The Bank’s Financial Policy Committee (FPC) has spoken again about the risks that the buy-to-let market poses to financial stability, but is there really a cause for intervention?
Bank of England governor Mark Carney told members of parliament on Tuesday January 26 that developments in the buy-to-let market warrant “heightened scrutiny”.
This was part of the Treasury Committee’s hearing on the Bank’s latest Financial Stability Report, which was released on 1 December 2015. Bank of England Governor Mark Carney was quizzed, along with FPC members Alex Brazier, Martin Taylor and Dame Clara Furse.
In its latest biannual report, the Bank had noted that buy-to-let lending had increased by an average of 5.9% per year since 2008 – nearly twenty times faster than owner-occupier lending.
MPs noted the Bank’s concerns about the risk of credit loss
During the hearing, one of the Treasury Committee members – Chris Philip, Conservative MP for Croydon South – expressed concern at the Bank’s report that credit losses in the buy-to-let market were around twice those experienced in the owner-occupier market.
Indeed, buy to let has experienced more write-offs (around 0.02% of outstanding mortgage lending per quarter, compared to 0.01% of outstanding owner-occupier lending) and more repossessions (0.04% of outstanding mortgage loans per quarter, compared to 0.2% of owner-occupier loans).
The proportions being discussed are far smaller than the word ‘double’ leads readers to believe, and are easily accounted for. The higher number of write-offs is simply indicative of a higher risk in buy-to-let lending that lenders address in their underwriting and according to their own tolerance; and the higher number of repossessions can be explained by the naturally lower levels of forbearance lenders must exercise when seeking to reclaim money owed on residential properties.
A smaller proportion of buy-to-let mortgages than owner-occupier mortgages are in arrears
This point about forbearance is corroborated by the Council of Mortgage Lenders’ data on mortgage arrears.
At the end of the same period discussed in the Bank of England’s data – Q3 2015 – 5,700 buy-to-let mortgages were in arrears of 2.5%, compared to 99,000 owner-occupier mortgages. As proportions of the total number of outstanding buy-to-let and owner-occupier loans respectively, the buy-to-let figure is far lower. In addition, buy-to-let lenders experienced a smaller proportion of arrears exceeding 5% of the mortgage balance.
This shows that, although buy-to-let arrears are less severe, buy-to-let lenders are quicker to repossess properties and write off unpaid debt.
The Bank’s policy on buy-to-let has not changed significantly
In September, the FPC said that it was “alert to the rapid growth” in the buy-to-let market, but that there was “no immediate case for action”.
On paper, their view has not changed significantly. They are continuing to monitor risks, but do not see a need for current action; the Treasury is consulting on whether to grant the FPC powers of direction in the buy-to-let market; and the Prudential Regulation Authority (PRA) is committed to assessing underwriting standards in the sector.
In short, the Bank’s public bluster about “heightened scrutiny” is little more than reaffirming its existing stance. The FPC belief that buy-to-let activity can amplify housing market cycles is broadly shared by the public, and both the Bank of England and the Treasury will wish to seem proactive in this regard.
But in truth, any country whose economic fortunes depend so highly on the wealth effect created by its housing market experiences amplified property cycles – particularly a country in the grip of as acute a property shortage as the UK’s. The rapid growth of buy to let in the years since the financial crisis is in response to a shift in tenure from owner-occupation to private rental, and that shift in tenure is caused primarily by the lack of affordability for ordinary buyers.
The PRA must be alert to slipping standards of underwriting in buy to let, just as in any sector. But there is no evidence that the still-increasing popularity of landlord mortgages is resulting in this.