In March 2016, when Remain was still several points ahead in the EU referendum polls, the Bank of England started to consult on buy-to-let mortgages. It seemed like a precautionary measure. Now, as the housing market digests the vote to leave the European Union, it could be a taste of what’s to come.
For years, politicians of all parties have clung to the vision of a nation of homeowners. Their promises have been aimed at first-time buyers, not renters. But in reality, since the financial crisis, first-time buyers have struggled to get loans. Instead, buy-to-let borrowers have become a lucrative opportunity for mortgage lenders – and an increasingly powerful force in the housing market.
In the first quarter of 2016, 21 per cent of all money lent as mortgages went to buy-to-let landlords, compared to 17 per cent to first-time buyers. Indeed, mortgage lenders interviewed by the regulators planned to lend roughly £50billion in 2016 – more than the last 2007 peak.
One reason the money has flowed into buy-to-let has been regulation. In sharp contrast to the free-for-all that preceded the financial crisis, mortgage lenders are expected to have a duty of care to customers who may be vastly inexperienced in the world of debt and finance. Tough affordability tests are now imposed on first-time buyers, and other residential mortgage borrowers.
Landlord mortgages are far less regulated. From one perspective, this makes sense. Buy-to-let landlords are businessmen and women, who take risks in pursuit of profit. Seeing a slumlord hand over the keys to his property empire is hardly the equivalent of a young family watching their home be reclaimed by a mortgage lender.
But if buy-to-let lending turns out to be a house of cards, it could send shudders through the residential property and renting markets as well.
The Bank of England’s latest financial stability report focuses on the risk that a shock to the buy-to-let market could amplify problems in the housing market more widely.
It warned: “Then macroprudential risks centre on the possibility that buy-to-let investors could behave procyclically, amplifying cycles in the housing market as a whole.”
In other words, investors are already pulling out of property funds and house building companies. If buy-to-let lenders decide en masse it’s time to cash in, house prices could fall off a cliff.
And should this happen, homeowners wouldn’t be the only ones to be affected. More than 8million households in England and Wales alone are renting.
While some might take the opportunity to snap up a home of their own at a discount, the reality is that during an economic downturn, many will find themselves constrained by affordability tests, their lack of savings or even a job.
Renters are not helped by the fact that the Government has neglected renters’ rights. A bill to make sure landlords make sure homes are “fit for human habitation” was voted down only this year. Letting agents in England and Wales can charge wildly inappropriate fees.
As a result, the shock could be quickly passed on to tenants. Landlords who decide to sell up have the right to evict tenants with just two months’ notice. In England and Wales, moving to a new home eats up renters’ savings – a new contract can mean hundreds of pounds spent on letting agent fees.
So, what of the Bank of England’s consultation? It found there was a risk lenders will relax their checks on borrowers and “some lenders were already applying underwriting standards that were somewhat weaker” than the market average.
It identified buy-to-let lending was a channel through which the referendum result could rock financial stability, and it added the Financial Policy Committee “stands ready to take action”.
As another wave of economic instability comes towards us, landlord mortgages are a clear weak spot. Despite the huge part buy-to-let lending plays in the modern housing market, MPs have been surprisingly quiet on the issue. The result of this complacency could be evictions of working tenants and house price slumps. Such events are much harder to ignore.