The Bank of England has this month published their bi-annual Financial Stability Report, which warns that the booming buy to let property market could pose a major threat to the UK’s economy.
In the report the Bank warns that borrowers are finding it easier to access credit and by investing this money in buy to let properties could put not only themselves, but the economy at risk. The Bank said:
“Looser lending standards in the buy to let sector could contribute to general house price increases and a broader increase in household indebtedness…In a downswing, investors selling buy-to-let properties into an illiquid market could amplify falls in house prices, potentially raising losses given default for all mortgages.”
With Britain preparing for a rise in interest rates for the first time since the financial crisis, these risks are likely to be intensified. Any small rise in rates could have the potential to wipe out any income from the property.
The Bank warns:
“This could be a particular concern in a rising interest rate environment, if properties become unprofitable given higher debt-servicing costs…Buy to let borrowers are potentially more vulnerable to rising interest rates because loans are more likely to be interest-only and extended on floating-rate terms, and affordability tends to be tested at lower stressed interest rates than owner-occupied lending.”
15% of all outstanding loans are for buy to let borrowers, whilst they are also accountable for 18% of new mortgages. It is believed that this has been boosted by the introduction of new rules, which allow retirees to hold their property in a personal pension, resulting in a future capital gains being tax free.
The new rules also allow savers to access their retirement funds from the age of 55, meaning they have the opportunity of obtaining a lump sum of money to invest in buy to let properties.
It has been estimated that £1 billion has been withdrawn from pensions by around 60,000 people, with many others likely to follow suit. Charlotte Nelson, of Moneyfacts says:
“It’s highly likely that some of this money has been accessed with buy to let in mind. Savings rates are currently so poor that many are looking elsewhere to fund their retirement.”
In the 2 months since the pension reforms were announced in the budget, the number of buy to let mortgages available rose by 15% to 700, with some lasting until the borrower is 105 years of age.
For pensioners that have finally been granted access to their hard-earned pensions, the prospect of capital growth and rental returns from an investment property portfolio is undoubtedly attractive. The wider result, however, could be inherent vulnerability to falling prices. When this ‘boom’ cycle does finally end, as it must, the next ‘bust’ could be heavily accentuated by a flood of investment property hitting the market as investors seek to cash out and avoid losses.
BT/SJ www.propertysurveying.co.uk 17.07.15