Grim Year as House Prices Fall and Mortgage Rates Rise

The new year holds some problematic times for buy-to-let landlords as rising rents and interest rates squeeze their finances as house prices collapse.

Property experts are predicting not only will landlords have to increase rents by at least 10 per cent, but they will also see up to £23,000 wiped off the value of an average home.

And while inflation keeps rising, the Bank of England will have no choice but to ratchet up interest rates to haul the economy out of recession.

Only a few days into 2023, the rest of the year looks bleak for property people.

Aldermore Bank expects almost two-thirds of landlords (62 per cent) must raise rents by 10 per cent if market conditions continue to stifle profits, even though they are worried that tenants won't be able to find the extra cash due to the rising cost of living.

The cost of living rises

Escalating costs and double-digit house price increases have stopped 48 per cent of landlords from adding more homes to their property portfolios, while 42 per cent are thinking about downsizing, says the bank.

Although 49 per cent of landlords are struggling compared with 12 months ago, just over half (54 per cent) are optimistic about their property investments, and 66 per cent believe buy-to-let is an excellent way to make money, adds the report.

The research also looked at how landlords are coping with upgrading homes to meet energy performance demands set by the government.

It is proposed the minimum energy performance rating rises from E to C from April 1, 2025, for new tenancies and from April 1, 2028, for existing tenancies.

Meeting the energy performance target is a priority for 58 per cent of landlords, with many planning improvements at their rental properties by the end of the year.

Outlook is tricky to predict

Aldermore head of mortgages Jon Cooper says: 

"Troubling economic developments marked 2022, and the property market has faced some significant challenges.

“With the cost-of-living crisis already impacting tenants, homeowners and landlords alike, the outlook for 2023 seems tricky to predict.

“However, there remain healthy and positive opportunities for landlords in the UK.”

Meanwhile, house prices are predicted to fall as interest rates rise.

Buy-to-let lender Finanze expects house prices to fall by up to 15 per cent - which wipes out any gains during 2022, when prices rose by 12.6 per cent, according to data from the Office of National Statistics.

Interest rate agony

Rising interest rates will also pile on the agony, says the lender, which anticipates the Bank of England increasing them to around five per cent to put a lid on runaway inflation. The current interest rate is 3.5 per cent and is due for review on February 2 2023.

Joshua Ellard, the lender's head of specialist finance and research, said: 

"This time last year, many would have been expecting a period of recovery in which the economy could thrive and recover from the global pandemic.

“In reality, 2022 has thrown everything at us, from both economic and political perspectives.”

How the government tackles inflation will also greatly influence the housing market.

Rising costs and interest rates will impact landlords.

Chancellor Jeremy Hunt wants to see inflation drop to around three per cent a year from the current 10.7 per cent. The latest data from the Bank of England showed prices are still rising, but the pace of the increase is slowing.

Buy-to-let 2023 FAQ

How do I value a home when prices are changing so much?

It's difficult to value a property when the market rises or falls quickly. The scenario is generally a buyer and seller agree to a price, only for a surveyor to assess a lower value.

This is good news for a buyer, who now has an independent valuation putting a ceiling on the home's value, but not so good for the seller, who can only withdraw or accept a lower value.

However, while prices are falling, mortgage costs are increasing, which may impact a buyer's ability to finance the purchase.

Can a buyer demand more than the valuation?

Yes, a buyer can demand more than the valuation, but no one is likely to pay more unless they have exceptional personal reasons to do a deal. The deciding factor for setting the price is what the buyer is ready to pay.

How do valuers set a property's value?

Surveyors set a property price after considering several factors, including:

  • The cost of similar properties that have changed hands in the immediate area - say within half a mile
  • The condition and size of the property
  • The home's location and local amenities

When is inflation likely to fall to 3%?

The Bank of England hopes inflation will fall to the three per cent target by the end of 2023 or early in 2024, but many analysts are already seeing a slower change of pace in cost of living rises, which could mean this is as bad as it gets.

You can also see our article Can Landlords Cope With the Cost of Living Crisis?

View Related Handbook Page

Investing in a Property

Investing in a private rented property can be achieved in a variety of ways. Sometimes landlords inherit a property that they then turn over to renting. Sometimes owners of properties become unintentional landlords because they are unable or unwilling to sell a property at the value the market currently dictates.