The Bank of England faces the consequences of pumping up Buy To Let lending

One of the features of central banking policy in the credit crunch era is that they have an asymmetric response pattern. They are ready to ease almost at the drop of a hat and at time even plunge us into negative interest-rates and yields. Yet on the other side of the coin they are slow to tighten policy or as we saw in the UK as inflation pushed to above 5% in 2011 sometimes do not tighten at all. In other words they are prone at best to doing too little to late. Even the US Federal Reserve which has begun a tightening cycle is proceeding slowly and is well behind the curve unless you believe that oil and commodity prices will continue to fall.

If we look at the UK the Bank of England has left official  interest-rates unchanged for over 7 years now. Its major effort has come via both QE and the Funding for Lending Scheme which helped both banks and the housing sector. I discuss that in more detail below. But I note that for all the hype about it acting it is even behind the government which has announced both Stamp Duty and Income Tax changes. Was not one of the points og having a committee of technocrats that they were supposed to act more quickly and decisively than politicians?

Also if we move to the Financial Planning Committee was it not created  for this sort of thing? Is all the expense of this particular Quango merely so it can use the word “vigilant” and then go to lunch. If we omit Governor Carney can anybody name a member of it? I can only because I used to work with Dame Clare Furse. I noted a while back when I retweeted a speech of hers for old times sake that it did not create much of a splash. Next time I decided not to so I could see if anybody else did and as far as I can tell nobody did. The musical reference has to be “The Sound of Silence” by Paul Simon.

Buy To Let Lending in the UK

An example of this has been the boom in UK Buy To Let lending which has help drive house prices out of the reach of first-time buyers in much of the UK. On Thursday the British Bankers Association published the latest figures.

Mortgage borrowing remained buoyant in February. It appears that borrowers are continuing to try to get ahead of the increases in stamp duty for buy-to-let and second home buyers scheduled to come into effect next month.

It was not only borrowing which was buoyant.

There were 20% more approvals for house purchase in February than in the same month of 2015. Reports suggest this is, in part, due to buyto-let and second-home buyers…….

Indeed one can make a case for UK credit standards overall being relatively lax if we look at these numbers too.

Unsecured borrowing by households is growing at around 6% per annum reflecting low interest rates and relatively strong household finances.

The BBA likes to rose-tint things as if household finances are so “strong” why do people need to borrow?

If we look back we see that any attempt to roll back on Buy To Let lending has a problem. You see back in the summer of 2012 the Bank of England panicked over the state of the UK housing market and launched the Funding for Lending Scheme. This depressed mortgage rates by up to 2% according to the Bank of England and I noted at the time that the initial effect was to reduce mortgage rates by around 0.9%. Putting it another way monthly bank lending for house purchase mortgages according to the BBA fell to £4.56 billion in July 2012 whereas this February it was £8.45 billion. The total stock of mortgages has risen from £776 billion to £845 billion over the same period. The latter number underrepresents things in my view as some have taken the opportunity of cheap finance to reduce their mortgage borrowings. We do not get enough detail from these numbers but has ordinary mortgage purchases been replaced by buy to let borrowing?

Putting that into affordability can be done by using the average house purchase mortgage size which was £161,100 in July 2012 but is £180,900 now. Wages however have only increased by some 6% leaving them well short of the change. No wonder first-time buyers need so much official “Help” these days leaving them singing along with the Beatles.

Help me if you can, I’m feeling down
And I do appreciate you being ’round
Help me get my feet back on the ground
Won’t you please, please help me

Actually if you argue that the Funding for Lending Scheme will have taken time to impact then you eyes may alight in the average mortgage of £145,300 in January 2013 given an increase of just under a quarter in a mere 3 years and one month.

Along this road you find that the Bank of England is looking at a Buy To Let lending boom of its own creation. No wonder they have tried their best to “look away now”. They should avoid reading Property Review.

