Landlord mortgage crisis on track to trigger the sale of 735,000 rental homes

Rental unit for sale
Rental unit for sale

Landlords risk being forced to sell more than 700,000 properties because of rising interest rates, economists have warned, as Jeremy Hunt said he would tolerate a recession to bring inflation down.

Around 735,000 properties will be lost from the rental market if rates hit 5pc, according to analysis by Capital Economics, as unaffordable mortgage costs trigger a wave of forced sales.

It came as Mr Hunt, the Chancellor, admitted in a Sky News interview that he would be comfortable with a recession caused by higher interest rates. Mr Hunt said controlling inflation was worth the pain of a short-term slowdown.

Stubbornly high inflation has spooked markets, triggering a jump in borrowing costs and interest rate expectations.

There are growing fears that higher interest rates could tip Britain into recession.

Yields on two-year gilts are now higher than those on 10-year bonds, signalling that investors are concerned about the short-term prospects for the economy.

City traders have placed their biggest bets on recession since February, when there were widespread forecasts of a major downturn from the Bank of England and the International Monetary Fund.

The Chancellor attempted to reassure markets that inflation was being brought under control on Friday.

Asked by Sky News if he was comfortable with the Bank acting to bring down inflation even if it could precipitate a recession, Mr Hunt said: “Yes, because in the end inflation is a source of instability.

“If we want to have prosperity, to grow the economy, to reduce the risk of recession, we have to support the Bank of England in the difficult decisions that they take.”

He added: “I have to do something else, which is to make sure the decisions that I take as Chancellor, very difficult decisions to balance the books so that the markets, the world, can see that Britain is a country that pays its way – all these things mean that monetary policy at the Bank of England (and) fiscal policy by the Chancellor are aligned.”

Capital Economics said landlords are being forced to sell their properties because of a government decision to slash tax relief on mortgage interest repayments, pushing up their costs.

It warned that increased mortgage rates will lead to the loss of hundreds of thousands of rental properties from the market by 2027, compared with 2021 figures.

The analysis is based on predictions that the Bank Rate will peak at 5pc and remain above 2.5pc until the end of 2027. Markets now expect interest rates to peak at 5.5pc, meaning the damage to landlords would likely be even worse.

Capital Economics said reversing the tax change would ease the financial burden on landlords and prevent the sell-off of 110,000 properties.

Downing Street has for much of this year tried to downplay expectations that major tax cuts are imminent, repeatedly pointing instead to the Government’s promise to halve inflation this year.

In the weeks after Rishi Sunak took office last autumn urgent action was taken to calm markets after Liz Truss’s premiership and this spring there was little Tory MP appetite for a major tax rebellion.

But the run-up to the next fiscal statement, which will take place between October and December, is expected to see a renewed push from low-tax Tories for action.

On Friday some Tory MPs reacted to Mr Hunt’s comments by raising concerns that no tax cuts would come this year and warning the Treasury not to take lightly the prospect of recession.

John Redwood, the Tory MP and former head of Margaret Thatcher’s Number 10 policy unit, told The Telegraph: “This economy needs to grow. To control inflation you need a lot more capacity.

“Instead of sandbagging British activity the Government must follow policies that encourage domestic energy, domestic food production and domestic industry.

“I’m worried that the Government will not cut taxes soon enough. They are now having to spend a lot more public money on subsidising business because they’re taxing business too much. This money-go-round helps nobody.”

Jacob Rees-Mogg, the former business secretary, said: “The failure of the Bank of England may mean that interest rates have to remain higher for longer but the Government ought to be implementing the supply side reforms that would lower prices and boost growth.

“The gutting of the Retained EU law bill has, therefore, been a great missed opportunity. The Treasury should never be relaxed about recession.”

Are you a landlord who feels forced into selling up? We want to hear from you, email:

Broaden your horizons with award-winning British journalism. Try The Telegraph free for 1 month, then enjoy 1 year for just $9 with our US-exclusive offer.