£27.4bn Buy-To-Let Market Seen As Key UK Risk

The Bank of England is looking at the way banks lend money to property landlords – but why does it see this market as a risk to financial stability?

In a nutshell, it worries that while it is now helping heat up the property market, a downturn in this sector could amplify a wider slump.

Buy-to-let mortgage lending has surged in the wake of the financial crisis and the Bank now expects that it will be close to pre-crisis levels this year.

Figures from the Council of Mortgage Lenders put the total advanced to borrowers in this sector last year at £27.4bn, up from £20.7bn the year before.

It had reached £45.7bn in 2007 but it plummeted during the recession, dipping to £8.6bn in 2009.

The Bank of England sees this market as key to the surge in UK house prices.

In the year to the third quarter of 2015, it grew by 10% - 25 times the rate of owner-occupier loans.

Behind the shift is the growing trend towards renting as borrowers find it more difficult to take out mortgage loans with only small deposits.

With greater demand for rental properties, and low interest rates, buy-to-let becomes an attractive market for investors.

The growth in this market leads to one of the Bank of England’s concerns about it – that banks and building societies' policies on lending rules could slip as they compete for customers.

It has already found that industry standards for assessing the availability for buy-to-let mortgages are already less stringent than they are for owner-occupier loans.

This means buy-to-let borrowers would be more vulnerable to a sharp rise in interest rates – with nearly 60% of recent borrowers in difficulties as a result of a 3% hike.

This compares to only 4% of owner occupiers who have recently taken out loans against their own homes being likely to get into difficulties.

The upshot could be that in a downturn large numbers of landlords could start selling their properties as rental income falls, exacerbating the impact of a wider house price downturn.

Meanwhile the growth in buy-to-let lending during a house price upturn can add upward pressure to rising house prices.

The Bank of England's Financial Policy Committee said it remained alert to the risks from the market and would monitor developments after George Osborne announced plans to add 3% to stamp duty on buy-to-let property purchases.

The Treasury is already preparing a consultation on giving the bank the same kinds of powers to clamp down on riskier lending in this sector as it already has for the wider owner-occupier market.