Two amazing things happened today for those of us following Britain’s buy-to-let (BTL) mortgage market, and wondering how long it’s going to keep going up:
- Fergus and Judith Wilson, two former maths teachers, sold 900 rented houses to a consortium of Arabs for £250 million, according to the Financial Times. “The pair had built their property empire almost by accident,” after a hobby got out of control, according to the Telegraph. They also received a “token premium” of £1 million on top of the market value of the houses. Fergus Wilson was once the subject of a documentary titled “The Man With 900 Houses.”
- The Bank of International Settlements — the bank that national central banks turn to for cash and loans — said it would tighten its requirements for banks that have buy-to-let mortgages on their books. Banks would now have to apply a “risk weight” of between 70% and 120% of the value of the asset for BTL mortgages, versus 25% to 55% for standard mortgages where the owner actually lives in the house.
A buy-to-let mortgage is for people who specifically want to rent the property they own to others. BTL mortgages are riskier because the interest on them resets at higher rates if the Bank of England rate changes, and they are often given to borrowers who have lower credit ratings than regular homeowners. (Plus, of course, they rely on a continued supply of new renters to make the payments, not merely the owner’s own income.) All those factors add repayment risks for the banks who hand them out, compared to vanilla mortgages.
Wilson’s house-buying philosophy is wonderfully simple: Don’t buy flats because “poor people live in flats … and they live in a flat because they can’t afford a house,” he once said. Supply and demand takes care of the rest. The demand for houses is greater than the number of houses available to live in. And because richer people live in houses, you end up with a “large volume of low-hassle tenants” who pay rent (cashflow) every month, Wilson said.
BTL mortgages also create a supply and demand problem in the UK housing market. By allowing richer buyers to buy multiple houses, it takes from the housing supply houses that might ordinarily be available for buyers who only want one house. A reduction in supply naturally increases the prices of the remaining houses, and concentrates property in the hands of a decreasing number of buyers.
Those buyers, however, must make sure that they can always find new renters for their empires to make sure the cash keeps coming. And they have to hope that mortgage interest rates don’t rise faster than they can extract rent increases from tenants (who are now composed of an increasing number of people who want to buy but are priced out).
The whole thing is done on leverage — landlords borrowing bank money for mortgages. When the Wilsons built their empire, “We didn’t really put in any money at all,” he told The Renegade Economist in 2009.
The whole BTL system breaks down if property prices go down, if mortgage payments become greater than rents, if the supply of renters dwindles, or if the demand for new houses dries up.
Just as a reminder: BTL mortgages are heavily concentrated in handful of UK banks.
These are just anecdotes of course. Banks always say the loans on their books are balanced and diversified. Still, the fact that BIS is worried about it seems … worrying.