The UK’s buy-to-let market is not something many people are familiar with, or even aware of. To many it sounds like a very neutral, maybe even innocent, phrase. But, alas, according to a recent report by the financial policy committee, part of the Bank of England, the buy-to-let market is posing a threat to the financial stability of the UK.
The report warned that the growing buy-to-let market could magnify the effects of a housing market crash. Landlords tend to buy rapidly when prices are rising, but are quick to sell when the prices take a fall. Though housing might not, at first thought, seem like an influential part of the global economy, let alone the UK economy, it is one of the only factors that is helping the Chinese out of a major stockmarket crash, and sub-prime mortgages, mortgages given to those with a poor credit history, were a major cause of the 2008 global financial crisis.
Recently, the buy-to-let sector of the mortgage market has been increasing. Since 2008, buy-to-let mortgage lending increased by more than 40%, which is much higher than the 2% growth achieved by owner-occupied lending.
Rising interest rates
Another set of data, also released recently, reported a surge in the number of buy-to-let mortgages over the summer 2015 period. Many are predicting the UK interest rate will rise in the next year, and that is driving up demand as investors scramble to buy property and lock in on current low rates.
Fortunately, the committee who compiled the report did say that any vulnerabilities were likely to be “contained”, and made prominent the fact that there are ways to mitigate any risks.
Mark Carney, head of the Bank of England, said that any recommendations to tighten the affordability criteria in lending would be made by the end of 2015. The committee has already implemented regulations for the general housing market, but this new report indicates a need for more stringent monitoring and assessment within the buy-to-let sector.
The treasury, the government department with responsibility for the treasury, do seem to recognise the importance of the report, and they released a statement:
“Building a stronger and safer financial system is a key part of the government’s long term plan to provide economic security for working people, which is why the independent Bank of England has been put back at the centre of ensuring emerging risks to financial stability are identified, monitored and effectively addressed”.
Chancellor George Osbourne announced during the July statement that buy-to-let landlords would face a cut in the current tax break, which may discourage many from the sector.
Threats to the UK’s financial stability
The report addressed other issues as well: the Greek economy and Eurozone crisis were deemed to be less of a risk to Britain’s financial stability now, compared to July. In the public’s mind too, the focus has shifted from the Greek economy and Eurozone to other matters, such as the migrant crisis and the EU referendum. The report noted some other threats to the UK’s financial stability: the Chinese crisis and economic uncertainty in many emerging economies were notable.
If anything, this report is something to be celebrated. Though it brings a number of issues to attention, it does highlight the important message that our economy is still a healthy, prosperous and stable one.