 6.67%.

 

The average yield in Southampton is 6.1%.

Some areas in Southampton can easily achieve a 7.6% to 9.0% yield, sometimes even more, depending on your choice of property and type of tenancy you wish to have.

If yield is your number one focus, the highest average yield in the UK can be found in Bradford City Centre, where it is 12%, Hyson Green and Radford in Nottingham at 9.6% and Pontypridd at 8.7%, while other areas in the UK can be as low as 2.2%.

So indeed, is the best strategy to go for high-yielding properties?

The problem with pursuing high-yielding Southampton buy-to-let properties is that you usually must compromise on the property’s capital growth to attain that high yield.

The second way to earn money with buy-to-let is capital growth as your Southampton property increases in value.

 

SO15 property values are 15% higher than 3 years ago.

 

A reasonable return in anyone's books.

Of course, this all depends on the rent coming in, yet you can buy landlord insurance to cover against loss of rental income, tenant damage and legal costs.

Interestingly, using Government data and Industry data, Denton House Research found that in the first lockdown landlords who managed their rental properties themselves were 272.5% more likely to be in arrears of 2 months or more (compared to those who utilised the services of a letting agent to manage their property).

 

The drawbacks of Southampton buy-to-let.

 

Your tax bill is higher today than a few years ago, but isn't everyone’s?

If Southampton property prices fall, the capital you invested will reduce, yet if it sat in the bank, it would decline in value anyway.

Being a landlord is a big responsibility, with over 170 pieces of legislation and orders to comply with. That's where a suitable letting agent can help you with your rental property to ensure you remain compliant.

I recommend Southampton landlords consider all options to maximise their rental income whilst reducing their outgoings concerning their rental property.

Rents are rising in Southampton (as mentioned above), and many Southampton landlords appreciate the demand-led increases in their rent. And let me ask you, why shouldn’t they, as they have been exposed to many legislative and taxation changes over the last five years?

Ok, last point and the elephant in the room.

Will there be a house price crash, and should Southampton landlords wait for it?

A house price crash conjures up a big event that makes house prices go down, and it certainly happened like that in 1988 with the removal of dual-MIRAS tax relief on mortgages and the Credit Crunch in 2008. Yet this time, it’s different.

As there is more normality and balance in the Southampton property market at the moment (compared to 2021/early 2022), the price that is being paid today on most houses in Southampton is not as extreme or as extravagant as what was being paid in 2021/early2022 (when people were outbidding each other).

Therefore, if you were to look at the house price indexes going into the spring and summer of 2023, then there will be a reduction. The doom-mongers and newspaper editors will call that a house price crash, yet I see it as the market easing back to normality.

 

A massive driver behind landlords and home buyers ‘waiting for a house price crash’ is that they fear they have ‘missed the boat’ when it comes to buying/investing.

 

There is always newspaper (and now social media) attention when house prices explode. This means people quickly feel pressure to enter the 'property market', as everyone is making money, yet they aren't.

The problem is that during the previous boom phases (the late 1980s and early/mid-2000s), house prices increased quicker than some people could save money for their deposit (for a house purchase). They saw their friends and acquaintances snapping up buy-to-let deals and they were missing out on the spoils of house price growth. As a result, many of these excluded house buyers judged that a house price correction was foreseeable, inevitable, and sometimes even needed. Not with any rational economic argument, but classic FOMO (Fear of Missing Out).  

Yet a ‘house price crash’ isn’t the silver bullet that many think it will be.

‘House price crashes’ virtually never drop house prices to reasonable levels, and in fact, they have a lot of additional effects that make house buying even harder.

Investing in buy-to-let is a long-term investment. Remember what I said at the start. It would help if you decided why you're getting into buy-to-let investment and when you will get out (and what you want to get out of it). Buy-to-let has advantages and disadvantages, but it is something tangible and something that investors can understand.

 

The UK needs to build more houses, so the demand for rental properties will only continue to grow.

 

The heady days of the early 2000s, when anybody could make money from any property, though, have gone. With increased legislation and taxation, you need the advice of a great agent to guide you on what to buy (and not to buy) for an excellent yield, incredible capital growth or a balance of the two. That agent should be able to find you a great tenant who will pay the rent on time and look after the property to ensure that when they leave, your investment is returned to you in the best condition possible.