According to new data released by the National Association of Estate Agents, during February, 85% of estate agents saw an increase in the number of buy-to-let investors flooding the market to beat the stamp duty changes on second homes.

Oh and as you peruse the market it is hard to escape the “interest-only” mortgages which we were promised would be persona non grata.

The numbers

It was only on March 18th that I pointed out how Buy To Let in the UK was providing substantial gains.

Taking into account both rental income and capital growth, the average landlord in England and Wales has seen total returns of 12.7% over the twelve months to February. This is up from 11.7% in the twelve months to January.

At a time of such low interest-rates and yields elsewhere no wonder people are attracted to this as an investment strategy. It was only yesterday we got more details on the amount of lump sum money taken out of UK pensions since the rules were relaxed ( £3 billion) and you have to wonder where it has gone?

The Daily Telegraph seems to keep plugging this area leading it onto all sorts of unexpected places.

Kellie Maloney: ‘Buy-to-let paid for my £100,000 sex change’


There is more than a certain amount of irony in the same Bank of England which pumped up the Buy To Let boom being responsible for puncturing any bubbles! I am sure that many reading this will be also thinking of the phrase “closing the stable door after the horse has bolted”. Indeed the FPC meeting minutes from November were rather clear.

The limited growth in mortgage lending had continued to be driven by the buy-to-let sector. In the year to 2015 Q3, the stock of buy-to-let lending had risen by 10%, compared to 0.4% for owner-occupiers.

This morning has seen the release of the awaited news on action so what do we get? Here is the Prudential Regulatory Authority.

This consultation paper (CP) seeks views on a supervisory statement which sets out the Prudential Regulation Authority’s (PRA’s) proposals regarding its expectations of minimum standards that firms should meet when underwriting buy-to-let mortgage contracts

This will not end fears that the boom will be over and out before anything happens as this is only a consultation paper. Indeed we even have use of the word “soundness” which was a favourite of the head of the civil service in Yes Minister. Should it ever be applied what will we get?

The PRA is therefore proposing that all firms use an affordability test when assessing a buy-to-let mortgage contract……..Even if the interest rate determined above indicates that the borrower’s interest rate will be less than 5.5% during the first 5 years of the buy-to-let mortgage contract, the firm should assume a minimum borrower interest rate of 5.5%.

Oh and those who have wondered about companies doing this will be intrigued by this reference.

The proposals also include clarification regarding application of the small and medium-sized enterprise (SME) supporting factor 1 on buy-to-let mortgages.

Dear Bank of England how much small business lending has been for Buy To Let property?

As to the FPC what will it do?

the FPC remains vigilant to risks in this area.

Perhaps not as vigilant as perusing the tea-trolley or the lunch menu. But along the way we see mention of an issue we have regularly discussed on here but seems to be news to our Quangocrats.

Strong growth of consumer credit, which reached 9% in the year to January 2016, in part reflects increased use of finance secured on the purchase of vehicles.

So it will be “vigilant” “remain alert” and “monitor”. Meanwhile.

The outstanding stock of buy-to-let mortgages has risen by 11.5% in the year to 2015 Q4.


27 thoughts on “The Bank of England faces the consequences of pumping up Buy To Let lending

  1. I don’t think they necessarily shut the stable door after the horse had bolted so much as opened the stable door, fired a howitzer behind the horse and then feigned astonishment at the result.

  2. ‘Was not one of the points of having a committee of technocrats that they were supposed to act more quickly and decisively than politicians?’

    An excellent point Shaun.At the time,I remember saying to a friend that the much vaunted ‘independence’ would be nothing of the sort and so it has proved.When you have a BoE committee appointed by the politicians it’s meant to be independent of,then you’re going to have problems.

    Onto the topic.Is it possible that the BoE is only moving as a result of BCBS changes being implemented(to the way in which BTL lending is treated on balance sheets) and thus are ‘reacting’ to the newsflow rather than getting ahead of the curve?

    Given history since independence,then,I’m afraid,I have little faith in it being the latter case.

