Bank of England voices its concern about ‘vulnerable’ buy-to-let market

Lenders’ underwriting standards are under review by the Bank's regulators

The Bank of England Governor Mark Carney says that an independent Scotland would need huge reserves if it tried to continue using sterling (Getty Images)

The Bank of England sounded the alarm about a boom in buy-to-let lending, citing it as one of the key risks to Britain’s financial stability.

The Bank’s Financial Policy Committee said it would “closely monitor” the market, voicing concerns that loans were being too easily offered to people wanting to play landlord, and that the mortgage controls in place were weaker than borrowers would face if applying for a loan for a home of their own.

Lenders’ underwriting standards are under review by Bank of England regulators. Some of the smaller, so-called “challenger” banks have been particularly attracted by the buy-to-let sector because of the potential returns it offers. But in a clear shot across the industry’s bows, the FPC said it stood “ready to take action, if necessary, to protect and enhance financial stability” if the sector looked as if it could endanger Britain’s economic health. In the Budget, Chancellor George Osborne increased stamp duty on buy-to-let properties and second homes in what was billed as an “attack on landlords”.

The sector has boomed since 2008, with the outstanding stock of buy-to-let lending growing by 5.9 per cent a year, on average, compared with only 0.3 per cent growth in the stock of lending to owner-occupiers. According to the FPC, “buy-to-let borrowers may be more vulnerable to an unexpected rise in interest rates or a fall in income, which could exacerbate the scale of a fall in house prices”.

The committee has already found that credit loss rates incurred on buy-to-let loans in the UK have been running at about twice those incurred on loans to owner-occupiers. The Bank is also worried about the risk to the UK of a downturn in emerging markets – a key reason for this being incorporated into bank stress tests – and its vulnerability to rising interest rates. Rates remain at historically low levels, with recent inflation data having delayed even a modest rise until next year.

The Bank’s biannual Financial Stability Report cited four other major threats to financial stability beyond the domestic housing market. One was the possible threat from emerging economies, to which the UK financial system “has substantial exposures”. It particularly stressed the fragility of China’s financial system, where the ratio of debt to GDP has soared to close to 200 per cent in recent years. It noted that direct claims by UK banks in the second quarter of 2015 represented 340 per cent of their tier-one capital.

One of the global scenarios modelled by the Bank in its latest banking stress test was a collapse in China’s growth rate. Another was general fragility in global financial markets after a long period of ultra-low interest rates in the developed world, which may have led investors to undervalue assets.

Another risk was the UK’s large current account deficit which hit more than 6 per cent of GDP in 2014. The Bank said a persistent current account deficit could lead to a sudden outflow of capital and a collapse of sterling. The final risk was cyber attacks on banks.