If you would like to pick my brain, whether you are considering becoming a landlord in Southampton, an existing landlord (irrespective of which agent you use) or even a self-managed landlord, do not hesitate to pick up the phone to me.

I will tell you what you need to hear, not necessarily what you want to hear.

 

Southampton Property Market Holding up Despite Doom and Gloom in the Newspapers

The Southampton housing market over the last three months is now becoming more ‘normal’ after the last couple of years of insane demand when the lockdowns started a race for space!

Even with the blackening economic doom-mongers forecasting a harsh slowdown in the British property market, the number of people buying and selling their homes is still very good for the time of year.

Whilst many homeowners are reducing their asking prices, it is not the 20% (some even said 30%) drop some property commentators and newspaper journalists had predicted.

Looking at the stats for Southampton for the last three months since the disastrous Truss mini budget – they make good reading.

Of the 943 Southampton properties that have sold (stc) since late September, the average length of time it took to achieve a sale was 42 days.

Interesting when you split it down by price, in Southampton:

·        Under £100k – 102 days

·        £100k to £200k – 54 days

·        £200k to £300k – 34 days

·        £300k to £400k – 41 days

·        £400k to £500k – 44 days

·        £500k to £1m – 55 days

·        £1m and above – 98 days

And by type:

·        Southampton Apartment/Flat – 54 days

·        Southampton Terraced/Townhouse – 34 days

·        Southampton Semi-Detached – 35 days

·        Southampton Detached – 45 days

 

The latest sold price data from the Land Registry shows that Southampton house prices currently remain 11.4% higher than they were 12 months ago; the rate of growth has dropped significantly.

Last month, Southampton house prices only rose by 1.2%; thus we are seeing the first sign that the property market is starting to cool.

With interest rates at 3.5% and further increases likely in 2023, that will undoubtedly spur ongoing cooling in Southampton property values yet it’s doubtful we will see the Southampton property market go into the deep freeze that many doom-mongers were predicting.

As I said in recent articles on the Southampton property market, we will see a 5% to 10% reduction in Southampton house prices over the next 12 to 18 months.

That will only take us back to the prices achieved in mid/late 2021 or early 2022 (depending on the property type).

Landlords have experienced double-digit rent growth in the last 12/18 months with a shortage of rental properties coming onto the market. I cannot see this changing in the short term, so I expect rents to be a further 10% higher by Christmas 2023.

Last week I stated it is not always wise to only focus on house prices but also take reference from the number of property transactions completed that feeds the fire of the British property market.

 

For example, in March 2021, 135,670 properties sold, yet a month later, it dropped to 87,600. A couple of months later, it rose again in June 2021 to 165,290 homes sold (for it to drop to 64,000 in July).

Whilst this is good news for estate agents and removals companies, it can skew the property market and put undue pressure on the property market (pressure which could cause a housing crash if not put under check).

Like most things, slow, steady and consistent is the preferred option for the property market. Throughout 2022, the number of properties selling in the UK has been a steady average of 68,832 per month, ranging from a low of 61,800 in January 2022 to 72,200 in July 2022.

 

This consistency will continue into 2023 and a return to a more 'normal' housing market.

One final thing I have noticed about the Southampton property market in the last six months is the number of larger properties coming onto the market that last sold over 25 years ago.

Homeowners in their 20s, 30s and early 40s tend to move every five or six years, yet when they reach their late 40s and 50s, they tend to stay put for longer. These properties only tend to come on the market when people pass away or must be sold for nursing home fees.

These mature homeowners are downsizing for several reasons. Their children have flown the nest and they are rattling around in homes with accommodation they don’t need. Many are being driven to sell their large homes in light of mounting energy bills, high inflation and never-ending maintenance costs that larger properties demand.

The second reason is that the recent rises in Southampton house prices has meant the money released to downsize has grown, meaning if these mature homeowners sell up and cash in to more manageable properties, the amount of money released is quite impressive.

In conclusion, 2023 is going to be a more 'normal' year, akin to the 2016 to 2019 years. Southampton homeowners need to be realistic with their pricing, yet as over eight out of ten sellers buy another home, the one you buy will be lower.

If you are considering selling your Southampton home in 2023 and would like a chat about your options, feel free to drop me a line or call the office.

What Will Happen to the Southampton Property Market in 2023?

