Estate agent signs advertising properties “To Let” and ”Rent Me” stand outside residential buildings in the Roehampton district of London. Central bank officials asked for more powers to regulate buy-to-let lending in October, and the government said this month that nothing will happen until after May’s national election.
While regulators have tightened lending rules for home owners to curb runaway price growth and limit lenders’ risks, the government has held off on giving the central bank greater authority to regulate mortgagesto buy investment properties, as demand for rental homes is soaring, particularly in London.
“One of the things London is desperately short of is rental properties,” said Mark Clare, chief executive officer at Barratt Developments Plc, the U.K.’s second-biggest homebuilder by market value. “We need more buy-to-let rather than less and that’s something government has pushed.”
Central bank officials asked for more powers to regulate buy-to-let lending in October, and the government said this month that nothing will happen until after May’s national election. BOE officials are concerned that investors are fueling home-price inflation, forcing owner-occupiers to take on bigger loans and increasing default risks because about 66 percent of landlords, the most since 1987, only repay interest on their mortgages. They repay the principal when the property is sold.
Loans for investment properties surged 40 percent in the past six years to a record 188 billion pounds ($289 billion), according to the Council of Mortgage Lenders, while the amount owed by homeowners rose just 6 percent. About 60 percent of new homes in London are bought by investors to lease, according to data compiled by researcher Molior London Ltd.
Market ‘Distorted’
The number of landlords investing in property makes it more difficult for those seeking to buy a home of their own, Britain’s biggest property website Rightmove Plc said Feb. 16.
“The strong rise of buy-to-let in recent years has led to lots of new flats being built,” said Scott Corfe, head of macroeconomics at the Center for Economics and Business Research in London. “The property market has been distorted into building more of the types of properties that buy-to-let investors want, rather than what we actually need — which is more family homes.”
The government delayed the buy-to-let mortgage decision because it wants more evidence about how the market “may carry risks to financial stability,” according to a Feb. 2 filing. A consultation on the proposals, including limits on loan-to-value and debt-to-income ratios, will be held “early in the next parliament,” the filing said.
Financial Crisis
Buy-to-let lending surged ahead of the financial crisis. It rose more than 27 percent to 127.5 billion pounds in the year through March 2008, according to CML data. Values began falling the following month as the credit crunch took hold even as the amount owed by landlords continued to rise. The repossession rate for buy-to-let mortgages last year was 0.3 percent compared with 0.17 percent for home owners, despite landlords having lower arrears, according to CML.
“Risky mortgage lending has contributed significantly to financial stress in this country and elsewhere in the past and it’s sensible for the government and the BOE to look at it,” said Jonathan Portes, director of the National Institute of Economic and Social Research. “After the election, whichever government comes in they will have to go ahead with taking some decision on this.”
New Regulations
BOE Governor Mark Carney announced new regulations in June to slow price increases in the U.K. property market, which were running at an annual rate of 10 percent at the time, according to government data. The rules control how much banks can lend relative to a borrower’s income, and require lenders to refuse mortgages to homebuyers who fail a stress test that assumes a sharp increase in the benchmark interest rate.
The central bank should be ready to take further action to rein in riskiermortgage lending if stability risks emerge, the Organisation for Economic Cooperation and Development said Feb. 24. Among the BOE’s options are broadening rules to include buy-to-let properties, the Paris-based group said.
“Housing supply has not risen to meet demand,” the OECD said. “House prices have increased rapidly and may create risks to financial stability in the case of a downward adjustment.”
Meeting demand for housing is a key battleground in the national election as supply fails to meet demand by about 100,000 homes a year. That may prove problematic as pollsters are forecasting a so-called hung parliament, a deadlock last seen in 1974 that led to an unstable government reliant on opposition votes to pass laws.
Neck-and-Neck
Surveys from the most prolific polling company, YouGov Plc, over the past week have shown Prime Minister David Cameron’s Conservatives and the main opposition Labour Party neck-and-neck at support levels between 32 percent and 34 percent.
The Labour Party pledged to increase the annual number of homes constructed to 200,000 and the Conservative Party says it will build 100,000 homes for first-time buyers that will be sold at a 20 percent discount to market value.
Carney’s new rules helped cut the number of loans advanced to home buyers by 5 percent in the fourth quarter of last year, while there was a 3 percent decline in refinancing, according to data compiled by the CML. At the same time, 54,000 mortgages were made to landlords in the period, a 16 percent increase from a year earlier.
“The scale and nature of buy-to-let activity makes it a potential amplifier of housing and credit cycles,” the central bank said Feb. 4. “Any increase in buy-to-let lending in an upswing will add further pressure on house prices, which will likely prompt owner-occupiers to take on larger loans.”
Gross Yields
Investors are drawn to rental homes by gross yields of 5 percent, according to broker LSL Property Services Plc. Total return, which combines rental income and value gains, was 11.7 percent for landlords in England and Wales in the 12 months through January, according to LSL.
That compares with a total return of 7.7 percent from U.K. equities in the same period and 6.3 percent from junk bonds denominated in pounds, according to Bank of America Merill Lynch index data.
Landlords also get tax breaks on mortgage interest payments while homeowners do not, according to Corfe at the CEBR. There are also tax breaks for repair and maintenance costs for landlords, he said.
Amateur Landlords
The Bank of England is aware that more amateur landlords will enter the market in April when new rules allow pensioners to invest their retirement savings in property. Currently they must invest in an annuity — an annual income from a life insurer.
“The British affinity toward property ownership, combined with weak savings returns, will drive new growth in the buy-to let sector,” said Adam Challis, head of residential research at broker Jones Lang LaSalle Inc. in London. “However, with average pension pots of around 30,000 pounds, this will be the preserve of more affluent retirees.”
Buy-to-let lending climbed to almost 20 percent of the value of all newmortgage loans by early 2008 and fell to less than 10 percent by late 2009 as home prices slumped during the financial crisis, according to the BOE. Soaring U.K. home price values, especially in London where values are increasing 13.3 percent annually, have tempted landlords back.
Record Lending
The record 188 billion pounds owed by residential landlords at the end of 2014 compares with an all-time high of 1.3 trillion pounds in outstanding mortgages to home owners, according to data compiled by the Bank of England.
With demand for home loans showing signs of weakness, competition among banks is resulting in lower margins. There was a 14 percent decline in mortgage lending in January from the previous month. That’s leading many banks and building societies to sweeten their offers to buy-to-let borrowers, who are typically charged higher interest rates than homeowners.
The average margin charged for buy-to-let mortgages fell to 308 basis points more than benchmark rates in the third quarter of 2014, the latest data available, the central bank said this month. That compares with an average of 339 basis points for the year, it said.
Virgin Money last week began offering a three-year rental homemortgage with a 3.6 percent rate, compared with a 2.25 percent rate for homebuyers offered by the Post Office Ltd. That’s based on a fixed-rate loan at a 75 percent loan-to-value ratio.
There are signs that the days of cheap financing may be coming to an end. The BOE may have to increase its 0.5 percent benchmark rate sooner than the market expects because of the risk of accelerating inflation, Martin Weale, a member of the central bank’s monetary policy committee said Feb. 24.
“The biggest risk to the buy-to-let market is obviously rising interest rates, because landlords won’t be able to pass on higher interest charges to their customers,” said Richard Donnell, research director at property assessor Hometrack Ltd.
Written by Anthony Kim
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