A plea to the Bank of England; don’t be so down on buy to let
Buy to let borrowing has had a stronger and longer recovery compared to the mainstream housing market. The number of financial advances for buy to let borrowers began increasing consistently at the start of 2011, growing on average by 23% per year.
In contrast advances to homeowners remained much more volatile, only showing sustained growth in the last three years, and at a much lower rate of around 10% per year. This growth means that about 15% of home loans are now buy to let compared with just 2% in 2000. More than two million people are now private landlords, which is up 600,000 since the financial crash.
This growth has prompted the Bank of England to raise a red flag. In its Financial Stability Report, the Bank said buy-to-let ‘could pose a risk to financial stability’. The Bank highlighted ‘a growing appetite for risk’ among lenders. The concern is that if interest rates rise, the buy to let sums might no longer add up and landlords be forced to sell. A mass flood of buy to let properties onto the market would no doubt cause prices to adjust – downward - thus starting a vicious cycle of negative equity, forced sales etc. Clearly as the bank eloquently put it ‘In a downswing, investors selling buy-to-let properties into an illiquid market could amplify falls in house prices…’
This assessment by the Bank is nothing new and buy to let has often been blamed for all that ails the housing market. However, the evidence from the last crash is that investors wanted to keep hold of their properties (even in light of price falls). This was partly made possible by low interest rates, but also the market is very much counter cyclical with a pick-up in rental demand and therefore rents in a downturn.
So while I agree irresponsible borrowing and lending will not help the market in the long run I do not share the Banks’s concerns about buy to let to the same extent.