Boom in buy-to-let mortgages could lead to unsustainable house price bubble

Mortgage availability at a five-year high as amount lent topped £5bn in second quarter of 2013
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Lending to people looking to buy houses in order to let them out has topped £5 billion in the second quarter of 2013, marking the strongest level of mortgage lending since 2008 and signalling what some fear could be an unsustainable housing boom.

Around 40,000 buy-to-let mortgages were advanced in the period, up from 33,000 in the first quarter and representing the highest number for five years.

Government schemes such as Funding for Lending have seen lenders slash their rates and a sharp rise in mortgage availability generally, revitalising the housing market.

Continued strong demand from tenants has encouraged more aspiring landlords to consider the potential returns they could get for investing in the rental sector, at a time when low interest rates are giving poor returns on savings.

The CML's head of policy, Jackie Bennett, said: “Strong rental demand is contributing to the continuing expansion of the buy-to-let sector, but growth is also being helped by improved conditions in funding markets and more widespread availability of mortgages.

”These conditions are creating more opportunities for landlords to remortgage, as well as helping to fund increased activity in the mortgage market more generally. This spring, we have seen the highest levels of lending to first-time buyers since 2007, alongside the continuing recovery in the buy-to-let market.“

But there are fears that the availability of credit will turn into a pricing boom. Stephen Lewis, chief economist at Monument Securities, told the Guardian: ”The danger is that, when a flood tide of mortgage finance meets a chronic shortage of housing, the result will be an escalation of house prices.“

And David Whittaker, managing director of Mortgages for Business, said: ”Demand for rental property remains red-hot. Landlords are refinancing in their droves to raise enough capital to make further additions to their portfolios.“

Matthew Pointon, a property economist at Capital Economics, said that many would-be first-time buyers living in the rental sector are still finding it a ”challenge“ to make the jump onto the property ladder, which is helping to keep rental demand up. Low mortgage rates are also making the potential returns landlords could make more attractive.

He said: ”Alongside a gentle recovery in overall mortgage lending, buy-to-let lending is also likely to continue its upward trend.

But he added that a return to the boom buy-to-let years of 2006 -2007 remains “a distant prospect“.

Mr Pointon said that tenants' squeezed budgets will prevent landlords being able to impose a ”substantial“ increase in rents and house price increases are unlikely to be enough to attract a ”surge“ of investor interest.