How the UK’s buy-to-let Market is affecting Financial Stability
The Bank of England recently released a warning regarding the buy-to-let sector in the UK, saying it was posing an increasing threat to financial stability.
At this stage, one out of every five homes in the United Kingdom is owned by private landlords and it’s been estimated that the buy-to let sector is worth a staggering £1tn (yes, that’s one trillion).
According to data published by the bank, buy-to- let mortgage lending has increased by more than 40% since the 2008 crash. This is in sharp contrast to the owner-occupied sector, which only increased by 2% during the same period. The stock of buy-to-let lending expanded by 8% during the first quarter of 2015, and now accounts for 15% of the stock of outstanding bonds and 18% of the total flow of new mortgage lending.
So, you might ask, what’s the problem?
After all, the UK property market is thriving: tenants are snapping up properties and landlords are making good money.
The bank’s concerns stem from how the actions of buy-to-let investors affect the broader housing and mortgage market as people compete to buy the same properties. Competition among the various banks to provide bonds for this sector is high and, generally speaking, buyers in this sector receive more favourable terms.
Another concern is the effect landlords have on the affordability of homes. The bank notes that looser lending standards in this sector could contribute to general house-price increases. However, the real problem is what happens when investors try to sell investment properties during a downturn.
The Bank of England’s Financial Stability Report, released in July 2015, stated: “In a downswing, investors selling buy-to-let properties into an illiquid market could amplify falls in house prices, potentially raising losses given default for all mortgages. This could be a particular concern in a rising interest-rate environment if properties become unprofitable, given higher debt-servicing costs.”
Words: Lea Jacobs