The autumn of 2022 saw economic and political instability with the resignation of Boris Johnson as Prime Minister and the ill-fated Liz Truss 44-day premiership. Now as we go into 2023, the economic and political turmoil has subdued, offering a greater feeling of stability in money markets.

So, on the back of that, what is the expectation for the British (and Southampton) housing market as we go into the new year?

The biggest issue is inflation. Low steady inflation of around 2% a year is good for the economy, yet the high levels we are experiencing now isn’t. It affects the spending power of the pound in your pocket, and it alters the way people spend their money (including buying and selling property).

So where has this inflation come from?

Many blame it on inflated gas prices because of the Ukraine issue (however, it is believed by most economists only around 4% of the current 10.7% inflation figure is because of the fuel crisis).

UK inflation was already running at 6.2% when the Russian tanks rolled into Ukraine in February 2022 which created that energy price shock. Therefore, where has the rest of the inflation come from?

The catalyst of inflation started in 2020 with the Bank of England’s Quantitative Easing (QE). This pumped £450m new money into the economy at a time when the future looked bleak. The problem was, people had nothing to spend that money on, so when things started to get going after the lockdowns, there was a mis-match of too much demand for goods (as people had that money) and a lack of goods and services (because there wasn’t enough supply of those goods and services with the supply chain issues).

This all meant prices went up (i.e., inflation). The catalyst of this inflation was the Bank of England printed too much money in 2020 with QE and the supply chain issues (all easy to say with hindsight!).

 

Too much inflation is bad for the economy and therefore, ultimately the property market.

 

Two things will reduce inflation.

One is a recession and the other is increased interest rates.

Many find it fascinating that the Bank of England were talking the UK economy into a shallow recession in the autumn. Yet there was method in their madness. It was because they didn’t want to rely solely on the second method of increasing interest rates.

Better for the economy to have a shallow mild recession and interest rates rising to say 4.5% by the middle of 2023 to reduce inflation, than placing the whole job of reducing inflation on interest rates.

If that had been the case, interest rates would need to rise to say 7% (or more), causing the economy (and property market) to stall ... and thus create a subsequent deep and long recession.

Therefore, with the Bank of England having recently increased its base rate to 3.5%, with more interest rate rises to come in 2023, what does this and the mild recession mean for the Southampton property market?

A recession will increase unemployment levels, which have been comparatively low in the last few years. Depending on the type of roles/jobs that are made redundant, will determine the effect on the property market. Until that happens, we won’t know.

Everyone is suffering from higher gas, electric and shopping bills, yet with interest rates rising, this will increase the pressure on household budgets. Higher interest rates mean higher mortgage payments if the homeowner/landlord is on a variable rate mortgage (17 out of 20 homeowners with a mortgage are on a fixed rate).

 

It’s these two factors of recession and interest rates that will place negative pressure on Southampton house prices.

 

Yet let us not forget this pressure is coming off the back of two of the strongest years on record in terms of house prices and transaction levels.

 

Southampton house prices have experienced 22.1% price growth since the pandemic started in March 2020.

 

This is interesting when compared to the UK average, where average house prices have risen by 27.4% or £44,700 since March 2020.

Before I tackle the issue of house prices in 2023, I would like to look at the number of transactions.

To many the number of properties selling is irrelevant, yet I believe it is as important, if not more important, than house prices. I believe the best way to judge the health of the Southampton property market is the number of people moving home (i.e., housing transactions).

 

You could ask yourself why Southampton people should be more concerned about the number of property transactions and not the change in Southampton property values.

 

Many economists believe the number of property transactions is a better judge of the health and virality of a housing market. The higher the number of people moving home is better for the whole economy than a smaller number of property transactions, whilst the same can’t be said for higher house prices.

Transactions levels have been quite high in the last couple of years.

 

3,725 households per year have moved home in Southampton since lockdown, compared to the long-term 27-year average of 3,132 per year.

 

Looking at the stats coming through in the last couple of months, maybe we will settle for a figure somewhere between the two figures above, yet nowhere near the sub-2,500 annual figure of homeowners moving in the Credit Crunch years in the 2008/9/10 time frame.

Finally, let’s look at Southampton house prices in 2023.

A good place to start to judge house prices is how many reductions are taking place on the properties that are already on the market.

 

In the last 3 years, the average number of price reductions for the properties for sale in the Southampton area (SO14 to SO19) has been 160 reductions per month.