    • Hi Dutch

      The whole point of appointing technocrats is that they have some skill yet we see example after example of it not being shown by central banks. Indeed the whole concept of their much vaunted Forward Guidance has been undermined again today by the speech given by Janet Yellen of the US Fed….

      Meanwhile in the aftermath of the UK PRA and FPC reports I noted this.

      “‏@econhedge 9h9 hours ago
      Most buy to let lenders had already increased their stress lending rate to 5.5% ahead of today’s FPC announcement”

      So they might enforce what is mostly happening anyway? Leading from the rear…

  3. “vigilant” “remain alert” and “monitor”.

    and do nothing

    I mean , were they given any teeth? or mandate to do “something” ?

    I presume they are forfilling the mandate …… “masterly inaction ”

    oh the BoE has also done its job , set HMG debt repayments low and continued life support for the Banks via asset inflation ( in houses of course ) . Would you entertain the fact they would bit the hand that feeds them?

    Its not “cats rule ! ” but ” TBTF Banks rule ! ”


    • Hi forbin

      The mention of “soundness” was so typical of the civil service in Yes Minister let me add another description of doing nothing. It was called “masterly inaction” by Sir Humphrey Appleby and considered quite a compliment.

      The UK establishment carries on regardless it would appear as you point out.

  4. My view is that it is more likely that people have paid down their mortgage debt as a result of the difficulty of gaining a decent return on savings, rather than the availability of cheap finance, which, admittedly is the other side of the same coin.
    Perhaps COUNTERING THIS debt repayment is the motivation for the high rates available in current accounts, as repayment of debt is not good for banks’ balance sheets?

    • the last thing the Banks need is money leaving them – from what I can make out despite, what ,7 years of emergency rates ? and other boondoggles they are for all intents and purposes – bust

      and the one thing any polly will tel you is that the Banks make good job opportunities for them and their pension pots ….


    • Hi therrawbuzzin

      Your mention of savings returns was rather topical today.

      “Paul Lewis ‏@paullewismoney 6h6 hours ago
      National Savings & Investments slashes interest rates on premium bonds (1.25%)& cuts odds, ISA (1%), Direct Saver (0.8%), income Bonds (1%)”

  5. Hi Shaun

    You could have gone much further with this.

    The failure to regulate BTL is what one might term “negative” policy; error by omission, failing to act to rein in irresponsible lending and pushing up house prices.

    Help to Buy has simply amplified this by being a “positive” policy of providing public subsidy for house buying to add yet another immediate push to demand without a commensurate increase in supply (we were not in a position of oversupply).

    In my view these policies are a deliberate political ploy to keep the housing market on the boil. People have had low wage increases; promotion prospects are less than they were; pensions are eroding; retirement ages are increasing and they have been sold the illusion that as long as their houses go up in value everything will be OK and the sunny uplands of financial security beckon.

    If there is a decline in property prices – and in my view it is inevitable – there will be a large political price to pay when folk realize the awful truth of their situation.

    I am no conspiracy theorist; these policies looked at coolly would be regarded as negligent (BTL) or totally irresponsible (HTB). That they are in place leads me to the conclusion that a system crash is what is envisaged and that this will make it much easier to ask for the sacrifices necessary to put things right. Of course they won’t be put right at all; what they will merely do is to set us up for the next crash.

    • Bob,

      Good post,I’m of the view that the TPTB are well aware of what’s inbound and are trying to achieve the inevitable deflation in asset prices via a long term real drop in said asset prices,ie giving wages a chance to catch up with house prices rather than letting prices drop to meet wages.

      In that way HTB boosts demand whilst the BTL changes reduce it.

      The chances of this ‘miracle’ cure being well managed and overseen by those currently in place in either Govt or the BoE are about as high as the chances of it working.

      I’m with you in that they’ve just set the scene for the next banking crisis because,as Forbin has pointed out,we haven’t dealt sufficiently with historical solvency issues.

