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Bank of England concerns over Property buy-to-let boom December 2015 #update













The Bank of England has again expressed concern about the UK's buy-to-let property market.
The Bank's governor, Mark Carney, said he was concerned about high levels of lending to landlords and that the Bank would take action.
"There are a number of things happening ... we are watching it closely and we will take action," he told the FT.
Mr Carney said the problem was that investors might sell their properties at the same time if house prices fell.
In September, the Bank's Financial Policy Committee (FPC) made a similar warning about the buy-to-let market.
The committee, which is led by Mr Carney, said the growing market posed a threat to the UK's financial stability.
"The stock of buy-to-let lending might be disproportionately vulnerable to very large falls in house prices," the FPC said.

Buy-to-let rush?

Since the FPC's warning, Chancellor George Osborne has announced that stamp duty rates will rise steeply for anyone buying a home that is not their main residence - which would include buy-to-let investors as well as second-home buyers.
But with the higher rates of duty only starting at the beginning of the next financial year, there are worries that there may be a rush by some would-be landlords to buy properties before then, which might help to push up house prices even further.
Lending to landlords has grown rapidly in recent years.
There are now 1.7m buy-to-let mortgages, making up about 16% by value of the total stock of all outstanding mortgages.
Each year, more than two million individual landlords declare rental income to HM Revenue & Customs in their tax returns.
For the 2012-13 financial year, 2.1 million taxpayers declared income from property, up by more than a third from the 1.5 million in 2007-08.
Earlier this year, Mr Carney said the Bank was in discussions with Mr Osborne about obtaining greater powers to regulate the buy-to-let mortgage market.
For sale signsImage copyrightPA
So far, however, there is no word on what these powers might look like.
The governor also used the Financial Times interview to defend his policy of "forward guidance" about the path of interest rates.
In the past two years, he has suggested several times that the Bank would soon start to "normalise" the base rate, which remains at 0.5%.
However, inflation has remained far below the target of 2%, prompting the Monetary Policy Committee to hold its fire.

No 'heads-up'

"Did I know that oil was going to fall 12% in the last 10 days? No, I didn't know that," Mr Carney said.
Neither, he added, had the Chinese "given me 12 months heads-up" that they would devalue the yuan. "But I will continue to try to frame as accurately as possible what's guiding my decision process."
The UK's inflation rate turned positive in November for the first time in four months, official figures showed on Tuesday.
The US Federal Reserve is expected to raise rates for the first time in nearly a decade on Wednesday, but Mr Carney's comments indicate that the UK's central bank remains in no hurry to follow suit.
The Bank has not altered UK interest rates for the past six-and-a-half years.
Its annual survey of household finances found that almost a third of households would have to reduce spending, work more or alter their mortgage payments if rates rose by 2 percentage points without any increase in wages.
The Bank of England research said that the government's austerity programme "has weighed on household spending, and it is likely to continue to do so".





In the United Kingdom, house prices continue to rise faster than incomes, with forward-looking indicators suggesting that house price inflation will pick up further in the near term. Transaction volumes have also risen and spreads on mortgage rates have fallen to their lowest level since 2008. However, the proportion of owner-occupier mortgagors with high debt servicing ratios has been broadly stable at 5% since 2011 and, more recently, the share of new mortgage lending with loan to income ratios above 4.5 has fallen slightly to 8%. The Committee judges that the insurance provided by its June 2014 housing recommendations for the owner-occupier market remains warranted.


The buy-to-let sector of the mortgage market has continued to grow rapidly, consistent with a structural trend towards a larger private rental sector, driven by demographic changes and higher house prices relative to incomes. The outstanding stock of buy-to-let mortgage lending ha increased by over 40% since 2008. Over the same period, the stock of owner-occupier mortgage lending rose by only 2%. The share of buy-to-let in the stock of outstanding mortgage lending has risen to 16% from 12% in 2008.


Overall, risks from buy-to-let mortgage lending are contained when house prices fall moderately, given that only a small share of buy-to-let is extended at high loan to value ratios. However, the stock of buy-to-let lending might be disproportionately vulnerable to very large falls in house prices.

Buy-to-let mortgages are typically extended on interest-only terms and therefore do not amortise.
As a result, loan to value ratios on older vintages of buy-to-let loans fall more slowly over time.
Indications of this vulnerability to larger falls in house prices were seen in the 2014 stress test of the UK banking system, which featured a 35% fall in house prices.


The results of the test confirmed the resilience of the core banking system to losses on buy-to-let mortgage lending.



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 tohouse 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-tolet lending later in 2015.


What is buy-to-let all about? >interesting discussion on buy to let  process and the illusion, that it is a quick way to make money. 



The Committee is publishing a letter to the Chancellor giving its annual assessment, as requested, of the impact on financial stability of the Help-to-Buy: Mortgage Guarantee Scheme, including whether the parameters of the scheme remain appropriate. As set out in the letter, under current
market conditions, the Committee assesses that the scheme does not pose material risks to financial stability. Further, the Committee does not see a case for changing the fee or the current setting of the house price cap on financial stability grounds at this point.


the full  PDF of Bank of England Financial Policy Committee statement from its policy meeting, 23 September 2015 can be downloaded here 



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