Is BoE paving the way for buy-to-let intervention?

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Bank of England warnings on the dangers of the booming buy-to-let market could be the precursor to a wave of interventions in the sector.

The Bank warned last week in its bi-annual financial stability report that the size of the market poses risks to the UK economy’s stability.

According to Bank statistics, buy-to-let lending accounts for more than £1.2trn of UK housing stock, 15 per cent of the stock of outstanding mortgages and 18 per cent of new mortgage lending.

However, the Bank says it is concerned lending standards may be slipping, leading to a situation in which a rise in interest rates could hit those with small property portfolios hard.

In particular, it warns if landlords find rents are no longer covering their mortgages it could trigger a rush to sell across the market, causing house prices to plummet.

The Bank says its financial planning committee will consult with the Treasury on how to build evidence of the risk to the UK, and will continue to monitor the sector closely.

One buy-to-let broker describes the Bank’s comments as a shot across the bows of lenders ahead of a likely intervention.

He says: “Let’s say you pay 4.5 per cent on a buy-to-let mortgage. By the time you have paid everything else your cashflow is almost neutral. But if the base rate goes up by 0.5 per cent, that could be as much as an 11 per cent increase in your outgoings, and there’s no way a landlord can get that kind of rent increase from their tenants.

“The BoE is sending a message and that message is ‘we are not very comfortable with too many variable-rate products in the market, so offer more long-term fixed rates, and make sure they are well priced.’”

Capital Economics property economist Matthew Pointon agrees the move may herald a strengthening of the Bank’s oversight of the unregulated buy-to-let market.

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“They will probably act to bring more power to supervision as an insurance play for the market,” he says, explaining the Bank has long been concerned about the implications of activity in the buy-to-let market.

“And it’s in the back of their mind that in the financial crisis, arrears on buy-to-let mortgages went up much faster than those of normal mortgages,” adds Pointon.

“A lot of that was down to the fact they tend to be linked to Libor rather than the base rate, so while other borrowers were able to benefit when interest rates were cut, people on a buy-to-let mortgage got stuck with high rates.”

Buy-to-let lender Fleet Mortgages chief executive Bob Young says there has been a surge of new and inexperienced lenders entering the market in search of margins. He says many are backed by hedge funds and private equity, forcing them to pursue high-yield products.

He says: “Some lenders are saying how can we make money, and buy-to-let is unregulated and you can do things which push the envelope, but credit-impaired lending gets you a better yield.

“I don’t particularly have a problem with the new lenders, but if that happens all over the whole marketplace it pushes credit risks.

“My big concern is we have people who don’t understand those risks, and are new to the market, and that’s going to have consequences for us all. Anything that pushes money into a sector of the market which is ill thought through has dangers and can affect stability.”

Housing research firm The Model Works founder Brian Hall describes the rate of growth in the buy-to-let market as “scary”.

“It’s getting so big so fast that when the bubble bursts it’s going to have quite a significant impact,” he says.

“But we’re seeing a sea change now in attitudes. This is the first indication of concerns about this rapid growth and the received wisdom is beginning to get questioned, and that’s very healthy.”

Hall adds, however, that the change in attitudes is a symptom of a much wider issue in the market. “There’s an argument that this is just an open market, but really it’s just the expansion as a result of the inability of the market to resolve the problems of first-time buyers,” he says.

“Yes, we haven’t got enough properties but the problem is that people are renting rather than buying, mainly because they can’t afford to buy, and my calculations show those people being £750,000 to £1m worse off through their lifetime.

“And if you can’t buy, then you are going to be less able to help out your own children, and you may have to rely on the state for housing later on.

“What will happen at some point is the powers that be will be forced to recognise there is this enormous problem coming and it is at least as big as the problem of private sector pensions. It could cost billions in housing benefit.”