UK Buy-to-Let Market on Very Shaky Ground

There is no doubt that the increases in UK property prices have been largely driven by the huge rise in private landlords coming to the market....

There is no doubt that the increases in UK property prices have been largely driven by the huge rise in private landlords coming to the market but what is expected to happen when interest rates rise?

The loan-to-income cap introduced by Bank of England governor Mark Carney last month was intended to cool the UK housing market but the measures do not apply to buy-to-let, now the fastest growing type of mortgage by value.

Economists say an increase in the central bank's benchmark interest rate or falling prices could result in a repeat of the past, when repossessions of privately let properties hit a record high after the 2008 financial crisis.

Private landlords would be advised to consolidate existing portfolios rather than adding to them in a climate that could increase mortgage payments to unmanageable levels for many buy-to-let investors.

Buy-to-Let Not Affected by Loan-to-Income Cap

Mr Kordestani, who has been renting homes in London and southeast England for over a decade said: "There is going to be mayhem. Whoever pays those prices is going to suffer," referring to how landlords would have no choice but to pass on increases to tenants or risk going bust.

Rob Wood, a former Bank of England official, now an economist at Berenberg Bank in London expressed concerns about the non-inclusion of buy-to-let mortgages in the loan-to-income cap said: "It was a mistake not to include buy-to-let investment. It's one way in which households can speculate on house prices rising and that is exactly the sort of dangerous debt build-up that Mark Carney was trying to avoid".

The proportion of amateur private landlords who largely supplement their salaries with rental income reached a record 72% of the buy-to-let industry in the first quarter after rising by 10% in the two years to March, according to the National Landlords Association. There are now 1.7 million residential landlords in the UK, the group said.

Amateur Private Landlords Dominate Market

£2.2bn was lent in private-landlord mortgages in April, representing a 57% increase from a year earlier according to the Council for Mortgage Lenders (CML). Almost half of that volume was for refinancing, principally to free equity for further buy-to-let purchases. Gross mortgage lending increased 36% to £16.6bn and loans to first-time buyers gained 47% to £3.5bn in the same period.

Data from CML shows that homes purchased for onward rental made up around 14% of new mortgages in the second quarter with lenders offering a record 637 buy-to-let mortgage products, a 37% rise from a year earlier.

Buy-to-let borrowing became easier in the 1990s when the government allowed more companies to provide mortgages. That fuelled a 19-fold increase in buy-to-let lending in the decade through to the end of 2007, during which time the value of UK homes tripled.

The property market collapsed as the credit crisis spurred a 15% drop in UK property prices in the following 18 months through to March 2009. In the first quarter of 2009 there were 1,700 repossessions of buy-to-let properties and lenders appointed 2,400 receivers to collect rent payments on behalf of landlords in arrears.

Repossessions of Rental Properties Set to Increase

The repossessions at 0.15% were higher than the 0.12% across the wider market according to CML. As the London property market began to recover, new lending to UK rental property investors rose by 40% in 2011, outpacing new residential lending.

The Bank of England loan-to-income restrictions placed a cap on mortgages worth more than 4.5 times the borrower's annual income. The central bank also mandated an affordability test in an attempt to slow runaway prices in London which surged by 20% in May from a year earlier.

The rules which do not apply to buy-to-let mortgages, require borrowers to prove they can afford to make payments even if interest rates rise.

Private Landlords' Affordability Untested

One in three economists surveyed by Bloomberg predict an increase in interest rates this year from the record low 0.5% benchmark rate set by the Bank of England in March 2009.

Buy-to-let mortgage providers are still offering two-year fixed rate buy-to-let loans of around 4.08% for 70% of the property value which is not limited by income. This is principally because the problem will be tenanted and therefore drawing in a rental income. However, if interest rates rise even slightly, rents will inevitably follow and in a market plagued with affordability issues, it could be the straw that breaks the camel's back.



- Monday 21 July 2014

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