There’s nothing like drama in the buy-to-let world to excite headline writers in broadsheet land. Splashes in today’s Times and Telegraph warn that thousands of would-be landlords face being snubbed by lenders following a Bank of England “clampdown” on buy-to-let mortgages. However, with considerable growth still expected in net lenders – albeit with a tail off of between 10% and 20%, according to lenders – it’s far from Armageddon.
There are broader debates people far more intelligent than me will have over the value of using credit controls in this way. But I would question what the real difference is: many lenders already calculate buy-to-let affordability on a borrower’s ability to fork out 125% of the mortgage interest on a theoretical interest rate of 5-5.5 percent, which is what’s now being brought in.
Lenders typically demand a deposit of 25 percent from a buy-to-let borrower with earnings over £20,000 (since the income to cover the mortgage is meant to come from the rent).
Without any mandatory rules around loan-to-value (LTV) ratios, it’s questionable what difference today’s clampdown will really have. The Bank has stopped short of imposing an LTV hike – possibly to 33 percent – which would have certainly had more of the dampening effect being talked up today.
In the Daily Telegraph’s piece, BoE deputy governor Andrew Bailey is quoted saying: “We have nothing against people wanting to hold their asset portfolio in the form of buy-to-ley but we want sustainable asset markets. The new restriction would help reduce the risk of ‘very volatile boom and bust conditions.”
The reality is that a far broader perspective is needed here. A proper look at how Britain approaches pensions and savings is necessary: the reason many invest in housing is to play for the future. If we had a mature pension system like North America’s perhaps this would encourage culture change.
That aside, an overhaul of how homes are taxed (council tax is a quarter century out-of-date) and the role of the state developing homes is necessary before any tinkering round the edges of mortgage lending can have a pronounced effect on improving the stability of both supply of homes and finance behind them.
However, as we’ve seen with recent stamp duty land tax (SDLT) reforms on high value properties, measures can potentially kill a market. The prime residential market – driven by overseas buy-to-let investors – has fallen totally flat. There’s no current risk of this happening more widely, but the government needs to be careful of biting the hand that feeds it in terms of who’s financing new homes.
One big error the chancellor George Osborne has made recently is his u-turn on the promise to not hike stamp duty for professional – institutional – investors in residential. The emerging build to rent sector has an eye-watering £90bn of firepower to invest new housing. Crucially, this is new money that could be lavished by pension funds on anything creating income. Housing for rent is seen as a safe bet – as evidence by the buy-to-let millionaires in Britain. Inconsistent government policy could drive this cash elsewhere unless the Treasury sees sense and realises that to keep promises over housing delivery it needs to keep private sector cash in the picture. For things to be truly sustainable, this needs to include both institutional pension pots and the savings of mums and dads across the nation.