FSA chief executive John Tiner has warned lenders about the risks of investing in higher-margin lending such as the buy-to-let market.
Speaking at the Building Societies Association's annual conference in Manchester last week, Tiner said more private investment was being attracted to the housing sector despite falling rental yields and the relatively high costs of acquisition and disposal.
In 2002 alone, building society figures showed a 160 per cent increase in buy-to-let lending on the previous year. Figures for 2003 showed a year-on-year increase of 30 per cent to £11.8bn, with commercial property investment accounting for £7.7bn.
Tiner said well judged and managed diversification could improve stability of earnings and financial resilience. However, he doubted whether societies operating in the commercial, buy-to-let, equity release, sub-prime and self-certified markets had properly assessed the risks.
He said the FSA had been told by one society that it “cherrypicked” or only looked for small amounts of such business, which was no more risky than traditional residential mortgages. Tiner said this suggested a misunderstanding of the nature of the risk and questioned the products' specifications.
Responding to Tiner's statements, Nationwide chief executive Philip Williamson said the industry should be cautious about buy to let but societies needed to generate income from other streams.
BSA director general Adrian Coles said it was risky for societies to have all their eggs in one basket but diversification also carried risks.
Williamson said: “Societies are generally risk averse and most have very minimal exposure to buy to let.”