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Resilient Landlords Defy Soaring Rates: The Rental Market’s Triumph Over Adversity

In a market that’s seen 14 rate hikes, landlords are showing remarkable resilience and adaptability. While rising mortgage rates have brought significant changes, there’s an unexpected twist in the story: the rental market is holding its own.

Imagine, just two years ago, a two-year fixed interest-only mortgage (75% loan-to-value LTV) stood at a mere 1.3%. Today, it’s 6.2%. This might sound like a significant leap, but here’s the thing – landlords aren’t hitting the panic button. Instead, they’re adjusting their strategies, and it’s having some surprising ripple effects on the rental landscape.

Amidst these shifting financial tides, the big question is, what will landlords do? Will they rush to raise rents, or will they exit the property market altogether, potentially shrinking the pool of rental housing? The outcome of this dilemma holds considerable weight because one in every five dwellings in the UK is currently up for rent.

Interestingly, this issue has started to concern the Bank of England (BoE), and here’s why: renters tend to be less financially resilient than homeowners. They allocate a larger share of their income to housing, often have lower savings, and sometimes find themselves in debt. The BoE’s research underscores that vulnerabilities in the private rental sector could trigger or worsen a broader economic downturn, especially as the costs of essential goods continue to rise.

However, a closer look at the data suggests that the rental sector might be more resilient than anticipated. According to Zoopla, nearly 40% of landlords have no borrowing at all, and an additional 30% have a mortgage with a loan-to-value ratio of less than 50%. This situation should theoretically ease the pressure on rents due to rising mortgage costs.

Here’s where it gets interesting: despite the concerns, data from the Office for National Statistics (ONS) reveals that year-on-year rent growth hit a record high of 5.5% in August. But the good news is that wages have also been on the rise, with average weekly regular pay up nearly 8% compared to a year ago, outpacing inflation. Economists at Pantheon suggest that this suggests “a smaller share of households’ incomes is being absorbed by rent,” indicating that landlords still have room for moderate increases, even if wage growth slows down a bit.

So, are landlords fleeing the market in response to higher mortgage rates? Not so much. Tracking this is tricky, but according to the BoE’s measurement, while some landlords have indeed exited, the shrinkage has been more modest than anticipated. This intuitively aligns with the fact that new investors, who are more likely to have higher loan-to-value ratios, might be more sensitive to rising mortgage rates and less inclined to enter the market.

Moreover, most landlords have fixed-rate mortgages, which limits the number of refinancing actions happening concurrently. Plus, many landlords are in it for the long haul, viewing buy-to-let properties as a part of their pension plan. This long-term perspective suggests that the rental property supply is more likely to inch up than experience a sudden decline.

In a nutshell, after nearly two years of interest rate hikes, the rental market is standing tall, proving its resilience in the face of adversity. Landlords are adapting, renters are finding room to breathe, and the housing market continues to play a vital role in the lives of many.