The growth of the buy-to-let sector poses a risk to financial stability, a deputy governor of the Bank of England has warned.
Sir Jon Cunliffe said that there was a risk that if large numbers of buy-to-let landlords were to exit the market at the same time, there could be a “spiral of house price declines” in the property market.
Appearing before a House of Lords committee, Sir Jon said that an “increasing amount” of housing stock in Britain was owned by buy-to-let landlords, with almost a fifth of new home loans being issued for buy-to-let properties. The Bank has conducted stress tests into the sector, which it thinks poses a danger.
“The question is how do they behave if they can’t cover their interest costs, because interest rates go up or there are tax changes, and how do they behave if house prices go down?” he said.
Sir Jon said that the Bank had asked a sample of buy-to-let landlords what would happen if the rental costs no longer covered interest charges or if house prices went down by 10 per cent. He said that 60 per cent of landlords said that they would consider selling in such circumstances. This could lead to “risks to financial stability because it starts a spiral of house price declines”, Sir Jon said.
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Asked if the extra 3 per cent stamp duty on buy-to-let properties and second homes coming in next month may provoke such a risk, Sir Jon said that “you have to make a lot of assumptions” to predict the outcome, but added that it may benefit first-time buyers by slowing house price growth.
In December the Bank asked the government for powers to intervene in the rapidly growing buy-to-let market, because of its threat to financial stability and landlords’ ability to exacerbate house price movements.
Buy-to-let lending is at its highest level since 2007, rising 26 per cent year-on-year in 2015 to £15.6 billion. An analysis by Paragon Mortgages, the lender, found that investors made £13,048 profit on every £1,000 they put in since buy-to-let mortgages for landlords were launched in 1996, outstripped every other type of investment.
Sir Jon said that it was a “pretty good investment”, particularly, he added, “at a time when many other assets are not giving a good return”.