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Monday, September 28, 2015

BofE concerns over BTL sector growth

Concerns over the ever expanding BTL sector were raised at the The Bank of England's
Financial Policy Committee policy meeting on 23rd September 2015.

The sector's rapid growth, of over 40% since 2008 to become 16% of outstanding mortgage lending is becoming an increasing worry to the UK's future economic stability. 

The Bank reflected -

 "Buy-to-let mortgage lending has the potential to amplify the housing and credit cycles, though the extent of the amplification is hard to judge because the market has only recently grown to significant levels. Any increase in buy-to-let activity in an upswing could add further pressure to house prices. This could prompt owner-occupier buyers to take on even larger loans, thereby increasing overall risks to financial stability. Demand for buy-to-let lending is itself likely to be cyclical, as in an upswing demand may increase from landlords seeking not only rental return but also capital gains. Buy-to-let investors may further exacerbate a downturn if they expect rental incomes to fall below their interest payments, and consequently add to selling pressure. Survey evidence suggests that around 40% of buy-to-let investors would respond to a fall in their rental income below their interest payments by seeking to sell their property. Large falls in house prices may in turn directly affect consumer spending, as households have less collateral against which to borrow. Credit risk on UK lenders’ balance sheets would also rise. 

Changes to mortgage interest tax relief announced in the July Budget are likely to reduce the incentives of some investors to take on increased leverage. And there is little evidence that underwriting standards of major lenders have fallen. Less than 12% of buy-to-let lending in Q2 2015 had an LTV greater than 75%, compared to almost 40% of owner-occupier mortgage lending. The majority of buy-to-let lending further appears to be extended at interest coverage ratios of greater than 125%, evaluated at a stress interest rate of 5%.

The FPC judges that there is, at present, no immediate case for action in the buy-to-let mortgage market. However, the FPC is alert to the rapid growth of the market and potential developments in underwriting standards. As the market continues to grow, particularly if driven by loosening of underwriting standards, the sector could pose risks to broader financial stability, both through credit risk to banks and the amplification of movements in the housing market. Intensified competition among lenders could lead to loosening underwriting standards in future. The FPC supports the intention of the Bank and the PRA to develop datasets needed for systematic monitoring of those standards and other terms and conditions on buy-to-let mortgage lending.

The rapid growth of the market also underscores the importance of FPC powers of direction for use in future. HM Treasury has said it will consult on powers of direction for the FPC related to buy-to-let lending later in 2015. "

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