Activity in the buy-to-let market is set to drop further in the coming three years as a result of Government interventions and a wider housing slowdown, a new report suggests.

The recent tax crackdowns on buy-to-let regulations are expected to lead to a further 'professionalisation' in the sector, while some amateur landlords could see their properties become loss-making once the gradual withdrawal of mortgage tax relief is completed in 2020.

This is the picture painted by a new report by Shawbrook Bank and the Centre for Economics and Business Research that looks at the impact of recent Government regulation on the buy-to-let sector.

Buy-to-let decline: Government interventions and a slowdown in the wider housing market have contributed to a cooling of the sector

The introduction of a 3 per cent surcharge in stamp duty from April 2016, coupled with a staged reduction in the tax relief landlords can claim from April last year and the tightening of mortgage lending rules have hit activity in the sector.

The number of buy-to-let mortgages decreased sharply in 2016 and 2017, falling from a multi-year high of 117,500 mortgages handed out in 2015 to 74,900 in 2017, a two-year drop of 36 per cent.

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The decline is set to continue, with up to a total of 360,000 fewer buy-to-let mortgages handed out by 2023 due to changes in regulation, according to the report's estimates.

But while mortgage approvals will continue to fall for another three years, the market should begin to stabilise in 2021 and they are expected to grow by half a percent in the following two years.

It is also predicted that transaction levels will fall to around 57,500 by 2023.

Shawbrook and Cebr said that while tighter mortgage checks and tax changes have contributed to the decrease in buy-to-let mortgages taken out, a general slowdown in the housing market is also behind the decline.

'We estimate that a cooling of the market would have happened regardless as the BTL sector is closely linked to the wider housing market which is facing more tepid price growth and a regional decrease in transaction levels, especially in areas where affordability ratios are stretched such as in London,' it said.

Mortgage approvals will continue to fall for another three years, but the market should begin to stabilise in 2021

The impact on amateur landlords

Previously, private landlords who owned properties in their own names could deduct both mortgage interest and other allowable costs associated with a let property from their rental income before calculating how much tax is due.

This meant the income they had to declare to HMRC was much lower than their rental income, keeping their costs down and keeping many in a lower income tax bracket.

But since 6 April 2017 landlords have begun to see the amount they can write off for tax purposes drop by 25 per cent each tax year until 2020 when they will have to declare all of their rent as income, pay income tax on the total and then claim back for 20 per cent of it as a credit.

Some landlords could see their buy-to-let properties become loss-making

The report suggests that for some landlords, especially high tax payers with a leveraged portfolio of properties, their buy-to-let properties will become loss-making if their mortgage interest cost is 75 per cent of rental income or more.

As an example, a private landlord with a rental income of £5,000 per month and mortgage interest costs of £4,000 per month would be left with an after-tax profit of £600 according to the old tax rules, assuming the landlord pays 40 per cent income tax on the net profit of £1,000.

But once the changes are fully implemented in 2020, the same landlord would make a loss of £200 per month as the tax bill would rise from £400 to £1,200, exceeding the pre-tax profit, according to the report.

‘The withdrawal of mortgage interest tax relief is a serious threat for a large number of leveraged landlords and we therefore expect demand for BTL mortgages to fall further over the coming years,’ the report says.

The number of buy-to-let mortgages decreased sharply in 2016 and 2017

Aside from the tax changes, landlords will also see their profits dented by an expected gradual increases in interest rates, which will push borrowing costs higher, as well as smaller rent increases.

According to the ONS’ Experimental index of private housing rental prices, rents have increased by 1.1 per cent in the 12 months to February, well below the general rate of inflation. Rental growth has been especially weak in London, the North East and Scotland.

‘If these trends persist, landlords will have little scope to raise rents by much more than the local average without losing tenants, limiting their ability to react to the changes in the tax code by raising rents,’ the report said.

Landlords will see their rental yields come under pressure as house prices are expected to rise faster than rents

Rents will continue to soar, lifted by a lack of housing supply generated by fewer buy-to-let properties. However, landlords will see their rental yields come under pressure as house prices are expected to rise faster than rents, according to the report.

‘We forecast average yields to fall from 4.9 per cent in 2017 to 4.1 per cent in 2023,’ it says.

Meanwhile, the focus of buy-to-let investors will shift away from London, where both rental and house prices are in decline, towards the 'hotspots' of the North West and Manchester.

All these projections are, however, dependent on a smooth exit from the European Union. 'Major upsets' during the transition period from 2019 to 2021 could have 'serious consequences' for the housing market, according to the report, which also highlighted that a decline in immigrants could result in lower demand for rental properties.

'Also, immigration patterns – while notoriously hard to predict – should be closely watched. A clear drop in EU immigration is already discernible in the data, translating into lower demand in the PRS,' it said.

Letting agents expect rents to fall in London and the South East

Karen Bennett, ‎managing director for Commercial Mortgages said: ‘Whilst the series of government and regulatory changes have had a significant impact on the sector, we have seen the impact felt more heavily amongst the “amateur” landlord community which has presented growth opportunities for professional investors.

‘Recent political turbulence has had an amplifying effect on investor confidence but positively, the market remains buoyant for those with a long-term strategy who draw upon specialist advice to fully understand the impact of these policy shifts.'

Adam Male, director of lettings at online lettings agent Urban.co.uk, said: 'We've seen a number of industry changes such as section 24 and stamp duty hikes in order to cap the prolific buy-to-let landlord from further stunting the chances of aspirational homeowners by removing more stock from the sales market.

'However, this consistent attack on the sector has actually done the exact opposite and the latest research from Shawbrook shows that it is, in fact, the amateur end of the market that is being impacted and not the professional investor.

'In contrast, it is those with the extensive knowledge and resources within the buy-to-let market that are able to take advantage of the shifting landscape and the average landlord with one, maybe two properties are feeling the pinch and having to exit the sector.'