The Financial Policy Committee has considered and reported that it remains concerned about the “potential threats to financial stability from rapid growth in buy-to-let mortgage lending”.
BTL now accounts for nearly 20% of mortgage lending and the “outstanding stock of buy-to-let mortgages has risen by 11.5% in the year to 2015 Q4.” The FPC seems to fear that too much buy-to-let investment could push house prices higher than they would otherwise rise and therefore cause future prices to fall further, worsening “the resilience of the banking system”.
To ‘dampen’ buy to let lending, they want to review further the “underwriting standards in this market, including guidelines for testing the affordability of interest payments”.
What does that actually mean? Well currently lenders tend to lend based on rental income being 120-135% higher than the mortgage interest. This doesn’t take into account the actual costs and in some cases could mean lending on a property which actually loses the new landlord money every month.
Read - Buy to Let Quick Guide
In London in today’s market as prices have risen much higher than wages – unlike rents - this means that currently a landlord would have to put down around a 50% deposit to make a property cash flow positive ie have money left after finance and other costs. With the loss of wear and tear allowance and the change to the way mortgage interest relief is calculated, this is likely to rise to 60% or more.
In areas where prices are considered ‘unaffordable’ for first time buyers, it’s likely to be the case that in the future these tax rises and increased burdens will now also make it ‘unaffordable’ for landlords to provide private rented accommodation to tenants, not in all areas, but certainly in those where we already have stock problems.
This is a big problem as Savills latest rental report whether the current government likes it or not, it’s estimated that “The rental market will still expand by more than one million households over the next five years.”
Simply starving the market of buy to let investment is not going to solve the fundamental problem that we don’t have enough stock at the right price/rent/tenure for the the population we have.
Reducing the number of buyers by say 10 to 8 competing for each property isn’t going to solve the housing crisis! And it’s a bit of a daft BTL investor that ‘competes’ prices upwards against FTBs in the first place. We are often told this happens, but to date no research has produce actual evidence.
All these policies will do is starve the market of properties in the private rented sector and put pressure on rents. This will hurt those in particular on benefits or low paid who have been forced by successive governments to rent in the PRS because they have refused to build enough social/affordable homes for them.
Read - Analysing a Buy to Let
It also completely ignores the fact that some people like and need to rent. This might be because they are students, divorced, moved for work reasons (UK or abroad) so are renting while retaining and letting the family home or because it’s more cost effective and less hassle than buying.
Rightmove estimate that 15% of tenants are actually landlords. Last year’s research from Halifax’s ‘generation rent’ and LSLs’ new data on tenants shows renting is far more popular than it is given credit for.
What the FCA is correct about
In my view the FCA is correct that “some lenders are applying standards that are somewhat weaker than those prevailing in the market as a whole.” Some brokers and specialist lenders truly understand why BTL works and why it fails. Many lending on BTL though haven’t been trained on lending as an ‘investment’. They don’t know to ask about the impact of taxation taking on another BTL may have on an investor eg losing all their child benefit payments, they don’t insist on properties being bought in the correct legal way or ensure landlords are protected financially. Neither do they do any checks to ensure the property will be let legally or even that the landlord has the appropriate landlord insurance.
No lender in today’s world, in my view should be accepting ‘averages’. They need to take into account the actual costs of letting a property – which with increased standards have added huge costs to a landlord, from EPCs, to Gas and Electrical Safety checks and soon problems for those renting F&G rated properties which will be illegal to let from 2018.
Read - Financing a Buy to Let
What the Treasury and FPC are missing
Sadly, there is a complete misunderstanding it appears that the ‘horse has bolted’ when it comes to price bubbles. They have already happened – just take a look at the city centre flats in areas like Nottingham, Birmingham, Leeds, Glasgow, Belfast and Sunderland. Many selling at half the price they were pre-credit crunch and not likely to recover potentially for decades.
Secondly the Treasury cannot be naive enough to think that their support of build to rent, albeit a good policy soley for large institutional landlords will fill the gap missed by a fall in demand for BTL lending. What they should be doing is encouraging landlords to buy stock which is uninhabitable or build new stock specifically for renters, a kind of ‘mini build to rent’. This would solve a lot of problems – not just transfer issues of stock shortages from one tenure to another.
Many experienced landlords already do this and will continue to do so, so if at worst this dampens the market for those who are just ‘jumping on a band wagon’ and not taking BTL as the serious business it is, it won’t cause too much of a problem.
Read - Buy to Let Insurance
The issue is the mortgage interest relief changes could seriously damage the stock in the market and they mean landlords must increase their rents each year to existing tenants, which currently they don’t tend to do.
The results of these policies, in the main will just be to increase rents for tenants and starve the rental market of stock.