As if the Buy-to-let industry didn't have enough to contend with, the Chancellor has handed over powers to The Bank of England to keep an eye on buy-to-let lending - following concerns aired by the Governor Mark Carney that property and buy-to-let was “a flashing red light on the Bank of England’s dashboard”.
The Bank has wasted little time in seizing control and the Prudential Regulation Authority (PRA), the ‘provisional wing’ of the Old Lady of Threadneedle Street, has opened up a consultation on the subject.
Speaking to the Treasury Select Committee in March, the Chancellor hinted that he would shortly be handing the bank powers to reign in the excesses in buy-to-let lending. He was clear that this was in response to the bank’s own concerns shared with the Select Committee last year.
Of the country’s 5m plus private rented properties, only about a third have a mortgage - but clearly these 2m borrowers could represent a ‘clear & present danger’ to economic stability - and the bank is keen to avoid the contribution residential mortgage lending made to the Credit Crunch from being repeated.
The consultation runs until 29th June and, in layman’s terms, invites comment on their ideas to ensure lending in the sector is done in a prudent manner, to avoid lenders loosening eligibility criteria as they compete for business, to support the bank’s Financial Policy Committee’s ability to react to macro events (like a repeat of the Credit Crunch), and to keep lenders’ growth plans in check.
Most of the lending industry is already complying with most of what is being proposed, so should make little practical difference. Consumers may welcome the same constraints applying to buy-to-let applicants on affordability matching those applicable to owner-occupiers, so the market expects little impact in the short term at least.
However, it is one more dab on the breaks, coming hard on the heels of other changes to the business of letting residential property that landlords are already coping with.
The Government have been very clear in the message they are sending out. They would prefer people owned their homes rather than rented them and, to help achieve this, they want to level the playing field to make it easier for owner-occupiers to compete for homes with second home owners - including landlords.
Increased Stamp Duty, tighter controls on what costs can be set against income, and no change to Capital Gains Tax for residential property all make it harder for landlords to operate without either driving down house prices or forcing up rents.
There may be some room for rental increases but the Government clearly hope that by making life harder for landlords they will make housing more affordable for those currently finding home ownership unaffordable.
Whilst it may seem to some that investing in residential property is no longer an attractive option, I think that things may never have looked better. No market likes uncertainty and the property market in particular hates it - but with uncertainties come opportunities. Others will blink first, will sell cheap or miss opportunities.
Remember, Stamp Duty - for example - is something that you can set against future Capital Gains Tax (just like your buying agent’s fees!). So, whilst you have to bank roll them in the meantime, you can even set them against future losses which - at present - can be carried forward indefinitely!
Don’t despair, with lower prices come higher yields. There is no chance of enough homes being built, at prices that will lead to a serious shortage of tenants, in my lifetime; so my advice to landlords is to push on, do the sums and let the feint-hearted leave the sector to those prepared to make a go of it, and who know what they are doing.
Henry Pryor is a buying agent & "the BBC's favourite property expert". Any views expressed in this article are those of the author.