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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.”

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Comments

There are 9 comments at the moment, we would love to hear your opinion too.

  1. A simple solution would be to build more affordable council and housing association properties instead ao allowing them to be bought under right to buy.

  2. Doesn’t sound a simple solution to me. It would require land, resources, finance and a whole lot of planning permission. Lots of NIMBYism would surely follow in the green and pleasant land.

  3. For some reason buy to let investors are basing their experience in the buy to let market as if it was their own home. Capital appreciation all the way a one way street to riches. Prior to the 2009 crash all I heard people invested in property say my flat/house has increased by 30%. You would never get that in the equity market.
    Should be interesting to see what the situation is now many are properly in a negative equity.

    Why have so many people forgotten fundamentals that decisions in the rental market are based on yields not capital appreciation.
    I also have to agree with comment made by the broker above. For some reason, they are under the delusion that rental income goes one way. Upwards. That cost can be passed on to tenants. If they do not like it they can lump it .There is always some one else who will pay the going rate.
    No wonder the bank is concerned last week announcement on the reduction in tax relief to standard rate. Cuts in housing benefit with the prospect of interest rates increasing.
    If that’s not enough buy to let investors will have to cope with EU legislation that is being proposed within this sector.

    We should all be concerned.
    But then there is always someone else to blame if the investment plan goes wrong Never the buy to let Investor.

  4. A criticism. It is too late now. The time to impose controls is before it is too late, not when it is too late. A regulator should heed the signals before they become overblown and endeavour to ensure there is an ‘orderly market’.

    Many of us have been shouting for so long and yet they haven’t wanted to listen. That said, to stop further rot and to protect more who have not yet entered the market, yes, there needs to be more regulation.

  5. James Clancy is spot on. Those who have bought buy to let property on large loans to value & interest only, all on the basis of increasing equity are at risk of wishing they hadn’t. There are simple rules for investing in the buy to let market, don’t over gear, always repay capital, have an end game (when will the mortgage be paid off) & most important of all, forget capital values, you are in it for the future yield.

  6. In my view this undoubted bubble has a cause as yet not investigated.

    As a result of ever more disincentives to the pension and savings market is it really surprising that BTL is attracting hoards. (not to mention those seeking a better yield than from cash).

    Indeed my clients didn’t gear – they bought outright.

    Want to prick the bubble?

    1.Stop messing with our savings and pensions and reinstate decent incentives. Yes this is for the better off – it is they who are creating the bubble.
    2. Cancel ALL tax relief on BTL (even for incorporated entities) and impose rent control.

    That should solve it.

  7. Tax relief on BTL is still surely the elephant in the room despite the recent change. We continue to see dysfunction in the housing market yet this is the only asset where it’s seen as appropriate for retain investors to gear up with debt, get tax incentives to do so and then plough their funds into an illiquid and un-diverse asset. They scrapped MIRAS on residential property but it remains on invesmtent property.

    Yes, as an investment, it works for many but I fail to see why, as an asset class, the Government (i.e. us tax payers) should incentivise others taking on debt to invest.

  8. Christopher Lee 13th July 2015 at 2:11 pm

    The tax relief on BTL pushes up affordability and prices and makes it more difficult for first time buyers as they receive no such HMRC assistance. I say scrap it now as it is distorting the market.

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