Mass Buy-to-Let Selling Could be Threat to Economy
The recent boom in the buy-to-let sector could pose a threat to the economy in the event of a large-scale sell-off of properties, a senior official at the Bank of England has warned. Sir Jon Cunliffe, deputy governor for financial stability at the central bank, pointed in particular to a surge in lending to buy-to-let landlords, which represented 15.6% of new loans in the third quarter of 2015.
Speaking to the House of Lords, Cunliffe described the extent of buy-to-let lending as a “potential risk,” and one that the Bank was looking into. He pointed to a survey carried out recently suggesting that as much as 60% of landlords would look into selling their investments if property prices fell by 10%, or if they were no longer earning enough through rental income to cover the cost of their mortgage repayments.
If market conditions brought about a downward shift of 10% in prices or a situation where a large number of landlords found that rental income no longer covered their mortgage, the result could therefore be a large-scale sell-off of rental properties. This, Cunliffe said, “starts a spiral of house price declines” and that this could mean “risks to financial stability.”
A number of changes to the way landlords are taxed are due to be rolled out in the run-up to 2020, having been announced by Chancellor George Osborne over the past year or so. These could bring about significant changes in the sector, and in particular damage the profitability of many buy-to-let investments held by higher-rate taxpayers. This could potentially contribute to the development of a situation where many landlords find their mortgages are not covered by their rental income and consider selling.
The matter of property prices, at least, seems rather more secure. Though price growth may slow in some areas, especially London and the South East, forecasters seem confident at present that prices will continue rising for a matter of years yet. One recent report, commissioned by Santander, claimed that prices were likely to reach almost double their current levels by 2030. Representing an annualised rate of 4.6%, this would be below the long-term average of 8.75% but would still represent a continued trend of growth.
Even so, the Bank still fears that a major sell-off in a heavily credit-dependant buy-to-let sector could be a significant risk to financial stability. As such, it has requested new intervention powers from the government, which would allow it to take steps to curb risky lending to landlords. The Bank’s financial policy committee has already stated that it “stands ready to take action if necessary” if it believes the boom may be about to start losing steam. It is believed that the request for additional powers could gain the approval of the government later this month.
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