Buy-to-let boom will pose risk to UK economy if house prices turn down, Bank of England warns
09-26-2015
• FPC warns buy-to-let boom could 'amplify' any property downturn
• Comes as lending to landlords soars 40% compared to 2008
• Adds volatility in China due to exposure of UK banks poses risk
By Lee Boyce for Thisismoney.co.uk
Risks to UK economic stability have grown because of a boom in buy-to-let mortgages and the ongoing turmoil in China, the Bank of England has said this morning.
Its Financial Policy Committee warned landlords, typically funded through interest-only loans, could be 'disproportionately vulnerable' to large falls in house prices and could in turn amplify any future property downturn.
Officials stopped short of taking immediate action, but said they would continue to monitor it closely. In July, the FPC said it would build an 'in-depth evidence base' in the coming months on how the operation of the buy-to-let housing market may carry risks to financial stability.
Landlord threat: The Bank of England has once again warned that buy-to-let poses threat to economic stability
Data shows buy-to-let mortgage lending has risen by 40 per cent since 2008, 20 times faster than owner-occupier loans.
In the same period, the buy-to-let share of the market has risen from 12 per cent to 16 per cent with more people than ever before privately renting.
This concerns policymakers partly because a continued increase in the market risks pushing up house prices further, meaning more borrowing and greater household debt.
But if landlords see their loan repayments starting to exceed their rental income, many would respond by selling their property - potentially accelerating a downturn in the property market.
The Bank also said intensified competition among banks might loosen the conditions under which they would prepare to lend to landlords.
It said: 'The committee considered the rapid growth of buy-to-let mortgage lending. It does not consider action to be warranted at present, but will monitor underwriting standards and other conditions closely.'
A slew of house price indexes have suggested values are growing annually, but at levels far lower than what was seen last year.
The FPC says the UK economic outlook 'remains challenging' and that while the financial system was becoming more resilient 'downside risks have risen'.
China slowdown: The Bank of England also highlighted volatility in emerging markets as posing a risk
Meanwhile, risks posed by volatility in China and other emerging market economies were also highlighted by the Bank's latest statement.
Fears of a slowdown in the world's second biggest economy have shaken markets in recent months.
Emerging economies have seen £59billion pulled out over the last year as their performances stutter - and with the era of cheap credit for US investors coming to an end, as an interest rate rise nears.
Wobbles in these countries 'affect UK financial stability through the direct exposure of UK banks' and indirectly if the shifts they cause in the global economy strain world markets, the Bank said.
The FPC noted recent instances of volatile trading and said the importance of automated systems that could amplify price moves 'may be growing in importance'.
Alongside its report, it published a letter from Governor Mark Carney to Chancellor George Osborne giving its annual assessment of the help to buy mortgage guarantee scheme.
Mr Carney said the way the scheme was run remained appropriate and 'does not pose material risks to financial stability'.
A Treasury spokesman said: 'It is important that help to buy can safely go on helping more people achieve the aspiration of buying their own home.
'That is why the Government asked the FPC to carry out an annual assessment of the impact of help to buy.
'The committee plays a crucial role in protecting our hard-won economic security by routinely assessing the housing market.'