There is a real risk that the layering of measures will be detrimental to those that rely on the sector for a home.
John Heron is managing director of Paragon Mortgages
The Bank of England has been running a none too subtle campaign for some time now calling for greater regulatory control over buy-to-let lending. The Bank has pursued this through repeated messages in its Financial Stability Reports, through its proposals to HM Treasury for powers of direction and various speeches and statements to the press. They have clearly briefed the Chancellor on the apparent dangers posed by buy-to-let lending and one suspects this has influenced the Chancellor's tax grab from landlords.
The essence of the argument being put forward is that buy-to-let lending is increasingly a potential source of instability in financial markets because of the rapid growth seen in recent years. They say this instability arises from two key areas: credit risk and landlord behaviour in a downturn. Much data has been presented by the Bank of England to support their case, but generally the level of evidence is thin, reflecting the fact this remains a poorly measured and poorly understood sector.
I therefore welcome Martin Taylor’s statement before the Treasury Select Committee last week in recognition of the fact that the Bank of England does not have enough data about the buy-to-let market at present.
Whilst data on buy-to-let lending may be thin on the ground the facts that we do have are these: There has been rapid growth in buy-to-let since the financial crisis, but lending levels for 2015 will still be materially lower than they were in 2007. In 2014 there were fewer buy-to-let transactions than there were 10 years earlier. Furthermore, on the basis of the latest data we have, the proportion of properties funded by a buy-to-let mortgage in the Private Rented Sector (PRS) has not increased since the financial crisis.
In 2007, 29.5% of properties in the PRS had a buy-to-let mortgage, by 2013 (the latest date for which we have numbers) this percentage had reduced to 28.2%. Buy-to-let represents around 17% of all mortgage balances and, on the basis of the latest PRA data, 15% of the flow of mortgages in Q3 2015. I will come back to this later on. So growth, yes, but from a low base and in line with the growth in the PRS which in turn is being driven by a long-term shift in tenures. There is no evidence to suggest that growth is out of control or unsustainable.
On credit quality there is very clear evidence that standards have improved sharply since the financial crisis. Average loan to values (LTVs) have fallen from a peak of over 70% in 2008 to less than 64% in 2015 and appear to be continuing on a downward curve. Furthermore, typical maximum LTVs at 75% are much lower than they were pre-crisis when 85% was the norm. On affordability, average income coverage ratios have improved from 163% in 2010 to 189% in 2015 and again we have seen further tightening of lender affordability criteria over the last year.
The killer fact of course is that arrears levels in the buy-to-let market are extraordinarily low; 0.61% of buy-to-let mortgages are three months or more in arrears compared to 1.27% in the owner-occupied sector, buy-to-let arrears are at less than half the level seen in the owner-occupied market. In contrast, the data presented in the HM Treasury Consultation relating to credit performance, which suggested poor credit performance in buy-to-let, was not actually buy-to-let specific data and referred to all non-regulated mortgages including second charge personal loans.
And finally, are landlords a source of instability? Do they buy aggressively in a boom market and sell equally aggressively in a downturn thus amplifying the effects of the cycle? It is impossible to say how landlords will behave in the future but we know how they have behaved in the past. If you track the stock of properties in the PRS against GDP, and against house prices over the last 15 years, you can see no link whatsoever between landlord behaviour and the economic cycle. The PRS has continued to grow regardless, driven by sustained increases in rental demand. All the indications are that landlords buy and retain property for the long-term because there is strong demand through the cycle; they do not sell an asset that produces a strong revenue stream into weak markets.
Before the Treasury Select Committee last week, Martin Taylor confirmed to MPs that buy-to-let lending was 18% of the stock and 50% of the flow of new mortgages in answer to a question from the MP Chris Philp. 18% is in the ballpark for the stock but as the PRA's own numbers indicate, buy-to-let represents only 15% of new mortgage originations. As Martin Taylor said: "We note that it (buy-to-let) has different characteristics from owner-occupied (lending). We do not understand its characteristics quite so well, because it has not been going so long. We do not have the historical data". In the absence of better data surely there is a case for the exercise of caution when taking action in a market that provides one out of every five homes in the UK.
The growth we have seen in buy-to-let lending in reality reflects the changes we have seen in housing tenures over the last 30 years. The scale of lending is not out of line with the scale of the PRS and, if demand continues to grow as most housing analysts expect, it is important for the housing market more generally that private sector landlords are willing and able to respond by expanding the supply of properties to the sector. Again, therefore, I welcome the more cautious tone in some of the comments made last week, recognising that in the absence of good data, with the government having already made some significant changes in policy towards the sector, there is a real risk that the layering of measures will be detrimental to those that rely on the sector for a home.
