Mark Carney, the governor of the Bank of England, has expressed worries about the growth of buy-to-let (BTL) mortgages in the UK, saying that the country’s central bank will “take action” to prevent the sector from getting out of control.
Carney gave an interview to the Financial Times, in which he defended his much-maligned “forward guidance” policy, the idea introduced when he first took the governor’s job that he would signal interest rate rises well in advance, giving the markets time to adjust.
But the most interesting bit was a snippet right at the end of the article, where Carney talked about his concerns around BTL mortgages.
According to the FT, the governor suggested that right now, looking at the high levels of lending in the sector is even more important than focusing on when the BOE will raise interest rates. Here’s what Carney said about buy-to-let (emphasis ours):
So we do have to be careful around that [buy-to-let] sector. And I think collectively there are a number of things happening and we are watching it, we are watching it closely and we will take action.
While the FT didn’t quote Carney on this bit, they did say that he signalled that he is:
Fearful of the risk that investors would all seek to sell at the same time if there were a general decline in house prices.
“We will take action.” That seems to be a pretty unequivocal sign that Carney is worried about what is going on in the buy-to-let sector, something which mirrors the general outlook of the BOE. And the idea that “investors would all seek to sell at the same time” is basically a description of the potential market panic you might see if the BTL sector collapses suddenly.
A couple of weeks ago, the BofE released its financial-stability report, and in it highlighted the fears it has about soaring growth in the buy-to-let mortgage sector, including a chart that shows the rapid rise of BTL in the last five years. Volumes of BTL mortgages are now approaching pre-crisis levels:
The chart was accompanied by a warning from the Bank that: “Strong growth in buy-to-let lending, and the potential for underwriting standards to slip, may have implications for financial stability.”
BTL is now 16% of a £200 billion market, according to Barclays:
The Bank for Institutional Settlements also said it would propose tightening the rules for banks that hold BTL loans on their books. And on Dec. 15, a Barclays analyst downgraded two banks, OSB and Paragon, who hold large BTL books on their balance sheets, because those banks might be hurt by stricter BTL rules.
Carney’s comments also echo the concerns of the government, and it was reported on Monday that chancellor George Osborne is set to allow Carney to take “action” against the sector, by giving the BOE’s Financial Policy Committee the ability to place limits on lending in the sector. The FPC already has these powers over the residential property sector, but it believed to have been pushing to get the same control over BTL mortgages.
Osborne has already placed some restraints on buy-to-let homes, adding a 3% stamp duty surcharge to second homes, and ending tax relief on mortgage interest for landlords.
Fears of a new housing crash
The worry about buy-to-let mortgages is that the standards and credit levels needed to get one are generally lower than for normal mortgages. Landlords also need a stream of tenants renting the property to make sure they can make repayments.
While it’s unlikely to anywhere near as bad, the fear is that if the buy-to-let mortgage keeps expanding as much as it is right now, it could trigger a crash similar in nature to the sub-prime collapse in the USA in 2007, the event which started the financial crisis.
One reassuring bit of news is that not all banks would be in trouble from a BTL downturn, with some far more exposed than others. Soon after the BOE’s financial-stability report was released, Business Insider’s Jim Edwards reported that if there is a downturn in the BTL market, then two small “challenger” banks, Aldermore, and Paragon, will be the ones most exposed.
Nearly two-thirds of Aldermore’s mortgage lending goes to BTL investors, whilst 99% of all Paragon mortgages are in the BTL market. Of Britain’s bigger banks, Lloyds is the most exposed to buy-to-let, with 18% of its mortgages in BTL.