 

In October there were 310 price reductions and in November 296 reductions.

 

Homeowners are being more realistic with their pricing and the price that one will achieve for their Southampton home today and the rest of 2023 will be lower than one would have achieved in the spring of 2022.

Yet, as most Southampton people buy another property when they sell (and most of the time move up market) the price you would have had to pay on the next purchase would have been even more.

 

Yes, the price of Southampton property will be lower in 2023 by between 5% to 10%, yet these are only levels that were being achieved in the spring of 2022 – and nobody was complaining about those!

 

Final thoughts.

Several economic commentators are preaching doom and gloom for the property market in 2023, yet things are very different than the Credit Crunch years of 2008/9.

The property market crashed in 2008/9 mainly because the banks and building societies stopped lending money i.e., credit (that is why it was called the Credit Crunch).

There are two large differences this time round.

The first is the introduction of Mortgage Market Review mortgage stress testing instigated in 2014.

Homebuyers taking out a mortgage must have undergone a stress test on interest rates to obtain a mortgage since 2014. These stress tests are a safeguard to ensure that if their household income continued to be the same, the homeowner could afford higher mortgage rates.

The second is the banks and building societies have much higher cash reserves. Higher reserves will ensure they can continue to lend money and so more mortgages are available, although at a slightly higher interest rate than a year ago.

With mortgage rates falling back, with some very attractive fixed-rate deals knocking on the door of 5%, this is a development that may continue into 2023 as banks and building societies obtain cheaper funding sources and then compete for business by driving down the price of mortgages - which would only be good news for the Southampton property market.

These are my thoughts - what are yours?

Southampton Property Market What will the stamp duty cuts and interest rate rises mean for Southampton homeowners and landlords?

 

Last week the Bank of England increased interest rates to 2.25% and they are expected to be 3.25% by early next year. This increase will make the monthly mortgage payments more expensive for first-time buyers, an issue dubbed by some as the 'property affordability crunch.'

It will also damage the household budgets of homeowners coming off their fixed-rate mortgages in the next 12 months.

So how many homeowners are coming off their fixed rates in the next year?

Of the 7.97 million homeowners with a mortgage in the UK, 6.1 million of them are on a fixed-rate mortgage at an average rate of 2.04%. Industry statistics indicate around 1.3 million homeowners are coming off their fixed rate in the next 12 months.

The current crop of fixed-rate mortgage deals available today have already had the recent increase in the base rate ‘priced-in’ for weeks.

The cheapest 5-year fixed-rate today for a 65% Loan to Value re-mortgage (i.e., you are borrowing 65% of the value of your home) is a mortgage rate of 3.8% with Royal Bank of Scotland (RBS).

 

So, what will be the difference in mortgage payments between a 2.04% mortgage and a 3.8% mortgage?

 

Say an average Southampton first-time buyer bought their first home in November 2019 on a 25-year mortgage. They had a 3-year fixed-rate mortgage, and let's assume they fixed it at 2.04% (as mentioned above), meaning their fixed-rate deal finishes next month. They have £260,000 outstanding on their mortgage, and their Southampton house is worth £400,000. They would have been paying £1,107 per month for the last three years (assuming they took out a 25-year repayment mortgage).

On the RBS deal above, they will have to start paying £1,548 per month from November when they come off their initial rate – a rise of £441 per month in mortgage payments – almost a 40% increase! That’s quite a rise and potential blow to their household budgets.

Yet if they pushed back the repayment term from 22 years to, say, 35 years, that reduces the payment to £1,120 per month – something to consider if you are re-mortgaging in the coming 12 months.

 

What will the stamp duty changes mean for

Southampton property owners?

 

PM Liz Truss and Chancellor Kwasi Kwarteng believe that cutting stamp duty will support economic growth by encouraging more people to move home or jump onto the property ladder.

Stamp duty also has other harmful side effects as it decreases labour market elasticity and curtails people from selling up and buying elsewhere, where the jobs are.

Also, stamp duty makes mature homeowners stay put in their large homes rather than downsizing. This reduction in stamp duty will encourage those mature homeowners to move, thus freeing up their large family homes for the younger families that need them.

 

The Chancellor doubled the zero-rate stamp duty band from £125,000 to £250,000, passing a stamp duty tax saving of up to £2,500 for all English homebuyers.

