The Bank of England is concerned that the buy-to-let mortgage market and the economic slowdown in China could pose a threat to the UK’s banking system.
Policymakers are scrutinising the booming buy-to-let sector for any moves by lenders to make it easier for would-be landlords to obtain loans. They are also concerned that a rapid fall in house prices could force landlords to sell their properties, exacerbating the decline.
The Bank said the “downside risks” to stability have increased since July and pointed to the market volatility sparked by gyrations on China’s stock market in August, highlighting so-called Chinese Black Monday when the FTSE 100 index of leading stocks lost more than £60bn. It is commissioning analysis on such contagion and impact of computer trading strategies.
In its quarterly update on potential risks to the financial markets, the bank said it was not taking any immediate action to cool the buy-to-let market, where the mortgages are usually riskier interest-only loans. But it said it was looking at whether the buy-to-let boom could magnify falls and rises in house prices.
The Bank published data showing that buy-to-let mortgage lending has increased by more than 40% since the 2008 banking crisis, while owner-occupied lending has increased by 2% over the same period.
“Buy-to-let mortgage lending has the potential to amplify the housing and credit cycles, though the extent of the amplification is hard to judge because the market has only recently grown to significant levels. Any increase in buy-to-let activity in an upswing could add further pressure to house prices,” the financial policy committe (FPC) said. “Buy-to-let investors may further exacerbate a downturn if they expect rental incomes to fall below their interest payments, and consequently add to selling pressure.”
The FPC said there was evidence that 40% of buy-to-let investors would respond to a fall in their rental income below their interest payments by selling their property.Set up by the coalition government, the FPC was created in response to the banking crisis and designed to spot potential threats to financial stability. It first said it was monitoring the buy-to-let sector in July, when it also outlined concerns about the level of household debt.
In its latest update, the Bank said the rapid growth of buy to let backed its call for the government to give it powers to intervene in the market – just as it can with residential mortgages. A consultation is scheduled to take place this year.
It said: “The FPC is alert to the rapid growth of the market and potential developments in underwriting standards. As the market continues to grow, particularly if driven by loosening of underwriting standards, the sector could pose risks to broader financial stability, both through credit risk to banks and the amplification of movements in the housing market. Intensified competition among lenders could lead to loosening underwriting standards in future.”
The FPC also conducted an annual review of the impact of help to buy on the sector – announced in March 2013 and helping buyers with deposit of just 5% of their property. It concluded that “the scheme does not pose material risks to financial stability”.
It also looks at global risks and in its latest analysis it pointed to the potential lessons from 24 August – Chinese Black Monday – when there were more than 1,000 temporary suspensions on individual equities on the New York Stock Exchange. The FPC has commissioned analysis from the Financial Conduct Authority of the way contagion spreads between markets.
“The committee is alert to the possibility that future heightened volatility and reductions in market depth could have more widespread and persistent effects, including on the provision of credit to the real economy,” the FPC said.
In July, the FPC had been concerned about the precarious position of Greece but concluded that the risk had abated. “However, other downside risks to UK financial stability stemming from the global environment, and to which the United Kingdom as a global financial centre is exposed, have increased. These risks come from both China and emerging market economies more broadly,” it said.
The outcome of bank stress tests will be announced in December and will look at their ability to withstand global risks and the impact or scale of future fines for misconduct. “The scale of future misconduct and redress costs for the UK banking sector is highly uncertain and banks should hold sufficient resources to pay these costs without affecting their ability to continue to lend to the real economy. The committee will review potential future costs as part of the 2015 stress test of the UK banking system,” the FPC said.