Bank Of England Says Buy To Let Is A Threat To Housing Market
The Bank Of England has issued a new warning today in it's Financial Stability Report by pointing out that the buy to let market is a threat to the financial stability of the UK economy.
His concern comes because the buy to let market has been booming over the last 5 years as hundreds of thousands of existing landlords and new landlords have been borrowing increasing amounts of money to invest in a buy to let.
It has become much easier to access credit and borrowers are taking out bigger loans in order to keep up with the increase in house prices. What is of most concern to the bank is that at some point interest rates are going to increase at a time when the indebtedness of many households is reaching worrying levels.
If there is a downturn in the property market there could be many buy to let landlords who find themselves with increased repayments and falling house prices. Many of these landlords could be forced to sell their properties into an illiquid property market. This would cause a lot of borrowers to default on their mortgages and would inevitably force house prices lower.
All of this would have a detrimental impact on the economy. With falling house prices banks would come under renewed pressure and would face mounting losses if there was a continued downturn. Sound familiar? It will only take a small interest rate increase to wipe out any profits that a landlord makes. In many cases this would make many buy to let investments unviable and we could see a flood of properties coming onto the market.
The buy to let market is massive and now accounts for 15% of outstanding loans and 18% of all new loans issued are to buy to let landlords. Since the financial crisis the buy to let market has seen a massive influx of new landlords as competition amongst lenders has increased. All of the banks are keen to lend money to these people because they make up such a significant chunk of new loans issued.
We are also seeing a new generation of buyers aged over 55. The changes to the pension rules means that over £1bn has been withdrawn from pensions so far and much of this money is likely to have been spent on a buy to let. Pensioners are also taking out small loans to buy these properties and they could also be at risk as well if prices start falling.
Another interesting point to note is that the number of buy to let loans that are now available stands at 700. The number has increased by 15% since the pension reforms were announced by George Osborne. If you are a borrower you can now take out some mortgages that will last until the borrowers is aged 105