 

Also, tax savings are even more significant for first-time buyers, particularly in areas with high house prices, such as London and the South East. They can save a maximum of £11,250 in stamp duty – with a new zero-rate band of £425,000, based on a higher £625,000 spend cap (i.e., the house they buy can't be over £625,000 for them to qualify for the tax relief).

So, what effect will these stamp duty changes have on the Southampton property market? Looking at recent events in the local property market is the best place to start.

 

Of the 7,399 transactions in the Southampton area since June 2021, 2,987 were below £250,000. These would now be tax-free!

 

Unsurprisingly, most housing transactions in Southampton were above the £250,000 threshold, yet irrespective of that point, it’s a saving of up to £2,500 for all future Southampton homebuyers.

Anyone currently buying a house in Southampton and not yet completed on their purchase (completion is when you have paid the money for your home and collected the keys) will be in line to make this saving.

Southampton landlords purchasing buy-to-let properties will also save money with the stamp duty cut (but they will still be liable for their second home stamp duty levy of 3%).

Overall, this is a welcome move to help the Southampton property market.

 

Yet will the stamp duty threshold rise have the seismic effect that the Rishi Sunak stamp duty holiday did in 2021, where just under 40% more people moved home than the long-term 30-year average?

 

I am sure the stamp duty cut will somewhat offset the rising costs in mortgage rates mentioned in this article and cushion the blow to the property market.

A blow to what you might ask?

Well, many people judge the property market's health by house prices.

 

The average value of a Southampton property stands at £340,869 and has risen 15.6% in the last five years. Not bad, eh?

 

But I believe there is a better way to judge the health of the local property market, and that is the number of people moving home (i.e., housing transactions).

You might be asking yourself why we should be more concerned about the number of property transactions and not the change in property values.

Many economists believe the number of property transactions is a far more accurate bellwether for the health and potency of the local housing market. A greater number of people moving home is better for the whole economy (i.e., what these changes are being made for) than a smaller number of transactions, whilst the same can’t be said for higher house prices. 

So, what is going to happen to Southampton house prices?

 

I believe the growth in Southampton house prices achieved in 2021/22 is not sustainable into 2023.

In conjunction with the price cap on energy bills, the stamp duty change, the reversal of the rise in National Insurance and the drop in Income Tax will mitigate house price drops. Yet, I foresee a ‘slight’ realignment in the house prices being achieved in 2023, compared to 2022.

The more significant impact these changes will have is the number of people moving home in the next 12 months.

I have been forecasting a 15% to 20% year-on-year drop in Southampton property transactions in 2023. Following this stamp duty cut and the measures mentioned above, I believe it will be lower, maybe around 5% lower.

 

To conclude, I predict we will have slightly lower house prices and fewer people moving home in Southampton, but not in any way a crash that many thought was on the horizon.

 

Before I go though, let me share some thoughts on whether stamp duty is a fair tax.

Now, this is almost a topic for a standalone article itself. Some economists believe that removing stamp duty (which raised £14.1bn in tax in 2021) and replacing that lost income to the Exchequer by increasing council tax on more expensive properties would do a lot more than other intended tax cuts to boost economic growth.

According to some commentators, the way UK Government taxes housing is flawed. They suggest instead of taxing an infrequent property transaction particularly harshly (the average stamp duty bill is £10,600), the Government should tax living in a house more, especially those who live in the higher priced properties.

So let us see how viable that could be…

Even if council tax was frozen for bands A to D (the lower priced properties), and the uplift between the more expensive council tax bands was doubled on each step between band D and H (so a typical band E property owner would see their council tax rise from £2,473 to £3,628 per year and a typical Band H see a rise of from £3,435 per year to £5,790 per year), such massive increases in council tax would be political suicide for the wealthy Tory voting homeowners and only raise £5.28bn – a long way from the £14.1bn currently raised.

Now, if the £14.1bn tax raise were spread evenly over all council tax bands, the average band D property would need to rise by £490 per year, and even a band A would increase by an extra £382 a year … something that again would be political suicide.

Yes, stamp duty is flawed. It's just every other option has more significant flaws.

Anyway, these are just my thoughts. Tell me, people of Southampton, what are your thoughts on the Budget, the stamp duty changes or whether stamp duty is fit for purpose and what you would do if you were the Chancellor to bolster the British property market?