  6. The banks have been busy offloading risk to BTLers so as to be ready for the next banking crisis. Those BTLers who are over-leveraged will be bankrupted when the tax changes kick in.

    • hi Jan ,

      if anything I have learned over the past 16 or so years its that the bad loans will not be allowed as they will take down the Banks .

      somehow the BTL bubble will be “re-financed” , maybe another bunch of PPI payouts or more QE

      but what ever it takes it will be done to save our Precious Banks !


      • I would agree with Jan on this point for two reasons.

        1) Politically,BTLers are dead meat.The Tories are under no illusions that their future success depends on increasing home ownership and not reducing it.This wasn’t the case ten years ago.

        2) The banks have had seven years to ‘sucker’ in retail money into BTL.Many BTL portfolio’s are underpinned by either a strong personal income or home equity now.Many BTLers of my acquaintance are completely unaware that their homes or incomes are at risk if their property investment heads up poop creek sans paddle.
        Ergo,the bad loans will take down the BTLers,not the banks.

        However,significant weakness in resale prices for residential property would impact bank balance sheets and that’s where your right.

        • hi Dutch

          the encouragement for BtL loans and for the use of your pension pot to pay for housing to rent will mean many will not be able to then claim state pensions .

          unless of course they are all meat for the bankers but why?

          pensioners are a major tory voting back bone . there is some danger that the fail out will stop any future conservative from being elected ?

          mind you short term gain seems always to win

          we shall see


          Ps the past 10-15 years has not seen great strides on home ownership , roughtly whars happened is that local gov housing has been effectively privatised – just look at HMG own figures , about 6k of housing moved from council to private ownership (btl not personel )

          and now they want housing associations to give up their stock ( and therefore they stopped building !! )

          theres a lot of politics going on in the economy of housing these days

        • Forbin,

          I agree on the privatisation of the public housing stock.Especially when the LL’s are being subsidised by HB.

          The numbers of BTLers are relatively small compared to then FTB’s that can’t get on the ladder,I also think there’s a view that the BTLers have nowehre to go but Tory.

  7. I watched “The Big Short” over the weekend, which succintly detailed how the US mortgage backed securities were built on a massive chain of fraud, whilst the regulators did nothing. Likewise the UK’s regulators inaction is inexcusable. The system is rotten, question is how to short the banks in 2016.

    • Hi Expat

      Was it good? I have had one positive recommendation so far out of one. As to your point below you are right that the UK government is now playing on the two main certainties of our existence. Also housing policy is indeed a mess.

      • Can I x 2 the Big Short.I took the Mrs and she came out of it saying that she’d begun to understand some of the things I’m always on about.

        It really was well done and went some way to highlighting the transformation of the banking sector over the last 30 years from utility function to casino(where losses are taxpayer refunded)

      • It was a good movie although it didn’t answer the question of why the banks, from being very strict with mortgages, suddenly started lending to anyone who wanted a mortgage. The answer to that goes back to politicians as it usually does..

  8. The BTL housing market is propped up by a scarcity of building land with planning permission and excessive “housing benefit” subsidies – which is milked by unscrupulous landlords letting substandard properties to the poor.

    The long term results of BTL will bring the only certainties in life : death and taxation. Stamp duty boom today, death duty boom to follow.

    • Yes, absolutely right. In particular planning permission is difficult to obtain. No matter what government may say, local councils make it almost impossible for small developers, and large ones have every incentive just to landbank.

  9. The proposals despite sounding tough, will probably do very little and that is precisely their purpose.
    I see no change, only the frenzy getting worse; UK government is now far too addicted to the tax gains and the illusion that the economy is doing well. Rinse and repeat.

    • Hi Andrew

      I agree. What many seem to have missed is that it is a consultative paper. We know what Sir Humphrey Appleby would make of that! It would be kicking it into the long grass. Also the dramatic sounding move of using a 5.5% interest-rate as a stress test was apparently mostly already taking place as I have replied earlier. Not much left is there?

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